Brexit threatens momentum behind EU's capital markets master plan

Europe’s flagship plan to open the channels for investor capital to flow across the single market could take on greater importance in the event of a Brexit – but the absence of a British voice in its development would be felt in both UK and the EU.

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Jonathan Hill

The Capital Markets Union is aimed at making it easier for companies to get access to funding from anywhere in the EU by reducing barriers to cross-border investment. The plan is being led by the EU’s financial services commissioner Jonathan Hill, a UK Conservative politician.

Senior capital markets practitioners and commentators have said that a UK vote to “leave” in tomorrow’s referendum on EU membership would reinforce the need for CMU but that it would miss the driving force of Hill.

One head of investment banking in London said: “Brexit would create even more need for CMU to work precisely because London will have gone”. He added that southern European states in particular “desperately” need other sources of financing other than that from banks.

According to research by the UK think tank New Financial, published in April, more than 75% of capital markets activity conducted in Europe, excluding the UK, is done in London. New Financial wrote in that report that “unpicking this interdependence could be a complex, lengthy and costly process”.

William Wright, a partner at New Financial, said on June 22 that should the UK vote to leave, the EU’s remaining 27 members would need CMU more than ever, though he warned it could “go to the back of the queue” as other areas take political priority.

He said: “Hill has won over sceptical governments and countries over this idea.”

The head of investment banking added that the “expertise and the drive of Lord Hill himself would need to quickly be replaced”.

The initiative was launched by the European Commission in 2014 to boost the range of funding options available for companies across the EU and reduce the reliance on bank lending – levels of which have fallen since the 2008 financial crisis. The Commission adopted an action plan of key measures to make CMU work in September 2015 in which it touched on, among other things, crowdfunding, private placements and securitisatons.

In the first status report for the project, published in April, Hill said the Commission was “on time and driving issues forward”.

Outside of the EU, experts have warned that the UK would lose ability to influence regulation of these markets, yet may still have to implement similar standards if it wanted to participate in them.

James Inness, a capital markets partner at law firm Latham & Watkins, said: “It’s the perfect example of how voting to leave would leave us bound by EU rules but unable to influence the development of those regulations.”

He added: “Who within the EU would be interested in our views if we vote to leave? In reality, in a post-Brexit world, if UK companies were to seek to participate in the European capital markets they would have to do so under the rules set by the other members of the EU.”

Inness’s comments were echoed by Lord Paul Myners, the former City minister, who told Financial News that the project would continue but that the “UK would be marginalised”.

He said: “[The] Union outcome is very important to the development of a safer and more diverse business financing model in Europe. Other European financial centres will press for progress but without listening to London.”

Guillaume Prache, the managing director of retail investors’ pressure group Better Finance and the former European head of Vanguard, said: “A Brexit can only hurt the CMU initiative which is already lacking ambition.”

He added: “This lack of any significant capital market integration still deprives European savers and investors from any economies of scale and improved competition benefits. A Brexit can only push further away again such a fundamental and basic achievement of any international trade union.”

A spokeswoman for the European Commission declined to comment.

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