Commissione Nazionale per le Società e la Borsa, Director of the International Relations Office
European Commission, Director, Financial Markets Directorate
Deutsche Bundesbank, Director General Payments and Settlement Systems
Ministry of Economy and Finance, France, Head of Corporate Financing and Financial Markets
European Parliament, MEP, Committee on Economic and Monetary Affairs
BNP Paribas Securities Services, Head of Public Affairs, Strategy and Corporate Development
BNY Mellon, Senior Advisor, Public Policy and Regulatory Affairs
Euroclear, Chief Executive Officer
Detailed SummaryThe topics to discuss ranged from insolvency and securities laws to taxation, and they all remain very important for the achievement of the Capital Markets Union (CMU). The Chair mentioned that the Eurofi polls indicate that the consistency of insolvency and securities laws is considered the first priority for the achievement of the CMU.
1. Common issues and priorities
Several members of the panel emphasized that discussing the three topics of insolvency law, securities law and withholding tax at the same roundtable made sense, because they faced the same type of situation, were deeply embedded in existing national laws and legal traditions, and required a common approach.
Panellists generally called for a pragmatic and practical approach to these issues and welcomed the EU Commission’s (EC) initiatives in this regard.
An industry representative considered that it is very difficult or even unrealistic to take a top down approach to these issues, aiming at harmonisation or attempting to replace the existing rules with new ones incorporating best practices. It is more realistic to take a more piecemeal approach, improving each problem one by one. But even a piecemeal approach carries risks, because each action raises potential feasibility and business case issues.
Some however encouraged the EU authorities to approach these issues in an ambitious way.
A public representative recommended that the EC should be sufficiently bold and avoid focusing too much on actions that are secondary if the objective is to implement a real CMU and reduce the dependence of the EU economy on banks.
There was some disagreement regarding the relative importance of addressing these three topics at the EU level.
Some panellists considered that the overall business case and incentive for tackling all three issues is significant and that insolvency law, securities law and withholding tax issues are three key elements of the success of the CMU. Others suggested that insolvency and tax related issues are particularly essential to tackle. Others yet felt that priorities should be more specifically identified: while conflict of laws regarding securities laws and withholding taxes are must-have actions, those related to insolvency law and securities law harmonisation are rather nice to have actions, one official believed.
Responding to these different remarks, a policy maker commented that the CMU should be considered as a toolbox. The first action plan had 33 actions. In the midterm review, the overall number of actions is expected to double. Every piece of the puzzle is equally nice to have and must have and, together, will deliver in the long term. The matrix applied for all three topics is largely the same, trying to be ambitious and realistic at the same time, and to add another piece to the CMU puzzle. Each tool alone will not be sufficient but, together with the other initiatives, they will deliver.
2. Insolvency law
The discussion began with insolvency laws. The Chair stessed that this involves in particular some issues of consistency of rules for corporations and investors in order to facilitate funding and investment across the EU. There are currently problems in several EU countries notably regarding the length of procedures and their differences across the EU. Insolvency regimes are also key for solving the treatment of non-performing loans.
A policymaker explained that the EC has made a proposal for a Directive on preventive restructuring, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures. This represents a first step at the EU level into the area of substantive insolvency law and the removal of the barriers that stem from the high level of fragmentation of such regimes in the EU.
Nobody should underestimate the importance of this initiative. On the one hand, everyone agrees that differences in insolvency regimes across Member States represent a high barrier to cross border investment. On the other hand, everyone has to be aware that Member States are jealously guarding their insolvency regimes, which they also consider as an expression of their social identity. It is therefore not easy for them to give up their sovereignty in this field and to go towards more harmonisation, which is why the EC has focused its work on these specific aspects to begin with. The EC has proposed a number of measures which aim, inter alia, at allowing honest entrepreneurs to be given a second chance, particularly in overcoming bankruptcy. This is a first step. The EC is confident that by making realistic proposals the chances for success will be much enhanced.
Similarly, with regard to the CMU, the EC wants to be ambitious, but also has to be realistic and propose measures which stand a good chance of finding acceptance. In parallel with the proposal on restructuring and second chance, which aims at harmonising specific aspects of pre- and post-insolvency regimes in the Member States, the EC is also conducting a benchmarking exercise of loan enforcement and insolvency regimes to get a comprehensive picture of the different elements of the insolvency regimes in Member States and to obtain a sufficiently clear mapping of the situation.
The panellists generally welcomed the initiative of the EC regarding insolvency law and commented on its level of ambition and feasibility.
A public representative considered that, although some of the CMU initiatives are not bold enough and tend to tackle secondary issues, that is not the case for the EC’s recent initiative regarding insolvency law which is both realistic and bold. When discussions first started on the CMU in the European Parliament, many stated that a change in insolvency law is essential for achieving the CMU. After the Prospectus Directive, which is useful but not essential, tackling insolvency regimes would be a major step forward. Addressing corporate tax issues and implementing European supervision are other crucial steps that would be needed.
Insolvency law is however a difficult issue to change because it is contentious for the Member States. In the NL, changing it has been impossible. Progress on this part of the CMU is a welcome initiative, but the key is also to put pressure on the Member States themselves to change. Although the initiative aims at improving the European level, the discussion needs to be held at the Member State level. The EC reform is a way to start discussion at the national level, where changes are required.
The current proposal will mainly affect a group of countries that lag behind in their insolvency frameworks. It is not clear whether that gives a great enough impetus for the CMU, which is the downside of this initiative. Looking at recovery rates, most countries have acceptable rates, except for a group of countries in Eastern and Southern Europe. This initiative will mainly have an effect in those countries. However, the initiative is still welcomed as something that everybody wants. Panellists placed an emphasis on the need to be precise and specific when tackling insolvency rules because the “devil is in the detail”. This was not the case initially with the hierarchy of creditors in BRRD where MREL was introduced and this had to be corrected. The EC needs to be bold and also very specific in this field in order to promote cross border investment in the way desired.
The Chair agreed that general principles only work to a certain extent and that precision and identifying the areas where detail is necessary is essential for the proposal to be effective.
An industry representative emphasized that one significant point is that insolvency law is very largely a national, structural barrier. Therefore what is really needed, is a national, structural reform. The statistics on all kinds of insolvency outcomes show massive differences between Member States and that the potential for improvement in some Member States is significant.
A public authority representative stressed that consistency is the right objective, rather than harmonisation. Insolvency law is deeply rooted in national legal traditions. There have been previous attempts to fully harmonise procedures like this in the EU but this has not been possible. These previous experiences need nevertheless to be taken into account. It is therefore appreciated that the EC has defined some objectives and left each Member State room for manoeuvre to reach such goals in their own national law, and in the most efficient way.
One of the most important issues is the timing of the procedure. It is important to have a process that is appropriate but also as fast as possible, and experience shows that that is possible. Shareholder and creditor rights must also be taken into account. Some countries have very efficient systems. Fixing common targets to reduce the delay of proceedings could ease negotiations.
It is also appreciated that out of court proceedings are put forward in the procedure because this avoids tackling some difficult topics that do not have so much influence in the end on harmonising court workings. Out of court proceedings are better when they succeed because they help to form an agreement. That is sometimes difficult, so in court proceedings are needed in the end also. However, the experience in France at least indicates that if one has successful out of court proceedings then the life of the company is more robust for longer.
An official felt that the EC’s initiative on the harmonisation of insolvency law is more of a “nice to have” initiative than a must have one for the CMU.
A public representative considered that addressing insolvency law issues is on the contrary a must have. It is close to the core of economic activity. The main example is banks, where Europe has non performing loans that are much higher than in the US, which shows how an inadequate insolvency framework can hamper economic growth and frustrate investment.
3. Securities law
3.1. The level of ambition of the EC approach and the relevance of a focus on conflict of law
The Chair moved the discussion to the second topic, on securities law. Securities law has been discussed for many years and the EC is ready to move forward.
An industry representative stated that securities law has been both considered as the potential answer to all questions and the Loch Ness monster of the past 15 years. The topic has been regularly discussed in Europe over the last 15 years without much success.
There are two things which all stakeholders could agree on. First, having legal certainty in the securities markets is essential for such markets to be efficient, safe and reliable at the European level. Secondly, current securities laws are still fragmented and highly complex across the EU because of their close relation with property law and because they are considered as a national matter.
To move forward on securities law, a pragmatic approach is needed. A number of requirements must be fulfilled in order to be more successful. First is to focus on a number of specific items and risks, rather than aiming for a high level top down harmonisation approach. That may require trade offs between investor protection, operational efficiency and systemic risk questions.
Second is to take current realities into account. TARGET2-Securities (T2S) is one of them. The ecosystem has changed over the past 15 years and that needs to be considered. Notably, a number of things work well in the current ecosystem. There is, for example, a good definition of settlement finality that protects a number of players. Therefore any changes must not put participants on the back foot of anything already achieved.
Several speakers agreed that the work expected from the recently launched European Post Trade Forum (EPTF) should be taken into account. Several aspects of securities law were handled there and it would be wise to take that into account before embarking on a major new exercise.
Another industry representative agreed that securities law harmonisation is not a new issue. Lessons need to be learned from the past. Some solutions have already been put on the table, but have been met with strong resistance from Member States. If the same approach is proposed again, the response will likely be the same, which is why they need to be pragmatic and realistic. A practical approach is needed but also one that takes into account the way operations work, otherwise it will not be successful. The EC announced that an initiative would be launched regarding conflicts of law. The speaker fully supported that approach. It may not solve everything, but it is the right way forward in order to be successful.
A third industry representative agreed that a pragmatic approach should be taken. However, it is important to point out that even a pragmatic approach still carries the risk of hitting obstacles and failing. An approach regarding securities law is needed that is both pragmatic and ambitious because there are questions of principle. One such question is that legal certainty is needed in the custody holding chain, on which the CMU is built, because investors need to use intermediaries to invest cross border. The industry cannot have a situation where there is a legal risk arising from national laws, which in some cases are antiquated. Legal certainty in this context is needed and if the discussion is not about achieving it, then there has to be a consideration of how to make significant steps towards it. That is the pragmatic approach.
The final remark concerned why the issue is both sensitive and important. The analysis that some degree of legal risk exists in custody holding chains is shared by European regulators and institutions; as a result and in order to try and mitigate legal risk, European legislation imposes various restrictions on how securities can be held in custody holding chains. This is an absurd situation that needs to be tackled. Making progress on issues of legal certainty will both help to reduce problems of systemic risk, and contribute to dealing with other current regulatory problems.
An industry representative commented that the first task for the expert group will be to define ‘legal certainty’. It will be interesting to have a common interpretation of what that means. It also needs to be certain that a decrease in investor protection is not part of the trade off mentioned by a previous speaker, as investor protection should not diminish.
An official agreed with the need for pragmatism and stated that T2S does not need further harmonisation of securities law, and since T2S is the technical underpinning of the CMU, no further harmonisation seems necessary for the CMU.
With T2S they have found a contractual workaround to get past the conflict of law issue and to deal with the legal uncertainty. Such workarounds may however not withstand the critical test in court. Thus, more transparency brought into that area would mean progress, i.e., being very certain of which local law applies to each settlement or holding. The official advised them to be ambitious, but only in the area of conflicts of law, and to forget the rest of securities law harmonisation.
A policymaker stated that the proposal that the EC is going to make within this year will aim at ensuring legal certainty on a specific point, which is the conflict of law relating to securities ownership. That is part of the issue. It is a pragmatic approach because the EC knows that a harmonisation of the substantive securities law is a no go.
A public authority representative agreed that a conflict of law rule could be helpful. However, the fact that securities law involves different trade offs, as previously mentioned, should not be forgotten. If one compares insolvency and securities laws, shareholders and bondholders are much more aware of insolvency law related to their investments than of securities law. Both are equally technical, but investors have more experience with failures of companies than with failures of intermediaries or depositories. However, for the shareholder, these are equally important when a failure happens. This was shown by the Madoff case. When dealing with insolvency law, the authorities care about giving certainty to the shareholder or the bondholder. For securities law, the end result should be to give certainty to the investors that when they put their money into a security they can get it back.
3.2. Shareholder rights issues
An industry representative underlined that a fundamental concern for the end investor that needs to be taken into account is for the right to the securities they have bought to be guaranteed, which is both the right to dispose of the security and to exercise the rights associated with the security (e.g. income, corporate actions, dividends…).
What is currently under discussion is largely the right to dispose of the security, but when discussing securities law and how to improve the situation there also has to be a consideration of the right to exercise the rights associated with the security, which is equally important for the end investor. That forms part of the Shareholder Rights Directive (SRD) discussion.
The Chair noted that the SRD still needs to be implemented with Level 2 measures, but in terms of allowing shareholders to exercise their rights to participate or to claim dividends, there should be an improvement. Being a directive, the SRD may leave too much space for the national authorities, but will still be a step forward.
3.3. Progress expected with the European Post Trade Forum (EPTF)
An industry representative agreed that progress is being made with regards to securities law and shareholder rights, and further progress is expected with the European Post Trade Forum (EPTF).
Another industry representative stated that the EPTF report was still being drafted, but going to be very rich and contain many elements that will be very helpful. The report identifies a list of priority barriers, with the number one barrier being withholding tax. In second place, and a major part of the report, are four barriers dealing with securities law. Among the remaining priority barriers are: corporate actions processing, asset segregation (which is a barrier that exists as one of the consequences of inappropriate securities law and of risk in securities holding chains), and how to improve post trade regulatory reporting (which is a relatively new topic).
A policymaker stated that the EC has launched a comprehensive, evidence-based exercise on reporting obligations stemming from all the legislation in force, including financial services legislation. The exercise will assess inter alia reporting obligations, and the EC is committed to then streamline them, reduce burdens and eliminate double reporting to make it easier for businesses to report, and also to make it more efficient for supervisors to use that information. This will be set on track in the coming months.
An industry representative expressed appreciation for the EPTF initiative. There is strong cooperation between the industry and the public sector in this context, which is crucial when talking about post trade and is the type of approach that has already been successfully used for T2S.
To reach the desired outcome, it is essential to determine some priorities and to focus on some major topics, as mentioned by a previous speaker. The current temptation is to produce a lengthy list of topics to be solved, some of which are more a question of diverging interpretations or operational burdens. However, the public consultation to be launched by the EC on potential future work in the post-trade area should help to address these issues.
The Chair agreed that fora where there is a dialogue between regulated entities and the public sectors are important. Regulation must follow real life development. The debate on Distributed Ledger Technology (DLT) also needs to be followed because of the importance of innovation. There is some disagreement about the order of priorities, but that is only to be expected.
A policymaker stated that the EC is also awaiting, with great interest, the report from the EPTF, which will help to identify any further measures that might be needed.
In parallel, the EC has already launched other work streams. The EMIR review in particular, which will contribute to simplifying the post trade market, should be published by the summer. The idea with the EMIR review is not to substantially change the main elements of the regulation, but to adjust it, notably on the basis of the contributions which came from the private sector through the specific EMIR consultation and the call for evidence. The feedback the EC received was basically to introduce some proportionality in the text to better target or tailor make the obligations according to the size, structure, and business model of the market participants. The idea is to streamline the number of obligations and reduce them where possible. The EMIR review will take these principles into account, which forms another piece of the puzzle; reducing unnecessary burdens will allow businesses to operate in a more efficient and less costly manner. The idea is practically the same: to introduce proportionality with a pro-business objective without compromising investor protection.
A regulator hoped that the EC would allow some flexibility with the clearing obligations because the standards do not and it is difficult to manage a market that is moving or changing fast.
4. Withholding tax
An official noted that withholding tax is a difficult issue, even in T2S. The struggle is not so much that there are different national rules applying to withholding tax in different countries, but that it is applied differently with the participants and the markets in T2S: for example, thinking of a German share, the strategy of the issuer, e.g. when making a corporate action, will follow the German law, which is logical. However a French investor owning that share will probably have to follow French tax rules regarding this corporate action. The issue is whether it is possible to harmonise the way of dealing with different withholding tax laws. The speaker hoped that the EC might be able to help find a solution.
An industry representative supported the request. The issue is not aligning tax levels, but having the same tax processes and the same level of predictability for investors. If aligning approaches such as tax relief-at-source, reclaim procedures and repayment periods was possible, that would be a significant step forward and would be a true contribution to CMU objectives.
A public representative warned that in the current discussion there is a risk of being too pragmatic. This is one of the areas where the EC should be bold. Taxes are national competences, but at the same time they are an important motive for competition of the wrong kind across countries.
There can be discussions on how taxation works out in practice, which is important, because the approach has to be pragmatic. However, there is much more at stake there, and the representative is keen to see pressure at work on the situation at the European level, and on working towards a common corporate tax base. This would solve many issues. There would also be benefits for both the corporate and financial sectors, which would lead to fair taxation. Currently there is a significantly unbalanced playing field between SMEs and multinationals in particular, and a growing gap between the two.
A policymaker underlined that taxation meant entering the difficult ‘world of unanimity’. The EC is trying to provide some answers, notably regarding the taxation bias in favour of debt compared with equity, proposing to introduce a certain allowance in favour of equity. Whether the Council will manage to reach unanimity on this proposal remains to be seen because it is very ambitious.
Regarding withholding tax, since harmonizing tax levels is not realistic, the EC has convened an expert group on withholding tax to propose pragmatic solutions to tackle the issue. DG FISMA is working with DG TAXUD and they are delivering a Code of Conduct on withholding tax by the end of the year, focusing on making recovery processes more efficient. The Code will be a voluntary tool, which will nevertheless put significant pressure on Member States that do not endorse it. The expert group is composed of 12 Member States tax authority representatives. The EC hopes that with peer pressure the number of Member States who are willing to implement the Code will increase. This represents another attempt to secure a small puzzle piece which will contribute to achieving the overall objectives of the CMU.
An industry representative agreed that tax is a core issue and, for retail investors, the biggest driver for cross border investment. There are two to three levels at which the issue can be approached and the substance is clearly difficult. Progress can certainly be made on the process and the toolbox.
Regarding the Code of Conduct on withholding tax and how it can deliver improvements in practice, one message that is relevant for the custody chain is that tax events are the same as corporate action events and the two cannot be disassociated. Corporate action events relate to a payment by an issuer which is also a tax event, so that when there are rules on corporate action events, they should be closely aligned with rules on tax events. The speaker was keen to ensure that the Code of Conduct incorporates the approach, the rationale and the logic of the existing market standards relating to the relationship between issuer and investor.
The Chair concluded that there are a number of issues where it is worth trying to improve the situation at the EU level, even if there is a risk of failure for some of them. Some harmonisation is needed for progress to be possible in Europe because there are all kinds of complexities linked to national systems that could greatly benefit from a European approach.