– Final Report of the High Level Forum on the Capital Markets Union –

I. Capital Markets Union

The Capital Markets Union seeks to remove regulatory and non-regulatory obstacles to the free movement of capital across borders, thus creating new opportunities across the Single Market for businesses, savers and investors and increasing the financial and economic resilience of the European Union. It is a cornerstone of Europe’s integration, a source of more sustainable economic growth and an important pre-condition for the strengthened role of the Euro.

Although significant progress has been made since the Capital Markets Union Action Plan of 2015, the Capital Markets Union has not been finalized yet. The European Union to a large extent still has 27 individual capital markets.

The Capital Markets Union is particularly needed to:

• improve the resilience of the EU financial system;
• diversify funding choices of European companies of all sizes and at all stages of their development;
• improve the reach of retail investors;
• foster cross-border investments and the provision of cross-border financial services;
• build a unique competitive advantage globally as an efficient and well-functioning sustainable capital market; and
• mobilize the private capital for a green Europe – notably supported by the European Green Deal – and a digital Europe.

The COVID-19 crisis as well as Brexit make the finalization of the Capital Markets Union even more urgent. In the aftermath of COVID-19, the Capital Markets Union should act as a catalyst for mobilizing private investments into companies to complement the unprecedented public support agreed on by EU authorities and Member States.

II. Final Report of the High Level Forum

A. Overview

The European Commission created a High Level Forum on Capital Markets to get the input from a broad range of stakeholders on how to finalize the Capital Markets Union. The High Level Forum published its Final Report on the Capital Markets Union in June 2020 (the “Report“). The Forum has brought together 28 experts from a wide spectrum of professional and national backgrounds to recommend an array of measures that should lead to the finalization of the capital Markets Union.

The Report does not contain abstract ideas or high level principles that should be achieved, but very precise and clear recommendations on what should be done in order to move Europe forward and create a Capital Markets Union. The 17 clusters of measures presented in the Report are mutually reinforcing and dependent on each other. A call for feedback is open for three weeks to gather the opinions from multiple stakeholders on the recommendations of the Forum.

The implementation of most of the measures is scheduled for 2021 or 2022, which seems to be – although not entirely unrealistic – at least a very ambitious timeline.

B. Recommendations

The High Level Forum proposes the following recommendations:

• Setting up a European Single Access Point (ESAP) for company data in order to minimize fragmented and scattered company data;
• Targeted review of the ELTIF framework and introduction of tax incentives as currently too few investment vehicles are available for late stage and long-term investment;
• Targeted review of Solvency II in order to ease insurers’ investments in equity;
• Implementation of Basel III rules in the prudential framework for banks to avoid banks’ withdrawal from market making activities and increase banks’ investments in equity;
• Targeted review of the securitization framework to extend banks’ funding to SMEs;
• Alleviation of listing rules as public listing is currently too burdensome and costly;
• Implementing clear rules for the use of crypto/digital assets to raise the potential of this asset class;
• Targeted changes to CSD passport, supervision and cross-currency rules in CSDR in order to facilitate cross-border trading;
• Targeted review of SRD 2 to facilitate the exercise of ownership rights by investors;
• Standardization of contractual terms for the provision and use of cloud services by EU financial operators;
• Creation of a pension dashboard in Member States including pension tracking systems for individuals to make pensions more sustainable and adequate;
• Establishing and implementing measures to foster financial literacy and engagement to strengthen retail investors’ trust in capital markets;
• Targeted amendments to IDD, MiFID II and PRIIPs Regulation to improve disclosure, fairness and quality of financial advice as well as the creation of a voluntary pan-European quality mark (label) for financial advisors;
• Creation of a regulatory framework for open finance by improving data sharing;
• Legislative proposal to introduce a standardized system for WHT relief at source as well as a proposal to harmonize tax definitions, processes and forms as currently lengthy and costly WHT reclaim processes deter cross-border investments;
• Targeted harmonization of central elements in corporate insolvency law;
• Legislative amendments to strengthen governance, powers and toolkit of ESMA and EIOPA.

In the following we provide an overview of some of the above measures which are of particular relevance for the financial services industry.

1. Setting up a European Single Access Point (ESAP) for company data

The idea is to establish an EU-wide digital access platform (European Single Access Point, or “ESAP”) to companies’ public financial and non-financial information, as well as other financial product or activity-relevant public information, which shall be freely accessible to the public and free of fees or license use. The purpose of the creation of ESAP is to help investors in their investment decisions by providing easily accessible, reliable, understandable and comparable public information. To make investment decisions, investors in capital markets require information about issuers of securities. The availability and quality of such public information is a measure of the transparency of a capital market, which is itself a driver of investor confidence in capital markets.

2. Legislative proposal to introduce a standardized system for WHT relief at source

The proposal is to implement in EU law common definitions, common processes, and a single form, relating to withholding tax relief at source procedures and their streamlining. To achieve significant alleviations for stakeholders, it is recommended to introduce a standardized system for relief at source of withholding tax based on authorised information agents and withholding agents.

The main issue as regards the current WHT situation is its inefficient, prone to fraud/abuse refund procedures. While national laws of each individual Member States in principle allow for a refund of the tax withheld to nonresident investors, those refund procedures tend to be extremely resource-intensive, costly and lengthy for both tax administrations and taxpayers, leading to late refunds. This ultimately affects cross-border investment and fragments the single market.

3. Targeted amendments to MiFID II

Apart from proposals concerning the MiFID II inducements provisions and the creation of a voluntary European quality label for financial advisors, the High Level Forum suggests introducing a non-professional Qualified Investor (QI) category into MiFID II with the following characteristics:

• Investment firms and credit institutions would have the option, but not an obligation, to apply the additional categorization to their clients.
• Upon his/her explicit request and subject to meeting the eligibility criteria, a retail client may voluntarily opt in to become a QI.
• The eligibility criteria should be cumulative and should include a proven track-record of trading different types of financial instruments over at least three years and financial assets of at least EUR 50,000 at the investor’s personal disposal.
• Investment firms and credit institutions should not be under obligation to ensure continuous compliance of QI with the eligibility criteria.
• A QI may revoke his/her QI-status at any point in time and upon his/her explicit request.
• Information requirements to QI should be considerably reduced as compared to the requirements applicable to retail investors. A QI should have access to a wider range of investment products.

4. Implementing clear rules for the use of crypto/digital assets

Currently, there is no unique interpretation of the MiFID and E-Money Directive rules as regards the classification of crypto/digital assets as financial instruments/e-money in the European Union. Considering that the classification of an asset as financial instrument/e-money has far-reaching regulatory consequences (potential license requirements, applicability of the rules of conduct under MiFID II etc.), this discrepancy in national laws results not only in a distortion of competition in the various Member States but, more importantly, in a fragmentation of the European Market which is a huge hurdle for the distribution and marketing of crypto and digital assets within the European Union. In light of this, the High Level Forum suggests amending the relevant EU financial legislation, in particular elaborating a uniform and encompassing definition of crypto/digital assets as financial instruments/e-money and ensuring proper and uniform supervision in the Member States.

The Covington Financial Services team will continue to monitor the situation and update you on any new developments.

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