EU capital market regulation: rolling along with both progress and pain

A tsunami of new regulation has hit EU capital markets and capital market players in recent years – and terms like MAR, MiFID II, CMU and SRD II have become a natural part of our vocabulary. The aim of this far-reaching process is to build a harmonised EU capital market characterised by transparency, trust and security. How far have we come and what have we achieved? And what’s next? We asked Professor Jesper Lau Hansen of the University of Copenhagen to share his views on the implications of recent years’ capital market regulation and to give us his take on the future development within this area.

06.12.2019

Thousands of new rules have been introduced in recent years – what’s on the EU’s agenda in the coming period?

"Following the implementation of MAR and the ongoing implementation of SRD II, there’s currently nothing new in the pipeline as regards corporate law. Corporate law itself does not attract much attention at the European level – it lives a bit of a hidden life. On the other hand, changes affecting the financial sector continue to be made, and in a number of cases we’ve seen financial sector regulation being extended to other types of companies. So we’ll probably see some drip-by-drip spillover.

The latest item of new EU regulation is the ‘corporate package’, consisting of a new directive on cross-border conversions, mergers and divisions. It was adopted by the European Parliament in April 2019, and will be implemented in the near future. Yet time is against this kind of new cross-border legislation, as there is very strong focus on tax evasion and tax fraud.

There are also no clear indications of what to expect from the European Commission, although we can see that some questions are being asked – about Artificial Intelligence (AI) and blockchain technologies, among other things. This may indicate that the Commission is considering how blockchain technology can be used to register and identify shareholders, for example, which is one of the problematic areas in relation to the implementation of SRD II. If this technology can be used, it will make companies’ communication with their shareholders, and vice versa, far simpler, enabling direct contact without intermediaries and also allowing shareholders to exercise active ownership more smoothly".

We’re more than three years down the road after the implementation of MAR – what has changed after MAR?

“It’s my impression that MAR has not actually brought that many changes. In Denmark, we already had prudent regulation of listed companies and a well-functioning market prior to MAR, and I didn’t actually see any great need for extensive changes.

But now we have a greater degree of detailed regulation, and it’s obvious that the European Parliament has a great appetite for implementing this kind of regulation. In my view, we now have more and more detailed rules that are not necessary – and on that note, I’m afraid that in the name of detail the bigger issues tend to be ignored.
On a more practical level, companies are experiencing a bigger workload and greater complexity after the implementation of MAR. The MAR regime demands more resources – within compliance, as well as in the day-to-day handling of disclosure rules. In addition, it has become more difficult for everyone to get an overview of the new legislation, due to the links between directives, regulation, Danish law and accompanying regulations. It’s quite simply a challenge to navigate across the entire package of regulation.”

Looking at some of the other areas covered by the recently implemented regulation – have more goals been achieved here than in relation to MAR?

“Yes, some important goals have been achieved, in accordance with the intentions outlined in the regulation. But in many cases I can see both pros and cons.
We’ve achieved greater transparency in a number of areas, such as derivatives trading, which played a significant role in connection with the financial crisis. The derivatives area has become more transparent, bringing some very useful information to the market – and is an important tool for the authorities.

We’ve also achieved greater transparency regarding management remuneration, but this transparency can also backfire. Everyone looks at everyone, which will tend to drive up remuneration – contrary to intentions.

In addition, institutional investors have assumed greater responsibility in relation to their investments. This has some positive effects, but we should also be aware that many investors – such as index funds – do not want to be more active. They’re being forced to exercise active ownership and seek to do so in the easiest way possible, namely by passing it on to proxy advisers, who thus become very powerful. I consider this framework to be too rigid, since we need to be careful about imposing active ownership, as it can do more harm than good.

As an overall assessment of the implications of the regulatory regime – and thinking ahead – I consider it important to note that the number of listed companies is declining, both in the EU and the USA. For many companies, the obligations that listing entails are too costly and burdensome. This is a serious reminder to legislators. On the other hand, the number of private-equity-owned companies is increasing. I see a risk of moving towards increasingly more comprehensive regulation of companies that are not listed, but are still considered important, called PIEs (Public Interest Entities). There will not necessarily be any recognition by legislators that they’ve probably been too tough on listed companies and should back off a bit. I won’t go into further detail on these complicated and interesting issues, but merely conclude that this is an important matter deserving political attention.”

One of the European Commission’s goals is to create opportunities for investors and connect finance to the wider economy by increasing and diversifying funding sources though the Capital Markets Union. What’s happening within this field?

“Since the European Commission presented the plan for the Capital Markets Union (CMU) in 2015, many ships have been launched, and the CMU project is forging ahead, although there has been some stormy weather, including Brexit.

It’s hard to predict the future of the CMU, since London’s position as Europe’s financial centre plays a key role in the achievement of the CMU. It would be difficult for other countries to take on this role – it’s not that easy to build infrastructure, competences, etc. and it’s also very expensive. We saw that many financial companies in London moved some of their functions to other EU countries after the UK’s referendum on leaving the EU, but this ’evacuation exercise‘ seems to have ceased. If the UK succeeds in leaving the EU on a reasonable basis, I don’t actually think that Brexit will necessarily have serious implications for the CMU. The UK and the EU need each other and there is a lot at stake for both parties. I believe this is a good starting point for developing future solutions.”

Revision of mar

Article 38 of MAR requires the European Commission to present a report to the European Parliament and the Council for assessment of various provisions of MAR. The European Securities and Markets Authority (ESMA) published a Consultation Paper on MAR on 9 October 2019.

The Consultation Paper covers a wide range of fundamental MAR-related topics – such as issues and questions related to the identification of inside information,

definition of inside information, delaying of disclosure of inside information, market soundings, insider lists and share buy-back programmes.

Based on the feedback received from stakeholders, ESMA will develop a final review report that is intended to be submitted to the European Commission in the spring of 2020.

Flemming Merring

Head of Issuer Services

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