Magazine Issues » February 2016

ASSOCIATION COLUMN: CMU should return capital markets to the public

Arnaud HoudmontThere seems to be a consensus that broadening and deepening EU capital markets – in order for these to complement the struggling and costly banking sector in the financing of the European economy – will be key to achieve the hitherto elusive growth Europe seeks. Crucially though, for the project to succeed, European citizens as individual investors and savers should be at the heart of it. There is an abundance of investable private capital in Europe, with households desperately looking for positive real returns on their savings in an ongoing climate of low interest rates, excessive fees, high complexity of investment products and financial repression.

The European Commission itself stated that EU households are the main source of long-term financing for the real economy. Despite this recognition, individual European citizens run the risk of being sidelined and dismissed by the future architects of the EU’s Capital Markets Union (CMU) project as being too risk-averse and short-term oriented. 

In reality, with 62% of financial savings by EU households invested in long-term investment products and a significantly larger share of individual investors in small and mid-caps than large caps, they, by comparison and contrary to conventional wisdom, prove themselves to be less risk-averse and more long-term oriented than institutional investors.

For too long, individual investors and savers have been crowded out of equity markets and pushed into underperforming packaged products. The fragmentation of equity markets has meant that they have, to all intents and purposes, been limited to data on, and transactions in, regulated venues, while the larger part of transactions are now being executed in the ‘dark’ by ‘professional’ players. 

To ensure long-term growth, it will be crucial to rehabilitate equity investment across the board and ensure a level playing field for all market participants. If the proposed CMU can help reconnect those companies and projects that need capital with those who have it, then it may well succeed in what it set out to accomplish in the first place. 

Naturally, restoring easy access to equity markets for individual investors in Europe will not eliminate the need to improve the long-term net returns of intermediated – ‘packaged’ – investment products. With a view on diversifying risk, such products will – and should – remain the main vehicles for individual long-term investments. In this light, it will be indispensable to address the acute lack of adequate, clear and reliable information on the price of packaged investments and on their real net performance… future and past. 

The CMU, as envisaged, is lacking on many fronts. The packaged retail and insurance-based investment products (Priips) rules that are expected to come into vigour around mid-2016, for instance, will eliminate the requirement for the disclosure of past performance in favour of ‘future performance scenarios’, permitting providers to use forecasts of future returns to tempt retail investors who will not know whether these products have lost money.

Another case in point is the proposal for a revised Shareholders Rights Directive (SRD) that will do very little to improve shareholder rights. For all intents and purposes the SRD in its current form means that we are now looking at a CMU without a single market for EU-wide shareholder engagement, as nothing is really done to lift the barriers hampering individual cross-border shareholders in their voting rights. 

All the talk about households being at the heart of the CMU risks being no more than hot air.

Arnaud Houdmont, chief communications officer, Better Finance

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