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July 2020

The European Commission is consulting until early August on the 17 recommendations of its High Level Forum (HLF) on Capital Markets Union (CMU). The recommendations (PDF 3.1 MB) are wide-ranging, and several are of direct relevance or interest to asset managers and fund managers.

The three overarching themes of the report are promoting simplicity, enabling competition and creating an equity culture. The 17 recommendations are grouped into four clusters, one of which is removing obstacles to cross-border investment. The suggested timelines for achieving the recommendations are mostly during the next two years.

Given that Commission President, Ursula von der Leyen has made the completion of CMU one of her key objectives, we can expect the Commission to seek to progress all 17 of the recommendations, although some will be more difficult to deliver than others. It is important that the asset management industry engages fully in the ongoing discussions.

On a separate note, the Commission has published a revised notice (PDF 356 KB) on the implications of the end of the transition period for UCITS, AIFs and MiFID portfolio managers. The notice does not contain new news, but it underlines the need for firms on both sides of the new EU-UK border to ensure they are prepared and seek to minimise disruption for portfolio management clients and fund investors.

Issues identified by the HLF

The HLF report delivers the clear message that the EU needs CMU more than ever and that it is now “vital and extremely urgent” that it is accomplished. Many businesses require substantial equity funding, which bank lending alone cannot deliver. The structural changes imposed by Brexit could exacerbate the weaknesses of the EU financial structures and national capital markets are generally too small to attract global investors. Fully functioning, integrated capital markets are needed.

The report picks up three themes that have come to the fore for regulated firms and regulators: use of technology/digitalisation, sustainable finance and cross-border activity. We discuss these themes in the first paper of our new publication series, Financial Services: regulating the new reality.

The HLF states that mastering and leading digitalisation will help drive significant efficiency gains in EU financial markets and that only sustainability can ensure prosperity in the long run. CMU is needed to deliver the EU's New Green Deal and to enable the EU to compete globally.

The HLF’s recommendations

The HLF proposes a set of measures to:

  • enhance trust and confidence of EU citizens in capital markets
  • simplify existing rules and reduce legal uncertainty from different national approaches
  • address unintended consequences of existing legislation and high compliance costs
  • improve access to and reduce the costs of information
  • review investment barriers
  • incentivise the use of new digital technologies

The proposals are grouped into four clusters: the financing of business, market infrastructure, individual investors’ engagement and obstacles to cross-border investment.

HLF recommendations and timelines:

  • Create a European Single Access Point for company data (phases: mid- 2021, Q2 2023, 2025 and 2028)

  • Review of ELTIFs and tax incentives (by end-2020)

  • Review of Solvency II and IASB work (mid-2021)

  • Implementation of Basel 3 and (end-2020)

  • Review of Securitisation framework (mid- to end-2021)

  • Alleviation of listing rules (end-2020 and end-2021)

  • Legal certainty on crypto/digital assets (end-2020 and end-2021)

  • Review of certain rules for Central Securities Depositaries (CSD & CSDR) (mid-2021)

  • Review of Shareholder Rights Directive II (end-2023)

  • Provision and use of cloud services (end-2020)

  • Pension dashboard, pension tracking system and auto-enrolment (end-2021 and end-2022)

  • Financial literacy and engagement (2022-2024)

  • Review of MiFID II, IDD and PRIIP KID regarding disclosures & financial advice; creation of a kitemark for financial advice; study of the role of inducements for the adequacy of advice (2020-2022)

  • Regulatory framework for Open Finance (end-2021)

  • Standardised system for WHT relief at source (mid-2022)

  • Harmonisation of central elements in insolvency law (early-2022)

  • Strengthened governance, powers and toolkit of ESMA and EIOPA (mid- 2021)

Of special note for asset managers and investment funds are the recommendations: to undertake a targeted review of the ELTIF framework and the introduction of tax incentives; a targeted review of the Shareholder Rights Directive II; and (grouped as one recommendation):

  • Targeted amendments to IDD, MiFID II and PRIIPs Regulation to improve disclosure
  • Amendments to IDD, MiFID II to improve the fairness and quality of financial advice
  • Creation of a voluntary pan-European quality mark (label) for financial advisors
  • Other non-legislative measures, including a study on the role of inducements for the adequacy of advice

The recommendations to standardise contractual terms for the provision and use of cloud services by EU financial operators (with new rules to enable firms and supervisors to monitor and contain risks) and to introduce a standardised system for withholding tax relief at source will have important operational implications for asset managers. 

On the investment front, the recommendations to review the securitisation framework and create legal certainty about treatment of crypto-digital assets will be relevant for some investment strategies. And measures to foster the pensions market and financial literacy and consumer engagement should lead to a widening of opportunities for firms in the retail investor market.

Questions for CEOs

  • Which of the report's 17 recommendations are of most importance for our business?
  • What challenges and opportunities might those recommendations raise?
  • How are we engaging as a firm in this debate?
  • For EU/EEA firms and funds:
    • have we maintained our position within the UK's Temporary Permissions Regime to be able to continue to do business in the UK after the transition?
    • have we considered which additional rules we have to comply with post-transition? How advanced are our preparations? Are we confident that we will be in full compliance by March 2022 at the very latest?