On 30 September 2015, the European Commission (the "Commission") presented its action plan (the "Action Plan") to establish a capital markets union ("CMU"). As part of the Commission's larger agenda to stimulate growth, employment, and investment, the Action Plan aims to remove barriers to investment within the EU. Furthermore, the Commission wants to create opportunities for investors, connect investment to the real economy, strengthen the stability of the financial system, and promote deeper financial integration.
The Commission considers that, in addition to traditional bank-financing, alternative sources of funding should play a bigger part in the financing of companies that have limited access to traditional funds (e.g., SMEs and start-ups). Such alternative sources include venture capital, crowdfunding, and capital markets. The Commission believes that the EU is running behind in relying on such types of financing.
According to the Action Plan, the advantages of using more diversified sources of financing are twofold. Not only does such use stimulate business and investment, it also increases financial stability as it limits the risk exposure of traditional financial institutions and, thus, reduces the risk of a banking crisis affecting the real economy. Establishing a CMU would therefore contribute to the achievement of the goals of the European Economic and Monetary Union.
Even though the Action Plan is a medium-term project, the Commission has already undertaken some initiatives. The Commission thus made proposals to revamp the use of securitisations, promote long-term investment in infrastructure by insurers, and amend the Prospectus Directive. These initiatives are addressed below in further detail.
The Commission estimates that an additional EUR 100 to EUR 150 billion would be made available in the EU economy if EU securitisation issuance would reach pre-crisis level. To this end, the Commission made two proposals to revamp securitisation in the EU.
Firstly, the Commission has introduced a proposal for a Regulation which will establish a simple, transparent, and standardised regulatory framework for securitisation (the "Proposed Securities Regulation" can be found here). The Proposed Securities Regulation will apply to all securitisations and will include rules on due diligence, risk retention and transparency. It will also list the criteria for Simple, Transparent and Standardised Securitisations ("STS Securitisations").
Secondly, the Commission introduced a proposal to amend Regulation 575/2013 on prudential requirements for credit institutions and investment firms (the "Capital Requirements Regulation"; the proposal can be found here), in order to make the capital treatment of securitisations for banks and investment firms more risk-sensitive. In particular, the capital treatment should reflect properly the specific features of STS Securitisations.
Investment in infrastructure
The Commission is convinced that large infrastructure projects are crucial to achieving growth in Europe. However, such projects require substantial long-term financing. In that regard, the Commission believes the insurance and reinsurance industry could play a pivotal role in the stimulation of infrastructure projects, through investments in equity and debt. In order to eliminate unjustified hurdles preventing (re-)insurance companies from making such investments, the Commission proposed a number of amendments to the Commission Delegated Regulation 2015/35 concerning the calculation of regulatory capital requirements for several categories of assets held by insurance and reinsurance undertakings (the "Solvency II Regulation"; the proposed amendments can be found here).
The main novelty is the introduction of a new asset category in the Solvency II Regulation, the 'qualifying infrastructure investment', which will benefit from its own risk calibration, resulting in lower capital charges. Consequently, the amount of eligible basic own funds which (re-)insurers must hold against the debt and equity of these infrastructure investments ("capital requirements") will be reduced. This will make it less burdensome for insurers to make such investments.
Finally, the Commission launched a consultation on Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading (the "Prospectus Directive"; See, this Newsletter, Volume 2013, No 8, p. 2), and has pledged to announce proposed changes before the end of the year. The changes will seek to reduce administrative burdens on companies, while maintaining effective investor protection. This should make it easier and less expensive for companies to raise capital throughout the EU.
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