Significant changes have taken place in the European Union since the launch of the European Commission’s Capital Markets Union (CMU) in early 2015, with the primary one being the United Kingdom’s departure from the EU.

On June 8 the European Commission presented its mid-term review of the CMU action plan. This proved to be an opportunity for the Commission to present what has been achieved, but more importantly to deal with the changes that have taken place over the past two years.

Focusing on the achievements, over 60 per cent of the proposed actions have been implemented in the past 20 months.  The main achievements were a moder­nised prospectus directive, a proposal for simple, transparent and standardised securitisation, a review of the European venture capital fund regulation, a consumer financial services action plan and the adjustment of capital requirements regulation (CRR) calibration for banks’ infrastructure investments.

These achievements are commendable considering the EU legislative hurdles policymakers need to overcome to pass a number of these initiatives.

Looking more closely at the changes, the departure of the United Kingdom from the EU Single Market in 2019 will place significant challenges on an EU 27 capital market. Some critics of the CMU even go as far as to claim that London’s significant contribution towards the EU’s capital markets activity could throw the EU project off the rails. It is in this light that the EU is placing increased emphasis on further developing a stronger EU Capi­tal Markets Union in its mid-term review.

The departure of the United Kingdom from the EU Single Market in 2019 will place significant challenges on an EU 27 capital market

Some of the new initiatives being proposed by the Commission include: (i) assessing the case for an EU licensing and passporting framework in the fintech space that would allow fintechs to attract new clients beyond national borders; (ii) promoting more proportionate and effective rules for investment firms, which would improve investor opportunities and promote better ways of managing risks, and (iii) implementing more proportionate rules on SME listing, which would make it cheaper for SMEs to list, and thereby increase the number of initial public offerings in Europe. These initiatives are ambitious when one considers the 12-month timeframe.

Taking into account the Brexit talks that kicked off on June 19 one notices a degree of savviness on the part of the European Commission with proposals designed to start to develop an alternative EU 27 capital market to London. The strong emphasis on areas in which London is a leader in the capital market space, such as institutional investments, fintechs and stock market listings, makes this evident.

From a market perspective, for a fully-fledged alternative EU 27 cross-border European capital market to work, one needs harmonised insolvency laws and withholding tax across different EU Member States.

The lack of harmonisation of insolvency regimes across Member States, such as different rules for opening insolvency proceedings, the lack of a common definition of insolvency, and the diverse ranking of claims gives rise to a lack of clarity for cross-border investors.  With regard to taxation, the lack of harmonisation of withholding tax procedures acts as a deterrent for cross-border investors and increases the costs of cross-border trading.

In the area of insolvency, the European Commission is undertaking a benchmarking exercise of national insolvency regimes to better gauge the discrepancies between national insolvency laws. In the case of withholding tax procedures, the EU executive has convened an expert group which, following an assessment of existing withholding tax procedures across EU Member States, will deliver a code of conduct by the end of this year.

The above initiatives are steps in the right direction to further develop a European capital market, but they may not prove to be sufficient to counter the challenges posed by a hard Brexit scenario post-2019.

Since time is of the essence, the EU executive needs to present palatable actions regarding the harmonisation of insolvency frameworks and withholding tax procedures sooner rather than later.

Such proposals could entail harmoni­sing individual elements of national laws by amending existing legislation, or in specific instances through the development of an EU regime.

Mindful of the technical and political complexities at play, our EU political masters need to be more ambitious when it comes to harmonising the insolvency law and withholding tax procedures if an alternative EU 27 capital market is to reach its full potential in a post-Brexit world.

Mark Scicluna Bartoli heads the EU & Institutional Affairs unit at Bank of Valletta as well as its EU Brussels Representative Office.

The information, views and opinions provided in this article are intended solely for educational and informational purposes and should not be construed as investment advice.

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