New Financial

If I ruled the world: a wish list for unlocking capital markets

September 2015 • Topic: Unlocking capital markets • by William Wright

For all the progress that has been made towards a single capital market in Europe over the past few decades, significant barriers remain. These inefficiencies cost the European economy many billions of euros every year in lost investment and unnecessary costs. Here are 10 fantasy reforms that could help unlock the potential of capital markets in Europe. 

Download the full report here

Ahead of the publication of the European Commission’s action plan on capital markets this month, this paper outlines a sort of ‘fantasy capital markets union’. It is based on a series of workshops with senior market practitioners from different sectors of the capital markets organised by New Financial this year to identify the main barriers to deeper capital markets in Europe and how to overcome them.

Our own research shows that capital markets in Europe are only half as developed on average as the US and that the wide range in development between different countries in Europe is holding the economy back, with hundreds of billions of euros a year in lost investment capacity.

As part of each session we asked participants to imagine they were an omnipotent but enlightened dictator, and to think of the one thing they would change – however unrealistic – that would have the biggest impact.

The first part of this paper is a selection of some of the responses to the question ‘if I ruled the world…’ In most cases, the items on this wish list are beyond the realms of possibility. So we have attempted to map out proposals that are a little more practical but which retain the overall spirit and direction of the original suggestion.

The second part of the paper is a more detailed analysis of these suggestions. And the third part is a comprehensive appendix of the different barriers to deeper capital markets raised during our workshops along with some suggested solutions.

The dominant theme throughout is that European capital markets would benefit from much more competition, particularly across national borders. The best way to catalyse this is by pulling down the often artificial national barriers to competition across Europe and significantly increasing the quality and comparability of available information in European capital markets to enable all market participants to make more informed decisions.

Here is a summary of some of the best responses to the question ‘if I ruled the world…’. They are intended to be directional rather than strictly practical policy suggestions:

1. An honest debate on pensions

Requiring governments to come clean about the affordability of their future pensions liabilities would kickstart a more honest debate on pensions. And nudging individuals to take more responsibility for their own future – with the help of a pan-European personal pension product – would encourage deeper pools of capital.

2. A single portal for information

A single pan-European platform for filing and distributing comparable information on issuers (a sort of ‘Euro-Edgar’) would be a great leap forward towards a single capital market. This platform could include credit data on SMEs, and could also act as a central portal for managing corporate governance and shareholder voting.

3. A single set of standards

The same level of comparability of information could apply to the capital markets industry itself. More comparable information on fees, costs and performance across different segments of the capital markets would encourage competition and help customers (and policymakers) make better decisions.

4. Back to the future in trading

The obsession with ever faster continuous trading has created an unwinnable IT arms race across the industry while at the same time fragmenting liquidity. Concentrating trading across asset classes in a smaller number of auctions each day could significantly increase liquidity and reduce costs.

5. A single stock exchange

There are too many exchanges and clearing houses in Europe and not enough competition between them. Airline-style code-sharing arrangements between exchanges and other market infrastructure providers would help create four or five competing blocs that could help concentrate liquidity and significantly reduce costs.

6. A single driving test

The concept of a passport is at the heart of the single European capital market – but many countries slap additional visa requirements on top of common standards. Passports could be replaced by driving licences: all driving tests in Europe are different, but you don’t have to sit a new test every time you drive across a border.

7. A single platform for funds

There are thousands of funds available in the EU but the complexity of the industry is a brake on competition. A single fund comparison site – perhaps – would provide more comparability and could act as a single point of entry for fund managers to register and market their funds.

8. A level playing field on tax

Tax breaks and regulatory waivers could begin to address the bias towards debt over equity and the endemic short-termism in European capital markets. For example, the cost of raising equity could be made tax deductible, and capital gains tax (or a future FTT) could be reduced or abolished for longer-term holdings.

9. A single digital passport

A digital passport for individual and institutional investors would help bring the capital markets into the 21st century and massively reduce the paperwork and administrative burden for all market participants. It could also provide a shot in the arm to cross-border investing.

10. A single insolvency regime

A single insolvency regime may be about as realistic a prospect as adopting a single European language but it was one of the most common items on our wish list. Previous work on convergence and adopting minimum levels of efficiency between national regimes could be accelerated, as could the development of a 29th regime.

Download the full report here