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European Commission - Speech - [Check Against Delivery]

The Capital Markets Union: breaking down the barriers to completing the single market

17 April 2015

Jonathan HILL

Member of the European Commission, responsible for Financial Stability, Financial Services and Capital Markets Union

Reuters Newsmaker's Event

London, 17 April 2015

Good morning, ladies and gentlemen. It is a great pleasure to be here. While I hope to give you a little respite this morning from the General Election campaign, I couldn't help reflecting on my way here this morning that the entire election campaign in 1992 was only a few days longer than the amount of time you have got left until polling day. I hope I haven't depressed you.

I also remembered as I travelled here on the tube how I came here, nearly 25 years ago, as an adviser to John Major to look at a development being built by Olympia and York down in London's Docklands that was going to be a rival to the City of London. It took quite a lot of imagination to visualise that among the half-finished buildings and wasteland. The developers brought me here in a motorboat to show me how close it was to Westminster and to try to persuade me that it would be a good idea if Government departments moved here to 'anchor' the development.

You will be astonished to know that various Sir Humphreys did not think that it would be such a good idea and they remained firmly anchored in Whitehall. But the years passed, the project was re-born, and it was the private sector, not the public, which moved in. The Docklands has once again become a centre of global trade. But whereas in the old days it was physical goods from all corners of the globe being unloaded in London's docks, today it is for financial services that Canary Wharf is known.

More than a hundred thousand people come to work in these towers every day. They make up, with Britain's other financial service centres, nearly a tenth of Britain's economy and contribute more than a tenth of Britain's tax receipts. They ensure that investment flows across the world to where businesses need it. They help keep the world economy ticking.

This transition from working docks to global financial centre is a fabulous example of London's exceptional capacity to reinvent itself and adapt to change. It is, of course, one of the main reasons why London is so successful and has become such a global financial powerhouse.

The British economy benefits greatly from having such a strong financial centre. The Single Market makes London a gateway for investment across the world into the whole European Union, the UK's single biggest market for the export of its financial services.

But London is also a great asset to the wider European economy. From here investment flows out across Europe: there is more than 2 trillion dollars of lending from UK banks into other European countries; more than a third of UK private equity funds' investments go to companies elsewhere in the EU.

This is a centre of excellence that we need to support by maintaining financial stability and making sure that regulation is effective and internationally coherent.

I will come back to each of these points, but first I would like to say a bit about the new European Commission, how I see my role as European Commissioner; how I see regulation as supporting the financial sector in underpinning a stronger economy; and our flagship project to build a single market in capital – the Capital Markets Union.

The New Commission, My role

I think it's fair to say that there is a fair bit of reinvention and adaption going on in Brussels too. President Juncker's new European Commission that came into office in November has a new drive and a new way of doing things. In essence, we want to do fewer things better. We have a new structure of Vice-Presidents, which is helping to encourage more joined-up thinking and a greater focus on a smaller number of political priorities. The most important of these is jobs and growth. And with nearly 24 million Europeans out of work, there is good reason for a great sense of urgency. That is why our first act, just three weeks into the life of the new Commission, was to launch a 315 billion euro Investment Plan.

It is also why we are pressing ahead with free trade agreements like the Transatlantic Trade and Investment Partnership. And why we are launching a major new push to expand the single market – in energy, digital services, and my own area of capital markets. Bigger markets, more competition and more trade will help economic growth and generate more of the jobs we need.

We also have a new drive, led by First Vice President Frans Timmermans on regulating only where necessary, of being smaller on the small things and bigger on the big things.

The way we approached the Commission Work Programme – where we set out our plan for what the Commission is going to do each year – is a good example of this new way of working. Each Commissioner had to justify each proposal they were making for new legislation in front of other Commissioners in a kind of Star Chamber.

I think the results of this new approach speak for themselves. This year we will be bringing forward just one fifth of the number of new legislative initiatives as was the case in a typical year in previous Commissions. We will be reviewing over two and a half times as many existing laws as was usual in the past. And in future no Commissioner will be able to take forward new legislation unless they have got sign-off from Frans Timmermans.

I will be applying this approach in my own area of financial services. So there will be less new legislation in the future and more focus on bedding-in the reforms of recent years. There will be an even greater focus than before on proportionality. I am also looking at how we can examine the cumulative effect of what we have introduced in the past.

Over the last five years, we had to legislate at speed while the fires of a crisis were burning all around. It was a remarkable achievement, in particular on Banking Union. We need financial stability because that is the basis for sustainable growth. But we must also recognise that in a Europe where, despite encouraging signs of recovery, we have so many people out of work, a lack of jobs and growth is now itself the biggest threat to financial stability we face.

So I think it makes sense to step back and ask ourselves whether we managed to get everything exactly right all of the time; to take a look at the combined effect of our legislation, to see whether there have been unintended consequences, to check whether we have always achieved the correct balance between stability and growth.

And if the evidence does show that the rules are not proportionate to the risks posed by different types of institution, or if it shows that in certain areas the combined effect of difference pieces of legislation is working against the Commission's priority of jobs and growth, then we should have the confidence to adapt the existing framework.

Capital Markets Union

If the €315 billion Investment Plan is intended to help kick-start growth, a true single market for capital would help encourage investment for the long-term.

As the title of today's event implies, this has been quite a long time coming. After all, the free movement of capital was one of the four fundamental principles on which the European Union was built. Yet over half a century on from the Treaty of Rome, we still don’t have a fully functioning single market for capital across the twenty eight Member States.

Why should this time be different? Because with low growth and high unemployment the need is greater. And I believe that politicians' will to act is greater. People can see that if we can get capital markets working better; if we can mobilise capital in Europe and help channel it to businesses that need capital to expand, then the prize would be considerable.

To take one example: if our venture capital markets were as deep as the US, as much as 90 billion euros more in funds would have been available to companies between 2008 and 2013. New services and new jobs could have been created if that funding had been there. Businesses could have developed and grown in Europe rather than being developed and grown in the US.

A single market for capital would make Europe more attractive to inward investment. It would create more financing opportunities for SMEs and infrastructure projects. And it would encourage more long-term investment. Of course, Europe already has a financial network; but now it needs better connections to make that network become faster, more developed and more efficient.

This must be a project for all 28 EU Member States. It is not another Banking Union and a different problem from the one that Banking Union was designed to overcome. Capital Markets Union is about eliminating obstacles to cross-border investment, and getting funding to where it can be most productive. It is about complementing the role of banks, not displacing them. And about increasing choices for financing at different stages in the life-cycle of a business to help boost growth.

Financing of long-term investment

My starting point is to try to make existing markets work better, to take a number of pragmatic, incremental steps to get funding to where it is needed most: to long-term investment projects, to infrastructure and to our SMEs.

Let me say a word about what I hope to see emerge in the coming years on each of these.

With the support of the Bank of England and the ECB, we want to get the market for high quality securitisation going again in Europe. This could make a positive difference to long term investment by broadening the investor base to include more long term investors such as insurers and asset managers. To do it, we are looking at how we could set up a framework for an EU market that singles out a category of highly transparent, simple and standardised products, with an appropriate regulatory treatment.

We also want to support institutional investors to invest in long-term projects. I do not think that it is for governments or European institutions to try to force such a change. But we do think that there is a role we can play in supporting such developments - for instance, insurance companies were given a number of incentives to invest for the long term in the detailed rules introduced for Solvency II last October.

As far as banks are concerned, many of the detailed rules implementing capital requirements take into account the needs of long-term finance. But we will produce a report under the review of the Capital Requirements Regulation to assess how appropriate the existing rules are.

Private placements have the potential to offer investment opportunities to long-term investors, and could broaden the availability of finance for infrastructure projects. A group of industry bodies recently launched an initiative to encourage the development of the European private placement industry. I very much welcome that, not least because I do not think that we always have to reach for legislation as a first, or indeed the only, option.

Financing of infrastructure

The Capital Markets Union also gives us a framework within which we could make a difference to our infrastructure: the roads, the bridges, and the broadband networks that connect our continent. It could do so by providing incentives to institutional investors to put their money in that infrastructure.

The European Long Term Investment Funds – ELTIFs for short – are an ideal vehicle to provide this type of incentive, for the new European Fund for Strategic Investment and for insurers. Now that the European Parliament has agreed to ELTIFs I want to see them up and running as soon as possible.

The task force on the investment plan also means to increase the transparency of infrastructure projects, which should make it easier for investors to identify strong projects.

I want to make amendments to the detailed rules on Solvency II to make provision for ELTIFs and to give insurers more ways of getting involved in infrastructure projects.

Helping SMEs get access to finance

CMU can also help SMEs to get access to finance. This is not a new goal and Member States have been active in a number of areas. Some have taken initiatives to try to channel funding more effectively to SMEs, as the UK has done – on the public side, through the UK business finance partnership and on the private side the UK business growth fund, for example – and we are looking at the experience that has been gained under such schemes.

We will also be looking carefully at SME lending in our forthcoming assessment of the impact of capital requirements. And in the context of international standards, we will argue that particular attention should be paid to the appropriate calibration of SME lending capital requirements.

Other SMEs, I recognise, may want to have other options, like listing on a growth market or attracting venture capital. And companies that decide to take the plunge and offer securities on a market should not be deterred from doing so simply because of the paperwork involved. That is why we want to revise the Prospectus Directive so that it becomes easier for SMEs to fulfil their listing obligations, but in such a way that investors are still well informed about what they are buying.

Although there is good basic information out there on companies and what they do, potential investors can't easily assess the credit risk that they might present. So we will look at whether there is a way of increasing standardised data for credit assessment – without tying all SMEs up in a new tangle of red tape.  

And we are also considering how we could improve the "ecosystem" in Europe for venture capital. This might include adapting the rules for European Venture Capital funds and European Social Entrepreneurship Funds to expand the categories of fund managers able to offer these funds.

So, just in these three areas, I hope you will see that what the Capital Markets Union project offers is an opportunity. An opportunity for banks as important intermediaries of market-based funding. An opportunity for investors to increase their options for investment. An opportunity for Europe to widen access to new channels of funding for SMEs and infrastructure projects. An opportunity to finance growth.

In short, if I may puff my old home, I thought that the House of Lords' European Affairs Committee put it rather well:

The CMU is 'a golden opportunity for the UK… a means to demonstrate afresh that the City of London, and the financial sector which is centred there, is an asset not only to the UK economy but to the EU as a whole'.

We are pushing forward now to make quick progress on early projects, like securitisation and revising the prospectus rules. And then based on the feedback we get on our Green Paper we will set out an action plan later in the year. I very much still want to hear practical suggestions from the industry, from Member States and from parliamentarians.

International coherence

Financial markets are cross-border markets by their very nature. No one knows that better than London. They underpin the global economy and what happens in one part of the world can rapidly spread to other countries.

Loopholes and overlaps do not provide stable and resilient financial systems. They make life difficult for global businesses, imposing costs on them and creating opportunities for people to game the system through regulatory arbitrage. That's why international cooperation matters, and why the EU strongly supports it.

Nevertheless, the international rules and standards are not always very detailed. And they must be put through the democratic legislative process in each jurisdiction. So the EU should not be afraid to implement the international standards in a way that makes sense for Europe and Europe’s diverse financial landscape.

The level of interconnectedness between the EU and US, in particular, means that this relationship is especially important. That's why I believe that we need to create a closer and deeper regulatory partnership through the TTIP. I don't want or expect identical regulation. But better co-operation would give us the framework within which we could consult each other at an early stage in the regulatory process.

This is in the interests of both EU and US markets, and important for financial stability. We would provide a larger and more efficient market place for financial firms, giving them greater capacity to provide finance for the economy. And we would solidify the leading role of the EU and US in financial regulation.


Ladies and Gentlemen, for London and for business one of the few constants is the ability to adapt to change. Financial services and their global centres must be fleet of foot to take advantage of new technologies and handle the new challenges they pose, such as cyber-crime.

Regulators too should be careful how they respond to change. Regulation must not stifle innovation, such as crowd-funding. It must not make it harder for new entrants to come into the market-place. Regulators must equally keep in mind the importance of regulatory stability so that businesses can focus on working for their customers. We want financial stability as the foundation of a strong economy, but we should not seek to eliminate risk, because without risk there is no growth.

If London can continue to see and take advantage of innovation, if regulators can regulate wisely, then there is every reason why financial services here and elsewhere in Europe can be an engine for the renewal of Europe's economy and the creation of jobs and growth. If we get Capital Markets Union right then the companies and the people who work in these buildings in the old Docklands can be – and be seen to be – the creators of prosperity for many millions across the continent.


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