Draft Response to the Capital Markets Union Green Paper

DRAFT RESPONSE TO THE CAPITAL MARKETS UNION GREEN PAPER

Working Document

22 April 2015

SUMMARY

To be added. It is key to make a good summary focusing on a few points. It must be done once all contributions are analysed, and then reviewed

INTRODUCTION

I would make a briefer introduction, but it is only my opinion.

EuropeanIssuers welcomes the Commission Green Paper on Building a Capital Markets Union. We appreciate that the Commission decided to first consult all stakeholders before proposing new legislation. In the recent years companies have been overwhelmed by the abundance of new EU legislation (Audit, Market Abuse, Non-Financial Information Reporting Directive, Shareholder Rights’ Directive Revision, IFRS, etc). Apart from the legislation directly relevant to companies, there have been also plenitude of those, which were impacting companies in some way, e.g. MiFID II & MiFIR, PRIPs (attempt by the Parliament to extend to shares and corporate bonds), CSDR, CRAs, EMIR, IORP, Anti-Money Laundering Directive, revision of European Supervisory Authorities. We are happy to hear that the new Commission promises less regulation in the upcoming years, nevertheless for companies it is only a begging of struggle as we hear that those 52 legislative pieces produced during the 2009-2014 legislature, will now result in approximately 400 level two measures. Also, implementation and transposition of many of new legislative pieces has only started. We believe that what is needed now is a cumulative impact assessment measuring the impact of financial services legislation on companies as users of financial markets separately, in order to fully understand burdens on companies. I wouldn´t say that this is a priority, it is important but I wouldn´t start with this statement against regulation when they are asking for your opinion, this is not the right place.

We are supportive of new Commission’s priority – focus on jobs and growth. I think this paragraph is unnecessary. The question is clearly answered in the first paragraph of the Green Paper: to build a true single capital market for capital for all the 28 Member States. But what is crucial for the outcome is how you get there. The Green Paper focuses amongst others on attracting more investment into the EU from the rest of the world. While of course it is important to ask ourselves a question why should investors choose to invest in Europe rather than elsewhere, we would like to also raise importance of the question: Why should companies want to raise capital in Europe rather than elsewhere? We believe that Europe should seek to be an attractive destination for public listings and other means for companies to raise capital. Over the last year there has been a significant decline in IPOs in Europe, while we hear about many European companies seeking funding elsewhere (US, Asia, etc.).

As I said in the last conference call, this is too much talking on IPO, we have to balance between shares and bonds. Data provided is not very relevant. To put things in context, during the period 2007-2014 (the crisis) IPOs went down in EU from 79 to 51 €bn, versus up in the US from 70 to 73. But Corporate bond issuance came from1,4 €tn to 0.8 in Eurozone vs. 0.8 to 1 tn. (AFME) This is the problem this CMU initiative want to tackle: companies can´t access to bond finance as they used to in the past. Finance is provided (when it is) mainly by banks. In the US capital markets provide 80% of financing, in Europe only 23%. It is good to mention the IPO report as it is very good, but not to focus too much.The data below shows that the IPO market is facing a long term decline, with capital raised in the last ten years only around half that raised in the 1990s. As mentioned in the EU IPO Task Force report, in Europe, the latest IPO data from 2012 and 2013 from PwC’s IPO Watch Europe shows a significant recovery in Europe compared to 2009 (which was the lowest in this period), but the current number of IPOs for either of these years remains still very modest when compared with the 2001-2011 averages. The exchanges have noted that the main factor explaining the decline in the number of IPO is the decline of smaller companies coming to the market.

The EU IPO Task Force, with members from different Member States and different parts of the capital markets (issuers, investors both retail and institutional, stock exchanges, venture capital, private equity, investment bank, lawyer, auditor) analysed reasons for this decline and together agreed on recommendations on how to improve this key component of Europe’s capital markets.

I don´t see the need for this point either, too much for an introductionT. I would remove it. The next paragraph explains the same and convey the message in a better, more direct way. he Green Paper lists as one of the CMU objectives unlocking/improving access to financing for all businesses across Europe. This spurred on a debated amongst various stakeholders whether there is a problem of supply of finance or of demand for finance. Certain claim that there is financing out there in the market, but that companies are not interested. Maybe the truth lies somewhere in between, meaning that there is indeed some funding available, but not on attractive terms (e.g. too costly, too burdensome administratively, etc.). Also, what needs to be taken into consideration is attractiveness of the European economy and administrative burdens of setting up or running a business (or expanding it or doing a joint venture, etc.). If operating or expanding a business (or starting a new project) would imply too high costs, companies would rather abandon this idea and continue business as usual or look for more attractive options or markets. Making economy more competitive needs creating markets which foster entrepreneurial culture instead of stifling it. Innovation, badly needed in Europe, is often killed by the excessive regulatory requirements. Large investors often ask for more disclosure, more right, etc., but at the same time do invest in rising starts from the emerging markets as they do offer lucrative profits and huge prospects of growth. Maybe instead of increasing use of a ‘regulatory stick’, it could be more beneficial to allow the supply and demand naturally incentivise companies to be more responsive to investors’ needs?

We would like to stress that companies do not like over-regulation we have seen in the recent years. Companies prefer focus on principles and outcomes, not rules. Companies also need regulatory stability (which we lately lack) and a level-playing filed with other companies oversees.

Consideration should be also given to the need for business progression for companies at different stages of growth and their financing needs. Companies need different forms of financing at different moments of their business cycle, and often they face difficulties while trying to ‘upgrade’ to the next one. Therefore, there is the need to facilitate development of a funding escalator which would facilitate growth of companies and fluid transition from of stage of development to another. Providing a central information portal for EU companies on the different mechanisms for raising capital cross-border could be an excellent resource. Companies should be encouraged to develop and grow at different stages of development. In my opinion, this idea of the facilitator is very good, but again I would not limit it to shares only. I´d also remove the next sentence, as talking of different markets can create confusion when the purpose is t create a single market for all.

Another measure can be to foster an equity culture in Europe that benefits entrepreneurship and small companies across Europe, rather than respecting investment culture diversity.This also requires different markets, to suit those needs, in line with the different investment cultures across Europe.

Source: FESE stats, LSE and Borsa Italiana stats

DETAILED RESPONSES TO QUESTIONS

1. Beyond the five priority areas identified for short term action, what other areas should be prioritised?

EuropeanIssuers welcomes consideration of the revision of the Prospectus Directive as an immediate priority. We also welcome willingness to boost interaction with SME Growth Markets. Currently Prospectus is very expensive for companies to produce and therefore constitutes an important constraint towards capital market financing. We provide more detailed comments and proposals regarding this review in our reply to the Commission consultation on the Prospectus Directive revision.

What we are missing in this list though, is a proper cumulative impact assessment of the impact of recent financial regulation separately on non-financial companies, particularly quoted companies, and for investors. It seems that impact assessments often focus on the impact on intermediaries or economy in general, while we believe there is the need for measuring impact of legislation on key stakeholders/users of financial markets separately. Also, given that financial services is not necessarily a core business for companies, they do not have time to read hundreds of pages dealing with intermediaries in order to find the information relevant to themselves. This also diverts their attention from running core business and delivering growth. Probably, this is to long to mention as a short term action here. Let´s focus on real concrete measures and mention that a coordination with other initiatives is importantFollowing such an impact assessment, we would suggest revision of the EU financial regulation to reduce administrative costs of listing for companies by 30-50% in line with recommendations of the EU IPO Task Force.

Another short term priority we would suggest to add is ensuring that regulatory framework being adopted, particularly Level 2 measures on MiFID II, CSDR and MAR, do not work against quoted companies and the real economy and are aligned with the objectives of the CMU in building effective and efficient markets. It should be ensured that SME GM rules are fit for purpose and take into consideration the local specificities of the markets, as smaller companies tend to remain local. And as long as their needs remain satisfied in the local markets (meaning they are able to attract sufficient funding, etc.), they should be allowed to remain local.

Consistency between various legislative dossiers and their consistent implementation is also essential. New rules should not be proposed before implementation of already existing ones.

Immediate rules supporting acces to finance for SMEs are expected.

Probable the most important, and difficult (so let´s start asap) is the tax incentive to long term and SMEs finance

1. What further steps around the availability and standardisation of SME credit information could support a deeper market in SME and start-up finance and a wider investor base?

While we recognise that the availability of credible credit information about SMEs remains underdeveloped, we would like to warn against adding more compliance burdens to companies which should focus on producing growth. We would like to stress that any increased transparency requirements should be voluntary.

Lighter regulation and less burdensome reporting requirements shouldn´t not go in detriment of good credit risk assessment and enough control and supervision. Audit and control should be supported by authorities to provide enough confidence at a reasonable cost.

Also, it is not entirely clear to us what in this Green Paper is meant by SMEs, as there are very diverging definitions and often a confusion between SMEs and small and mid size quoted companies. For instance SME growth markets definition for the purpose of MiFID 2 is €200 million market cap, while at industry small-cap fund definitions which range from €1 to 7bn (see staff working paper to EU IPO Task Force report for more information). The US definition for Emerging Growth Companies is USD 1 billion revenues or within 5 years of listing. As EuropeanIssuers, we agreed to adopt a definition of Emerging Growth Companies until €1 billion revenues to ensure consistency with the US. It would be helpful if at EU level we could differentiate between an SME definition for those products which relate to bank lending / other intermediary-led financing, and those smaller companies that are nevertheless large enough to seek direct funding (EGCs), and to be included in small-cap funds. At the same time we do not propose to have the same threshold attached to the definition for all EU member states due to the differences in purchasing power parity across the countries.

1. What support can be given to ELTIFs to encourage their take up?

Afep proposal: We believe there may be value added in the forthcoming Regulation establishing ELTIFs and it has the potential to channel European savings into the real economy. Long-term investment funds (LTIF) offer numerous advantages: they enable investors to diversify their investments, to spread their risks and to access larger scale projects. Thus, they may help to better earmark long-term savings for long-term investments, including in equity instruments and corporate bonds. However, we believe that this instrument will only be really useful, and achieve the goal of increasing long-term investment in productive assets and able to attract a lot of investment from the widest possible range of sources. To that end:

- the European Investment Bank (EIB) should play a formal role in guaranteeing the investments, in order to facilitate access to such funds for a larger pool of investors;

- such investments should be afforded the best tax treatment of any financial investments (our understanding is that the DG Taxud is currently examining how their tax treatment could be handled);

- prudential requirements for insurance companies and pension funds[1] should facilitate such investments.

1. Is any action by the EU needed to support the development of private placement markets other than supporting market-led efforts to agree common standards?

Based on Afep paper: As mentioned in the introduction it is important to facilitate smooth business progression and therefore a funding escalator which allows companies at different stages of growth obtain funding appropriate to their needs. Moreover, private placement also provides another alternative to constrained bank financing.

We would support comparison of existing best practice across EU Member States and possibly in other jurisdictions. This would facilitate promotion and implementation of best working models. For instance we hear that the French Euro PP model, the German model of Schuldscheine or the U.S. model of private placement (USPP – US Private Placement) work well. The desired characteristics are:

- be open from a comparable threshold of potential investors across the EU;

- ready to put in place rapidly, with a possibility of getting a loan from a bank first, while the bank is looking for participants afterwards;

- flexibility regarding duration of the loan;

- possibility to adjust the terms to the client’s needs (repayment…);

- transferrable to other than initial investors;

- require less documentation and disclosure than a bond issuance;

- not qualifying as a financial instrument for accounting purposes;

- not including rating obligation.

Support a simple, efficient and reliable rating system; produce and share credit research.

1. What further measures could help to increase access to funding and channelling of funds to those who need them?

By QCA:

• I have already said the I fully disagree with this point.Promote equity vs debt and promote public equity as a source of permanent long-term capital;it is not equity vs debt, it is capital amrkets against banking finance) or lack of it)
• Assess and reduce costs for companies for joining capital markets;
• Evaluate the creation of a SME Asset Class, so that Commissioners, policymakers, regulators and market operators can easily facilitate proportionate and appropriate policy for growing companies, and so that investors can more easily allocate funds to these companies; and
• Ensure that major European and national indices are constructed and calculated in a way that more accurately reflects constituents and their contribution to member states’ economies and the European economy as a whole.
• Understand what incentives investors – both institutional and private – have to invest their money in growing companies.
• Assess the fact that there is less research available on small and mid-size quoted companies than that which is available for large blue chip companies, which hinders their ability to attract and retain investors. Small and mid-size quoted companies need more research coverage in order to retain current investors and attract new ones, which would stimulate increased liquidity in their shares.
• There are a number of potential obstacles arising from regulations that lock these investors out of money raisings, thus cutting off a source of funding for these companies. If these rules were adjusted so that retail investors could be more involved in the small and mid-size quoted company sector and have access to a higher-level of information about their investments in order to ensure investor protection, then there would be increased liquidity for these companies, which would make the market function more efficiently.
• Again, start with tax incentives for long term and Small companies investments.

To complement with EU IPO Task Force & other sources

1. Should measures be taken to promote greater liquidity in corporate bond markets, such as standardisation? If so, which measures are needed and can these be achieved by the market, or is regulatory action required?

Let’s discuss during the WG as diverging views on this one: while Afep is supportive of improving liquidity and certain standardisation, DAI comments that:

- “Depends on what will be the feedback on that issue for issuers of corporate bonds. First feeling: Though standardization may improve liquidity it comes at the cost of reduced flexibility for issuers. Issuers will frequently rank this flexibility higher than potential benefits form increased liquidity.

- Liquidity can however improved by reviewing the regulation for market makers which increasingly leave the market for reasons of capital requirements etc.”