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09 January 2015

Legal underpinnings for CMU

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The serious groundwork on Capital Market Union (CMU) is now underway but the most difficult areas of commercial law still lie ahead.

The December European Council meeting of the heads of state/government (HoSGs) achieved little but did give its formal, generalised blessing to the concept of capital market union. It may be a year or two before they actually come face to face with the practical implications of what is needed to give effect to this concept. Further, they may be quite surprised to find how much additional integration of commercial law that is required and how deeply that goes to the heart of national economic systems. But that process simply underlines the hugely integrative financial and economic forces unleashed by the crisis. These are now irreversible without an equally grave crisis, so probably irresistible.

A very `green’ paper will be published by the Commission (and will probably already be out by the time this article is published).  It is likely to be little more than a list of questions to be answered by the market.

The Latvian Presidency will support this work in general terms but there may be little in the way of new proposals in 1H 2015 – with the probable exception of a formal commission proposal on the resolution of non-bank intermediaries (especially central counterparty clearers – CCPs). This means that the real work of convening council working parties and creating compromises will probably fall to the Luxembourgish presidency in 2H 2015, and then the Dutch presidency in 1H 2016.

By a delicious irony, the critical work on the whole project may well take place during the UK presidency in 2H 2017. However, if the UK Government is then simultaneously campaigning to leave the EU, its influence will likely be diminished. It will be interesting to see exactly how a Prime Minster who extols the virtues of CMU for an EU-27, whilst campaigning to cut off the City (and thus a significant portion of its £60bn annual foreign earnings) from this opportunity, might straddle that divide.

A box ticked already: the proposal for European Long Term Investment Funds (ELTIF) was approved. The Commission’s motivation for the proposal was clear but the potential demand for the product is uncertain. However, it seems that some pension funds have an internal requirement that they can only buy products that are open to retail investors.

If Commissioner Hill is not to preside over a mere re-heat of `left-over’ proposals and ticking of boxes, he will have to reach for some of the `high-hanging fruits’ that his predecessors have shied away from.The time must now be ripe to pluck even the most difficult. He listed them in his hearing with the Economic and Monetary Affairs Committee (ECON): “company, securities and insolvency laws, and … barriers in other cross-cutting areas such as taxation...” Several of the detailed specifics are still eerily familiar from my time serving on the Giovannini Group at the turn of the century and some of the “barriers” we identified seem to remain. These include: 

  • Domestic withholding tax regulations serving to disadvantage foreign intermediaries
  • Transaction taxes collected through a functionality integrated into a local settlement system
  • The absence of an EU-wide framework for the treatment of interests earnings from securities
  • National differences in the legal treatment of bilateral netting for financial transactions
  • Uneven application of national conflict of law rules

However, the sheer magnitude of the financial crisis forced attention onto other more pressing measures of financial stability – the European market infrastructure regulation (EMIR), the Bank recovery and resolution directive (BRRD), and the single supervisory mechanism (SSM) to give obvious examples. So, the overall work streams on longer-term structural matters have lapsed even if some issues may have been rolled into the new legislative measures. Perhaps the first task is an audit of what remains - both outstanding and still relevant.

Taxation: Commissioner Moscovici is in charge of this portfolio and he told his ECON hearing that “The common consolidated corporate tax base (CCCTB) proposal should be brought back into the offer[s] major simplification for businesses and foreign investors…” However, and in the context of barriers with regard to transaction taxes and the EU-wide treatment of interests earnings from securities, the commission’s November 2014 report on “Removing cross border tax obstacles” elaborates on some of the minutely-detailed (and politically painstaking) changes that will be required from Member States’ tax authorities to create a genuine free market in capital.

The snag is that “tax” always has to be a matter of unanimity in the EU, so there has never been the pressure to compromise on harmonising such matters. But perhaps there is a silver lining to the black financial transaction tax cloud: many of the euro area states have now broken the taboo on collective action on tax matters. Assuming the UK does not veto their proceeding via “enhanced co-operation”, progress may now be feasible if it turns out that, say, the Commission’s recommendations of 2010 on simplifying withholding tax procedures have not been fully implemented.

Securities law:  As collateral in the EU is normally given in the form of securities, this process has to assume that the title to the securities collateral is clear and available for seizure in the event of a default. Any legal uncertainty poses significant barriers to the safe functioning of the Single Market – as well as risks to stability. The Legal Certainty Group delivered its advice in 2008 and not much has happened since.

Conflict of law rules:The Hague Convention was agreed in 2006 on the “law applicable to certain rights in respect of securities held with an intermediary”.  All EU states have now signed it but I will leave it to legal academics to opine on whether this completely resolves all issues around the uneven application of national conflict of law rules. If not, then Commissioner Hill will have to add that to his list of action points.

Company Law: The evolution of company law within the EU has a long history and generates great heat so the commission’s 2012 Action Plan described its objectives thus: “European company law and corporate governance should make sure that companies are competitive and sustainable. The commission's analysis and consultations over the last two years clearly indicate that further improvements can be made, by encouraging and facilitating long-term shareholder engagement, by increasing the level of transparency between companies and their shareholders and by simplifying cross-border operations of European undertakings.”  However, about 500 responses were generated in the consultation process so the overall action plan is clearly a hot potato for Commissioner Hill as it goes to the heart of the economic functioning of Member States.

Insolvency law: The Commissionmade a formal proposal in 2012 to amendthe existing regulationbut it seems to have run out of steam as member states were forced to modify their own existing laws under the pressure of the recession. The commission’s recommendation of 2014 set out some principles for the states to follow. It included a review clause for 2016 so the topic will surely be revisited.

© Graham Bishop

Documents associated with this article

Legal underpinnings for CMU.pdf

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