By Huw Jones
LONDON, Sept 4 (Reuters) - The European Union’s executive will propose “radical” changes to cut the cost of stock market listings and streamline insolvency rules as part of wider efforts to raise more corporate funds for economic growth, an EU document showed on Thursday.
The European Commission’s (EC) financial services chief Jonathan Hill wants to put in place the building blocks of a “capital markets union” or CMU by 2019 to make it easier for companies to raise new money.
The CMU is aimed at removing barriers to create a more efficient system of market-based financing, ironing out national differences.
Currently “EU companies mostly rely on bank funding to finance their growth,” the document seen by Reuters said.
The document, written by EC officials, sets out many elements for Hill’s CMU “action plan” that will be unveiled on Sept. 30. Some changes would require legislation, others would be industry-led.
The EU executive will propose a “radical modernisation” of the bloc’s rules on the prospectus a firm must publish to attract investors to make a stock market listing “less costly”, the document said.
The executive would also “launch work on the development of a blueprint for the creation of a pan-European market for private pension products”.
The executive wants pension funds to play a bigger role in buying shares in companies and investing in infrastructure such as roads and faster Internet networks.
The action plan also lists ways to remove the remaining national barriers to a “fully efficient” mutual funds market in Europe.
The action plan represents an opportunity to take another look at how funds are authorised, reduce national administrative burdens and simplify cross-border marketing, the document said.
Winning back the trust of retail investors is another core objective, such as by looking at “availability and cost” of financial advice, and tailoring EU rules to better fit online sales of financial products.
Karel Lannoo, chief executive of Brussels think tank CEPS, said proposals in the document to end fragmentation in the retail investor markets were encouraging but the action plan needed to be slimmer.
“If you have a big shopping list it won’t work. Three or four big proposals should be enough. Making changes to tax and insolvency rules will be impossible,” Lannoo added.
Tax changes require unanimity at EU level, a very high hurdle, while insolvency rules generally reflect long standing national practices.
Some elements address issues that have languished for years due to their political sensitivity, such as differing tax and insolvency regimes.
“The Commission has begun preparatory work with the intention to put in place a minimum harmonisation directive focusing on specific aspects of insolvency,” the document said.
“Subject to further analysis and consultation, a legislative proposal focusing on specific aspects of insolvency could be envisaged for next year, based on commonly agreed principles and minimum rules which would reduce the differences between national insolvency regimes while strengthening weaker regimes.”
Differences in how states collect tax on earnings from a citizen’s savings in another state, known as a withholding tax, also make the bloc’s capital market less efficient, the document said.
The executive suggests a “simplified and unified” template for collecting withholding taxes.
“It will be very difficult to get unanimous member state backing for a unified template and I think the commission should go after something that is easier to achieve,” said Chas Roy-Chowdhury, head of tax at accounting body ACCA.
Some elements have been trailed, such as changes to boost securitisations or the use of pooled debt to raise funds, and industry-led moves to make wider use of venture capital and private placements, or direct investment in companies.
The executive will also examine the “potential risks” of market-based financing and look at how market liquidity in corporate bonds can be enhanced.
Banks say heavier capital charges since the financial crisis make it less attractive to “make markets” for investors and have reduced liquidity in the bond markets, a phenomenon that is now worrying some central bankers.
David Hiscock, a senior director at the International Capital Market Association, a bond industry body, said the CMU was recognising the need to get the right balance in regulation to help improve liquidity. (Reporting by Huw Jones; Editing by Carolyn Cohn and Greg Mahlich)