On 22 May 2024, the European Securities and Markets Authority (ESMA) published a Position Paper on Building more effective and attractive capital markets in the EU.[1] The Position Paper includes 20 recommendations to strengthen EU capital markets and address the needs of European citizens and businesses.
ESMA’s recommendations for a well-functioning capital market focus on three dimensions: citizens, companies and the EU regulatory and supervisory framework. The actions proposed in the Position Paper go beyond changes to financial regulation and are thus directed not only to capital market supervisors but also to EU Member States, the European Commission and EU Co-Legislators as well as to the financial industry.
Verena Ross, ESMA Chair, said:[2] “Creating effective and attractive EU capital markets requires improving the wider market ecosystem and putting investors and companies at the heart of it. Steps are needed to ensure capital markets can play their role in supporting the financing needs of Europe. Therefore, ESMA today puts forward proposals for how markets can serve the needs of European citizens and businesses. Taking into account the current state of the capital markets and leveraging on our expertise and engagement with stakeholders, we have built this comprehensive set of recommendations. As we publish our position paper, I would also like to thank the members of ESMA’s Board of Supervisors for their ideas, suggestions and support, which allows us to bring the voice of securities regulators to the debate.”
The EU’s ambition to develop and integrate capital markets has been a long-standing goal, driven by urgent financing needs and the necessity to boost the competitiveness of European businesses. ESMA’s 20 recommendations are aimed at strengthening EU capital markets, addressing the needs of both citizens and businesses. The recommendations are categorized into three main areas: broadening investment opportunities for EU citizens, boosting the financing of European companies, and improving regulatory agility, supervisory consistency, and global competitiveness.
The State of the Art of EU Capital Markets
Capital markets are essential for modern economies, providing platforms for businesses to raise financing and offering investment opportunities for citizens. However, EU capital markets are characterized by an over-reliance on banking systems and fragmentation. Despite the Capital Markets Union (CMU) initiative launched in 2015, significant structural flaws persist. The EU’s share of global equity market capitalization and IPO activities has been declining, underscoring the need for a more integrated and efficient capital market ecosystem.
To mobilize new long-term capital, the report emphasizes the importance of broadening the investor base and enhancing market efficiency and resilience. EU households traditionally favour bank deposits, which limits the potential growth of their savings. A shift towards capital market investments could unlock significant economic growth. Key recommendations include:
- Creating an EU-label for basic investment products by developing a voluntary “basic” investment product label for non-complex financial instruments to guide less knowledgeable investors towards straightforward and cost-efficient options.
- Simplifying advice for basic investment products by stablishing a streamlined advice segment to reduce compliance costs and promote “basic” labeled products.
- Supporting digital solutions for retail investors and leveraging digital platforms to enhance investor confidence, knowledge, and engagement.
- Encouraging Member States to assess pension systems and explore pan-European long-term savings products.
- Considering successful tax-advantageous schemes from certain Member States to encourage retail investment in capital markets.
- Encouraging the development of employee share ownership plans to diversify savings and foster a culture of ownership and engagement.
- Enhancing financial education by embedding financial education in national curriculums to improve investment culture over the long term.
Boosting the Financing of European Companies
The CMU aims to reduce the reliance on bank financing by enhancing access to diverse sources of financing, especially for SMEs and startups. Despite some progress, European businesses still depend heavily on banks. Recommendations to support diverse financing options include:
- Creating dedicated EU-wide markets with sufficient size and liquidity to attract investors.
- Building a stronger equity culture to improve resilience and support innovation, including support for crowdfunding and venture capital.
- Proposing a comprehensive review to revitalise the EU securitisation market, focusing on prudential treatments and reporting requirements.
- Simplifying the trading and post-trading landscape to reduce costs and enhance liquidity.
- Pursuing practical agreements on insolvency proceedings and debt-equity bias reduction to enhance market integration.
- Adopting a principles-based approach and delegating technical work to ESMA to improve responsiveness and reduce regulatory burdens.
- Streamlining the single rulebook and addressing inconsistencies across sectoral rules.
- Enhancing cooperation and joint supervisory work among national authorities, and centralizing data collection.
Conclusion
The paper emphasizes the crucial significance of capital markets in bolstering economic growth, innovation, and competitiveness in the EU. ESMA will persist in actively involving and cooperating with all relevant parties in order to execute the recommendations specified in the Position Paper. Additionally, ESMA will contribute to the advancement of more efficient and appealing capital markets in the European Union through its efforts.
References
- European Security and Markets Authority (2024), Position paper on EU capital markets – Building more effective and attractive capital markets in the EU. ESMA24-450544452-2207. Available at https://www.esma.europa.eu/document/position-paper-eu-capital-markets-building-more-effective-and-attractive-capital-markets ↑
- European Security and Markets Authority (22 May 2024), ESMA makes recommendations for more effective and attractive capital markets in the EU. Press Release. Available at https://www.esma.europa.eu/press-news/esma-news/esma-makes-recommendations-more-effective-and-attractive-capital-markets-eu ↑
