Boston Consulting Group: Yes Europe Needs a Capital Markets Union

European Union Financial Services Commissioner Jonathan HillCrowdfund Insider reported last week on the push within the EU to further capital markets integration in light of the daunting challenges of a fragmented regulatory regime and cross border idiosyncrasies.  The European Commission was envisioned as a seamless market facilitating continent wide economic amalgamation.  The reality has been a bit of a challenge as national political motivations and cultural disparities has often acted as an invisible barrier to market efficacy. The European Commission has published a “green paper” on building a functioning capital markets union and we believe crowdfunding and new forms of finance can act as a catalyst in achieving this goal.

Now the prominent Boston Consulting Group, alongside the Association for Financial Markets in Europe (AFME), has added to the cacophony of proponents on a Capital Markets Union (CME).  In a recent report entitled “Bridging the Growth Gap”, BCG states that market fragmentation has put a brake on growth – especially when compared to the United States.

Funding Hurdle with Finish LineSimilar to the EU Green Paper, BCG admonishes the EU for being too dependent on bank financing – a heavily regulated and largely antiquated industry.  BCG and AFME support the objective of a CMU advocating on behalf of a “responsible equity risk culture, important for funding entrepreneurs, especially in high growth sectors such as technology”.

Economic growth and inefficient bottlenecks in the financial industry are styming much needed job creation and innovation. While the report by BCG is accurate regarding the equity risk culture gap in the EU it fails in recognizing the power and potential of new forms of finance. Banking and traditional financial vehicles have suffered from excessive regulations and cultural ossification. Crowdfunding, while mentioned tangentially in the report referencing the Massolution data that is several years old now, has grown dramatically since the numbers BCG / AFME promote. The recent report published by Cambridge University’s Centre for Alternative Finance depict alternative finance growing at a rate of 144% per annum in Europe (excluding the UK).  Peer to  peer lending is positioned to completely transform the banking industry unless established players adapt. Equity The Future of Bankingcrowdfunding has moved in quickly becoming an efficient form of early stage, and later stage, capital raising.  Cambridge estimates the alternative finance sector will jump to £7 billion for 2015.  Granted BCG may not have had the benefit of the report before it completed its document “Bridging the Growth Gap” but perhaps it is indicative of a traditional perspective instead of a disruptive approach?

BCG poses the question as to what could Europe do differently?  The authors highlight the following suggestions:

  • production of a Private Placement guide
  • establishment of common documentation
  • tax treatment ambiguity should be a priority area for standardisation
  • achieving regulatory clarity about the capital treatment of European Private Placement bonds
  • easy-to-understand guidance about the current regulatory treatment of Private Placement Deals

European Union GrowthWe would suggest focusing on a light touch regulatory environment to both crowdfunding and peer to peer lending that recognizes the social dynamics of the internet and embraces the power and potential of transparent capital formation. Pan European standardization is a requirement but challenging established norms is a first.

 


 

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