Aiming to Ensure Better Capital Markets in the EU

On 22nd May 2024, the European Securities and Markets Authority (ESMA) published its position paper Building more effective and attractive capital markets in the EU which outlined key recommendations based on its assessment of EU capital markets (covering asset management, banking, insurance and pension funds).

The Objectives

ESMA’s key objectives remain well aligned with the goals formulated as a part of the CMU (capital markets union) plan to create well-developed, well-integrated capital markets that span the entire EU.

ESMA highlights that capital markets need to be strengthened and enhanced to unlock capital, in order that it can be mobilized across the wider EU economy – and this needs to happen while supporting the growth, innovation and competitiveness of EU economy, including infrastructure and sustainable finance domains where significant capital investments will be needed in the years to come.

Current Weaknesses

At the same time, ESMA has also acknowledged that there are some fundamental weaknesses in EU capital markets.

These are

• A significantly lower and trending down share of EU equity markets (as a percentage of global markets).
• A highly fragmented asset management industry: by depositaries, CCPs, UCITs/AIFs (with too many participants and a lack of economies of scale).
• Trading venues and exchanges that continue to operate on a national level, without a cross-border order book, with continued fragmentation of liquidity.
• High reliance of EU households on risk-averse investment strategies, with over allocation to bank deposits and under allocation to capital markets – resulting in subdued returns over the long-term.

ESMA recommendations

One of the most interesting recommendations is the proposed new basic investment product label. This would apply to non-complex financial products (i.e. certain UCITS funds and other suitable equity and debt securities) with inclusion based on complexity and cost efficiency. This new product will indirectly compete with savings deposits (which is in line with another EU aim – to reduce the reliance on banking within the EU). Indirectly this is something that may affect banks going forward.

There is also a recommendation to streamline and simplify execution for retail investors with basic needs – which should result in streamlined suitability and lighter reporting requirements.

Decreased costs and increased public appeal

The proposals should result in decreased costs for these investment products, whilst at the same time making them more appealing to the broader public – which has in the past generally avoided interaction with these investments due to complex structures and costs.

From a practical standpoint, it will be interesting to see where the basic investment product will plot on the investment plane/efficient frontier. So, would investment returns – including savings from product simplification – result in a product having a risk/reward profile somewhere between bank deposits and typical equity investments for example?

Another interesting aspect to watch out is how tax efficient this new product will be for retail investors, making it more appealing for long-term investors.

Overall, these ESMA proposals represent a novel approach to looking at retail investment products, making them more aligned with retail investors’ long-term needs and the EU’s future ambitions in capital markets.

Press release: ESMA press release

Position paper: ESMA position paper

ESMA strategy 2023-2028: ESMA strategy