ESMA chairman positive about securitization, venture capital, crowd funding and retail investment
The European securities markets are more fragmented and heterogeneous than the banking industry, which is precisely why they require a broader and more variegated range of measures if they are to be better integrated as part of the long term goal of a European Capital Markets Union (CMU). Or so said Steven Maijoor, the chairman of the European Securities and Markets Authority (ESMA), speaking yesterday at the Clearstream Exchange of Ideas event in London.
Maijoor said that a major objective of the CMU is to encourage the growth of alternative sources of finance. European officials believe this will increase the competitiveness of European companies, but also to mitigate systemic risk by diversifying their sources of funding. The obvious corollary of this policy is to encourage a shift from bank- based lending to equity, rather than just into debt securities.
SMEs – by which Maijoor means smaller listed companies and larger unlisted SMEs - are a particular target of the proposed shift. He thinks there is insufficient financial information available about these companies for them to attract capital across European borders. The solution, he says, is greater standardisation of accounting rules, more open corporate financial disclosure regimes, and more specific prescription of the contents of prospectuses, which have become a risk management tool for managers rather than a source information for investors. ESMA also thinks it would be helpful if there was greater harmonisation of insolvency laws between member-states of the European Union (EU).
The parlous state of the European securitized assets market remains a concern, said Maijoor. Though asset-backed securities emerged from the crisis with their reputation in tatters, the European regulator believes they can be rebuilt as a reliable source of finance through insisting underwriters have "skin in the game," greater disclosure of the contents of the underlying portfolios, and tighter regulation of rating agencies.
Maijoor said that although crowd funding is emerging outside the regulated markets of MiFID and AIFMD, and there are obvious risks in its growth and development, ESMA values the disruptive potential of the concept. However, in order to encourage its continued growth in Europe, Maijoor is promising a regulatory initiative to allow crowd funding services to be passported.
ESMA is also pondering how to wean European savers off their addiction to deposits, in order to boost their engagement in the securities markets. In the United States, said Maijoor, two thirds of households are engaged in equity investment, compared to just one in five European households.
While ESMA recognises it is not easy to encourage savers to abandon deposits, Maijoor says it is essential that European retail investors get access to the better returns available, given the shift away from defined benefit pension regimes throughout Europe. The more robust investor protection regime being developed by ESMA, through PRIPS/KID regulation and MiFID, aim to offer that encouragement.
On the asset management industry, Maijoor was positive. He said that, in general, asset managers have made good progress on crafting a pan-European industry, largely via the UCITS passporting regime. However, he added that the home bias to investing needs to be encouraged through cost transparency. Maijoor sees cost disclosure as essential to enable investors to judge funds on performance, and wants technology to be developed to make comparisons easier for consumers.
On the unbundling of commissions from research, Maijoor said the aim of ESMA is to improve the functioning of the market in research. He says there are a lot of complaints about the quality and coverage of research, especially of SMEs, and that the regulator expects more independent research houses to emerge from the cap on commission spending with single brokers. Maijoor also noted that the Commission and the Parliament have insisted on a ban on inducements in all sectors of the financial markets, and that equity commissions are seen as an inducement.
Maijoor says a successful CMU programme is best measured by the emergence of a larger European capital market. ESMA sees the associated dangers, in that a larger market is a more inter-connected one, which is why Maijoor offered a robust defence of the data being collected via forms such as Annex IV. He insists its quality can and must be improved, and promised the regulator would invest in the technology and the data analysts it needs to make sense of the data.
However, Maijoor added, in response to questioning, that overcoming the problems experienced by the trade repositories since they opened in February 2014 was a "work in progress." According to Maijoor, the quality of the data being reported to the repositories had come up at every ESMA board meeting in the last year. Work to facilitate the exchange of information with the Commodity Futures Trading Commission (CFTC) in the United States is also in hand.
Despite the drive to a single European rule book, Maijoor thinks there is still too much variation in regulatory regimes at national level. He said that, although ESMA is not seeking complete uniformity, it is looking for a higher degree of harmonisation. To encourage it, ESMA has a range of tools at its disposal, ranging from Q&As to compulsory regulation, and even financial penalties.
In the subsequent panel discussion, it was noted that Jonathan Hill, the European Commissioner for financial stability, financial services and the capital markets union, had set 2019 as the date by which the "building blocks" of the CMU will be put in place. A poll of the audience found nearly half the people present did not believe the schedule was realistic.
Professor Alberto Giovannini, who chaired on behalf of the European Commission a group charged with clearing barriers to financial market integration from 1996 to 2006, said the flavour of European financial market reform is coloured by the consistent disappointment of expectations. He recalled that the disappointing outcome of the abolition of exchange controls under the 1992 Ceccini programme led to the Financial Services Action Plan, which mysteriously omitted to consider the role of capital market infrastructure.
This in turn led, at the prompting of Giovannini himself, to the two Giovannini reports at the turn of the century. He added that the failure to make much progress on the abolition of the 15 infrastructural barriers to integration of European markets that those two documents identified was a factor behind the introduction of TARGET2-Securities (T2S) as a single settlement system for Europe by the European Central Bank, and the accompanying Central Securities Depositories Regulation (CSDR).
Niall Bohan, head of the CMU unit at the European Commission, promised a programme that would not attempt to do everything at once. Getting easier access to capital for SMEs through venture capital and even crowd funding as well as the securities markets, is the major priority, both for growth reasons and to reduce the potentially destabilising effects of the reliance of corporate Europe on bank finance. In response to a suggestion from the floor that regulation had actually shrunk the ability of the banking system to advance credit, especially to corporates, Bohan argued that the collapse of credit in the financial crisis proved that diversification was essential.
Philippe de Backer, an MEP and member of the ECON committee of the European Parliament, followed Niall Bohan in naming diversification of forms of financing as his priority. He is looking to the private sector to develop the financial instruments that enable retail savers to gain access to alternative investment products, though he accepted that tax incentives drive choices.
David Lawton, director of the markets policy and international division at the Financial Conduct Authority (FCA), who delivered the closing address, also endorsed the idea of more retail investors investing in the capital markets. However, he argued it would require better investor protection - comparable to that given to bank deposits – plus the development of suitable collective investment vehicles, and a lower cost of intermediation, to make it happen.
Matthias Papenfuss, COO at Clearstream Banking, said finalising the abandoned (as too difficult) Securities Law harmonisation initiative was his priority, though he conceded that it reflected the fact he is an executive officer of a market infrastructure. Diana Dijmarescu, managing director, global market infrastructures at J.P. Morgan, urged the Commission to let the private sector take more of the initiative. A poll of the audience suggested four out of five members thought legislation was essential to make progress.
Alberto Giovannini pointed out that every change in a regulatory regime entails cost, which is incurred by banks, investment banks and fund managers. There is therefore no point in asking market participants to invest in change unaided. Instead, regulators must take a firm lead, and offer the marketplace the certainty it needs to invest in making the reforms work.
Giovannini thought ESMA should be cautious on encouraging the growth of the ABS markets, since at current yields the only natural buyers of the securities are leveraged “shadow banks.” He also proposed an "asset passport" for institutional investors, which would allow them to purchase any asset in any European market on the basis of a licence from a regulator based in any European member-state.