Today, 26 November 2021, the European Commission presented its Capital Markets Package. The package includes changes to the Markets in Financial Instruments Regulation (MiFIR), the rules for alternative investments such as hedge funds (AIFMD), the European Long-Term Investment Funds framework (ELTIF) and the creation of a single European data hub for company data (ESAP). The proposals are mainly aimed at more transparency in the fragmented European capital markets, for example by creating a common European ticker tape for trade data (‘consolidated tape’). For the most part, the measures had already been announced in the Commission’s Capital Markets Union Action Plan last year. The Capital Markets Union is an important step towards a more stable monetary union in which risks are shared across borders. More information on the contents of the various proposals can be found at the bottom of this email.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“The European Commission’s Capital Markets Package is not a major step forward. The plans do not do justice to a real Capital Markets Union. Capital market transparency alone does not make for a Capital Markets Union. For a true European Capital Markets Union, there needs to be a significant harmonisation in various areas of law between the member states. Tax, corporate, insolvency, supervisory and consumer protection laws should be harmonised across the EU. With its new proposals, the EU Commission continues to pick only the low-hanging fruit along the way. This will hardly bring us any closer to the goal of a Capital Markets Union. At least the European Commission wants to present a proposal for a mini-harmonisation in certain areas of insolvency law next year. But that alone is not enough. The European Commission must urgently revise its unambitious action plan for the Capital Markets Union and put the crucial harmonisation projects at the top of the agenda. The incoming German government has announced that it will support the European Commission in this.
Without more transparency and better data, the Capital Markets Union cannot succeed. The creation of a European single access point for company data at ESMA is an important step. In addition, it is overdue that the European Commission finally wants to get its act together on the consolidated tape. A common European ticker tape strengthens competition and can help both professionals and retail investors to navigate the jungle of European capital markets. It is crucial that there is fair and cheap access to the data for all. It should be noted, though, that the European Commission is putting old wine in new bottles: After all, already MiFID II should have delivered the consolidated tape. Today’s overdue initiative mainly makes up for mistakes of the past.
With the planned complete ban on payment for order flow, the European Commission is doing consumers a disservice. The proposed ban is a gift for all conventional providers who want to get rid of the annoying fintech competitors. Retail investors would then have to rely on conventional providers again, which often charge overpriced fees and are not very customer-friendly. There has been a clear market failure in equity trading for retail investors for a long time. As long as the European Commission has not remedied this market failure, it should not ban the business models of innovative challengers outright. The European Commission should ensure fair competitive conditions between fintechs and conventional providers. This includes minimising conflicts of interest and placing great emphasis on investor protection. It is telling that the Commission sees market transparency endangered primarily by the neobrokers. While the European Commission wants to force all retail investors onto the hitherto expensive stock exchanges, it continues to allow financial firms to trade on a large scale in dark pools and on other non-transparent platforms. This does not fit together. Little thieves are hanged, but great ones escape.
A Capital Markets Union can only co-exist with an Investor Protection Union with uniform high standards. ELTIFs can be a sensible long-term investment for retail investors. But the EU Commission’s plans for ELTIFs are unbalanced. The planned expansion of the investment spectrum means that ELTIFs are losing their profile. This will make it even more difficult for retail investors to assess the complex, high-risk and often expensive products. Independent financial advice could prevent bad investments. But as long as MiFID II continues to allow commission-based financial advice with its inherent wrong incentives, independent financial advice will remain a niche phenomenon in large parts of Europe. With the planned opening of ELTIFs also for retail investors with little investment capital, the European Commission is taking the second step before the first. Before the Commission weakens existing consumer protection rules, it must first end the market failure in financial advice for retail investors. I expect the European Commission to tackle the structurally wrong incentives in financial advice to retail investors next year as part of its retail investor strategy.”
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MiFIR: A common European ticker tape is to be created for all major classes of securities, which will bring together the trading data of all European stock exchanges and other trading venues in a timely manner. Market and transparency rules in securities trading are to be partially adapted (e.g. double volume cap), weakened (e.g. derivatives trading obligations) or abolished (e.g. open access for exchange-traded derivatives). In addition, the proposal surprisingly also provides for a blanket ban on payment for order flow (PFOF). PFOF is the common practice of trading venues paying commissions to brokers when they forward client orders to them. These reimbursements form the basis for the business model of the so-called neobrokers, who offer retail investors trading in financial products online or via app at low fees. Since the stock market turbulence surrounding the shares of Gamestop in the spring, in which the users of neobrokers had a considerable share, the business model of these fintechs has been criticised. Among other things, it was criticised that the often game-like presentation of stock trading (“gamification”) can entice particularly a young target audience to gamble. In addition, it was criticised that PFOF creates conflicts of interest and that the neobrokers may not always act in the best interest of their clients. However, the European Commission justifies the planned ban with advantages for market transparency if the orders of retail investors are exclusively routed to transparent trading venues (stock exchanges and multilateral trading systems). In the EU, retail investors account for 7 to 10 percent of daily equity trading.
ESAP: A data hub called European Single Access Point (ESAP) is to be created at ESMA. The information of all companies subject to disclosure requirements in the EU is to be made available in a single place. Currently, users and investors have to search for the information on the individual websites of the companies or use expensive commercial services. ESMA’s offer should be free of charge for most users.
ELTIF: The asset class of European Long-Term Investment Funds (ELTIFs) was launched in 2015 to provide regulated access to tangible and other illiquid investments, especially for retail investors. ELTIFs are closed-end funds that invest in long-term assets such as infrastructure or real estate and must, among other things, meet certain diversification requirements. The distribution of these high-risk products to non-professional investors is only permitted under certain conditions. Among other things, investors must have at least 100,000 euros of free capital, of which they may only put 10% into an ELTIF. So far, this has resulted in a minimum investment amount of 10,000 euros. The Commission’s plans provide for a significant expansion of the investment universe of ELTIFs and, among other things, also allow securitisations. In addition, the thresholds for including short-term investments as well as leverage are to increase. The requirements on the minimum investment amount and the free capital of retail investors are to be dropped.
AIFMD: The AIFMD is the European framework for alternative investment funds (AIF). These include hedge funds, real estate funds, private equity funds and commodity funds. The European Commission wants to tighten the outsourcing requirements for AIF managers. This is primarily aimed at British funds, many of which are currently present in the EU through letterbox companies. In the future, those who want to market funds in the EU single market must also prove a sufficient physical presence in the EU. In addition, the rules for lending by funds are to be harmonised more strongly at the European level.
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The EU Commission’s Capital Markets Package of 25 November 2021:
https://ec.europa.eu/info/publications/211125-capital-markets-union-package_en
The EU Commission’s Action Plan for the Capital Markets Union 2020:
https://ec.europa.eu/info/business-economy-euro/growth-and-investment/capital-markets-union/capital-markets-union-2020-action-plan_en