After Brexit and with the City of London leaving the single market, economists argue that the UK needs to be part of the Capital Markets Union and work closely with the common capital market regulatory body so that the EU develops a strong single market for capital.

What is the EU Capital Markets Union (CMU)?

The Capital Markets Union (CMU) is an initiative “to build a true single market for capital” for all EU Member States. Its goal is to develop strong capital markets in the EU. At the heart of the European Union’s single market is the fundamental objective of the free movement of capital across borders so that it can support companies and increase investment opportunities. The European Commission’s priority is then to strengthen European economy and stimulate investment, so there are diverse sources to fund business and entrepreneurs, offer more options for savers and build a robust economy. 

On 30 September 2015, the Commission implemented an action plan in which it set out a list of measures that would enable the creation of a “true single market for capital in Europe.” By removing barriers to cross-border investment and dropping funding costs, the CMU aims to help businesses access capital from anywhere within the EU, increasing opportunities for investors and savers so that there is significant economic growth and more jobs. 

Benefits of a CMU

The action plan on building a Capital Markets Union stresses the need to unlock investment from the EU and the rest of the world so that capital is mobilised within Europe and EU companies, where long- term sustainable projects can create more job opportunities, while the financial system becomes more stable and competition increases. Cross-border risk-sharing and investments, more liquid markets, different sources of funding, lower costs, are a few of the benefits from developing a stronger capital market. The function of a Capital Markets Union is to strengthen “the link between savings and growth. It will provide more options and better returns for savers and investors. It will offer businesses more choices of funding at different stages of their development.”

What will happen after Brexit? 

The City of London is a strong capital market, but with Brexit, London will no longer be part of the single market. With investment banks transferring parts of their operations in cities such as Frankfurt, Paris or Dublin, and possibly with pension and insurance funds moving to Amsterdam or Luxembourg, the capital markets would become fragmented. In a Financial Times article, Reza Moghadam, the economist and vice-chairman for sovereigns and official institutions at Morgan Stanley, explained that Brexit has upset capital markets union by removing London and that “a physical splintering of capital markets is under way — with adverse implications for cost and efficiency.” In addition, a “regulatory splintering is also on the cards — with adverse implications for consistency and efficiency” since after Brexit the UK’s Prudential Regulation Authority (PRA), currently the sole regulator of capital market activity, will be changed. The PRA, which was created by the Financial Services Act (2012), is part of the Bank of England (BoE), and is responsible for the prudential regulation and supervision of 1,700 banks, building societies, credit unions, insurers, and major investment firms.

How to save the capital markets union

Moghadam says that the CMU needs a common regulator. He has pointed out that the European Securities and Markets Authority (ESMA) is an example of such a supervisor. ESMA is an independent EU authority whose role is to protect the stability of the EU’s financial system by safeguarding investors and helping financial stability. Brussels research group, Bruegel, said last week (8 February), that the EU needs a fully integrated single market for financial services and a reformed ESMA which will become the supervisor of centralised European capital markets: “ESMA should operate in a hub-and-spoke model with national capital market authorities, similarly to EU competition policy enforcement and euro-area banking supervision.”

The creation of a regulator for the new single capital market would oversee national regulators and the growth of capital markets, ensuring that the EU’s Markets in Financial Instruments Directive (MiFID)—a European Union law that provides harmonised regulation for investment services across the 31 member states of the European Economic Area—is properly enforced across all capital market activities within the EU.  

Moghadam added that the UK could participate in the common capital market regulatory body, and this could be part of Theresa May’s free-trade arrangements for the financial sector. For him, the UK has a lot to offer apart from stability to European capital markets. It can also bring the continued use of English law to enforce contracts and “would allow the EU to tap into the PRA’s capital markets expertise.” Moghadam sees the CMU as one of the EU’s best initiatives, but if it’s going to be successful, it needs to have a new “pan-European regulator” and “a seat for the UK at the table.”