It’s a great pleasure to be here this afternoon. Paris was the first capital I visited after launching our Capital Markets Union Action Plan. So six months on it’s good to have the opportunity to tell you how we have been getting on. And to give you a sense of our priorities for the months ahead as we work to strengthen capital markets in Europe.
Our biggest challenge across Europe, including here in France, is lack of growth.
That is why we must focus on agreeing free trade deals, on renewing our drive in extending the Single Market, on legislating less and legislating better. And I have a responsibility to have this same focus on growth and jobs as I reflect on how to regulate financial services. Yes, I have to worry about financial stability. But we don’t want to see the stability of the morgue. That’s why we need to be careful, to think about the macro-prudential picture and not just the micro-prudential one when we regulate.
In recent years, we’ve done a lot to build a new regulatory and supervisory architecture. It’s been an unprecedented period of legislative activity. As a result, our financial system is stronger and more resilient. Our banks are better capitalised. None of this is in question.
But now, as the Chairman of the Financial Stability Board has said, many of the big reforms have been implemented. Yes, there’s still some unfinished business but I think there’s also a growing sense that we’ve reached the legislative high-water mark and that we’re now entering a new phase. As we do so, I always try to follow some simple principles.
- legislate only where you have to;
- always try to understand the impact that you’re having on the market and the economy;
- keep things proportionate;
- keep things simple;
- keep things under review.
Let me say a little bit more about each. If we want businesses to plan ahead and invest, we should look to offer greater certainty. We should aim for a period of greater regulatory stability and only legislate where it is absolutely necessary and where other alternatives won’t work.
My second principle is that regulators should always look to understand the impact of what they do. You shouldn’t regulate in an ivory tower. It is the job of the regulator to decide and to be prepared to over-ride the arguments of industry. But you should always listen to those arguments and see whether there is a more growth-friendly way of achieving the same or similar prudential objectives.
Third, be proportionate. Be sensitive to different business models, different business sizes, and to whether a financial institution is systemic, or not. That’s the approach, for example, that I want to take towards Basel Committee discussions and make sure that we apply international standards proportionately, in a way that makes sense for European business. And that’s the approach we’re taking on the review of the Capital Requirements Regulation and its sister directive CRD4. I want to look at how we can simplify reporting requirements, and costs that are associated with compliance more generally. I want to know whether we can tighten legislation up, correct technical mistakes, and give more certainty to businesses. I’d like to take a more proportionate approach to smaller banks and take a close look at whether it really makes sense to have the same compliance requirements for all banks and business models.
Fourth, keep it simple. To my mind, the more complex the rules – the more you try and have a rule for every situation – the less well they are likely to work. The more individuals are likely to ask, “can I get away with this within the rules?”, rather than “is this the right thing to do?”. The more you employ lawyers and staff up compliance departments, the less likely individuals and managers are to take personal responsibility.
Fifth, keep it under review. We need to check that the legislation we have passed in recent years to get the crisis under control is working as we had hoped. Because while the basic regulatory framework has made our financial system stronger, when you’re firefighting, legislating at speed and under stress, it’s difficult to get everything completely right.
That’s why we’ve launched a call for evidence. It has just ended. We’re now working through the hundreds of responses we’ve received. Three early themes are emerging which give me confidence we are right to be asking these questions. Respondents have said that in places our legislation isn’t proportionate enough; that it’s weighing down on the amount of financing available to the wider economy; and that the compliance burden is too high. Once we’ve completed our analysis, weighed up the evidence, I’ll set out our thinking on how we’ll take things forward this summer.
My general approach to regulation informs the way I have gone about tackling the Capital Markets Union. I have made it evidence based, and pursued a bottom up approach designed to try to create early momentum and generate confidence.
Its goal is to link savings with growth. To increase the flow of capital across borders to projects and businesses that need financing. And to improve the funding conveyor belt so that companies of all sizes can get the investment they need to grow and sell into bigger markets. For consumers, I also want to provide more options to those who want to put money aside for the long term.
These are the goals. But to make the fastest possible progress, I have broken my work down into a series of separate but connected measures that fall under three main categories: increasing the flow of funding to business investment;delivering meaningful returns for investors; and tackling long-standing barriers to cross-border investment.Let me touch briefly on all three.
To increase funding to businesses at every stage of their development, we’re looking at ways of building up Europe’s financial sector in areas that help smaller companies scale up, and sell further afield and into bigger markets.
To make it easier for companies of all sizes to tap public markets, we’re overhauling the Prospectus Directive to create a simpler, faster and cheaper prospectus regime. I want to streamline the process for companies which have already issued a prospectus and want to raise capital again: that’s currently about 70% of all prospectuses. This would speed up the process, and we estimate it should save listed companies up to 100 million euros a year. And we’re proposing to get rid of the prospectus requirement completely for companies that only want to raise small amounts, under 500,000 euros.
We’ll come forward with a package of measures to strengthen venture capital markets, where investment hasn’t increased in Europe since 2009. We’ll make a proposal to amend existing legislation governing venture capital funds, EuVECA and EuSEF, to build up scale, diversity and choice. And we’ll look at how we can use public money to crowd in private investment with a pan-European venture capital fund of funds.
I also want to understand better whether we can build on existing private placement markets that work well. They’re now well-established in France and Germany, and it’s a market that’s taking off in the UK. Based on this experience, these markets could be a powerful source of funding for medium sized companies when they want to raise amounts above twenty million euros from institutional investors. So we’ll launch a study to identify regulatory and other barriers that are holding back this funding channel in other Member States.
We’re taking forward a range of measures to provide better returns for investors. Put differently, increased demand for capital must be met by an increased supply from institutional and retail investors, investors who believe that capital markets are attractive because of the different levels of risk and return they offer.
Institutional investors have the largest pools of capital to invest in our capital markets. They provide the money to power long-term corporate or infrastructure projects. But institutional investors have been scaling back their exposure to equity. The total assets of the insurance sector and pension funds increased by 63% over the last 10 years, but their direct investment in equities has remained stable. I want to check this trend is not being caused by excessively conservative rules.
We’ve begun by acting to stimulate more long-term investment in infrastructure. So we’ve proposed to define infrastructure investment as an asset class under our prudential legislation Solvency II and for long-term investment funds: ELTIFs, and bring with it lower capital requirements.
To free up bank lending in the wider economy we’ve made a proposal to restart Europe’s securitisation markets. In 2014, the securitisation market was worth 216 billion euros, about a third of its value in 2007. If we could revive that market to its pre-crisis average, this could provide an extra 100 billion euros of credit to the economy. So our proposal sets out criteria for simple, transparent and standardised securitisation, with reduced bank capital requirements for securitisations that qualify. It whizzed through Council in record time. It’s now the responsibility of the Parliament to take this forward. The sooner we can get it into effect, the sooner we can get more lending flowing into Europe’s businesses, something which is in the interests of everyone.
For investors to enjoy more choice, I want to improve the passport system we have for investment funds so they can offer their services more easily and compete in different markets. This year we’ll launch a consultation to identify the main barriers to funds operating in other countries than their own. I want a system where investors can get hold of enough information, where they’ve got more choice, and where investment funds can genuinely compete with each other across borders.
To inject more savings into capital markets we’re considering proposals for a European market for simple personal pensions. This could provide the economies of scale we need to reduce cost and increase choice for savers who are putting money aside for their retirement. So this year, we’ll work out exactly what steps might be needed to make this happen.
The third area we are working on is to knock down barriers to cross-border investment. In recent years, investors have been shy of investing in countries other than their own. And while some of this was related to the financial crisis, much of it is to do with obstacles of longer standing.
By the end of the year we’ll bring forward proposals to try to reduce differences between national insolvency regimes. We want to try to make company restructuring easier, and to increase certainty for those wanting to invest across European borders. Our proposals will seek to address the most important barriers and again, build on national regimes that work well.
We’ll look to see whether we can make cross border investments easier by simplifying the system to reclaim withholding tax when these are subject to double taxation. At the moment, cross border investments are penalised by double taxation on dividend income, interest payment and capital gains. The process for reclaiming these withheld taxes can be complicated and off-putting, and investors don’t always reclaim the money to which they’re entitled. This is estimated to cost investors more than 8 billion euros a year, so there is considerable scope for savings if we can make the whole process simpler.
One of the lessons of the financial crisis is that deepening the single market for capital will be of benefit to all Member States, in particular those who are more dependent on bank financing. But if a deeper single market for capital can be of benefit to all, it can also benefit countries with strong financial sectors like France or the UK.
I guess no speech from a Brit can be considered complete these days without mentioning the referendum. Since we are guests of The Economist, I cannot resist reminding them of an editorial that appeared on 11th April 1992, a few days after John Major’s general election victory. It has always stayed with me because I helped run his election campaign and went through the next few years with him. They wrote that “he will be able to put aside one issue that has pre-occupied him since he took over from Margaret Thatcher; the Tories’ divisions over the European Community will now not count. For the first time since Britain joined the EC in 1973, its role can be framed without regard to the minutiae of domestic politics.” Not one of their best predictions.
Since that time, there is no doubt that in Britain, as in other European countries, people from all parties have had questions about the EU and where it is going. I do think the agreement reached recently at the European Council helps address some of those concerns. Take economic governance as an example: the settlement tackles an issue that both euro-ins and euro-outs needed to address. It recognises the need of the euro area to integrate further. But it also enshrines for the first time the principle of non-discrimination against businesses on the grounds of currency. And it confirms the integrity of the single market, giving both euro ins and outs the assurance that their companies will be able to compete on a level playing field. And it also makes clear that the euro-outs will not create obstacles to the much needed further deepening of the economic and monetary union. I believe these new arrangements will help build trust on all sides so that financial services inside, and outside, the euro area continue to thrive.
The part of the settlement focusing on competitiveness is also important for the whole of Europe and the agenda for growth. It commits the EU to pursuing better regulation, to reducing administrative burdens and pushing for ambitious free trade agreements.
It requires the Commission to conduct annual reviews of EU legislation to check that it complies with the principles of subsidiarity and proportionality. Reviews that will be the basis for repealing regulations that weigh too heavily on business’ ability to grow and create jobs, or on regulations in areas that could be better dealt with at national level. I think that’s important if we’re going to have regulation that’s practical and that commands respect.
From a financial services point of view, the Single Market offers opportunities to businesses across Europe – in Paris and of course in London too. Over the last few years, the City has continued to grow and thrive at the heart of the Single Market. And we know that access to the Single Market is one of the factors that continues to draw investors to London because they see it as a gateway to Europe.
If the UK were to leave, to suggest that London would simply or quickly be able to secure access to the Single Market on the same terms as it has today is fantasy. To do business with the EU, it would basically have to comply with rules over which it had no say. In other words, in the name of gaining more control, it would in fact lose control.
The deeper single market that we are trying to foster with the Capital Markets Union is for all 28. I know it won’t be built overnight. It’s going to require sustained effort, over months and years. But we’ve got off to a good start. And I sense a political opportunity – and a political will – to strengthen the role that capital markets play in our economy.
I intend to take that opportunity to strike the right balance in our approach to legislation, to take the single market a step further, to make the EU a more attractive place to invest, to do business, and to work. And by doing that to support the growth and investment in Europe that we all want to see.