PwC has recently published an interesting report on the European Capital Markets Union (CMU). The European Commission has an objective to diversify and improve access to capital. Knocking down barriers and streamlining processes to accomplish this goal should be good for the entire EU economy. But as with any strategic policy objective there are challenges ahead. PwC is of the opinion that “two different complimentary approaches need to be pursued”.
First market-based finance must be a priority. Second, integration of capital markets can reduce the friction inherent in cross-border transactions today. PwC states that “market-based finance is underdeveloped in Europe”. Contrasting to the US, European households hold far fewer listed shares as an equity culture is not as prevalent. Alternatives to banks and large capital markets remain sclerotic with private equity and venture capital less evolved as well. PwC highlights eight major barriers that impede the development of a more efficient capital markets. According to PwC these challenges are as follows:
- The cost for firms, especially SMEs, to enter market-based financing is high
- Households have an aversion to risk (and thus equity)
- The cost of securitization is too high. Securitization can boost liquidity.
- Crowdfunding is still “embryonic” and suffers from “legal and regulatory impediments”
- Access to information remains “Asymmetric”.
- Taxes are diverse and not harmonised across national boundaries
- Inconsistent regulation is a big problem
- The EU is not a complete Monetary Union
At first glance, the challenges may seem insurmountable, but the goal is very important. Integrated capital markets can foster and build economic activity – if the guiding policy is market driven.
Crowdfunding is a shining light on the horizon. While still miniscule in comparison to traditional capital markets, EU member countries possess an opportunity to allow the sector to evolve without traditional regulatory impediments. But national regulatory regimes diminish pan-European effectiveness;
“In Europe … crowdfunding is largely regulated by national laws. In practice, 28 different legal frameworks coexist in a single market, which impedes the scalability of the crowdfunding sector.”
PwC notes the evolving peer to peer lending or marketplace lending (MPL) sector is “interesting”. The firm views MPL as playing a “key role in the growth of securitization”. The report states that MPL benefits from a more supportive regulatory environment in some EU countries. Of course, the UK is at the top of the list as the FCA has provided a simple “landscape for marketplace lenders”.
In closing PwC downplays the challenges ahead by saying “additional work is needed”.
As for alternative finance such as crowdfunding, “implementing an EU framework could promote investor protection and introduce a step away from the localised ‘friendly’ investing that characterises much of the sector.” Access to capital is imperative for any nation to create a vibrant, innovation-based economy. The question remains whether policy makers have sufficient motivation to reduce barriers instead of simply adding more.
The PwC report is embedded below.
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