Working paper a single market in financial services

4. The risk capital market

The present situation leads European entrepreneurs to depend on bank loans to start their businesses. This is particularly inadequate and counterproductive in the case of start-ups, for which initial cash flows are likely to be limited or even negative. Bank facilities have the disadvantage of being less flexible in terms of the price and time conditions applied, more expensive. They generally do not provide support advisory functions compared to venture capital.

The disadvantage of the European securisation market, compared to that of the US, is that the latter is homogenous. Companies can pool assets denominated in the same currency in which they issue bonds. Using the € for this market can overcome this disadvantage, but regulatory regimes within the Member States are still diverging.

In these circumstances, in order to attract investors, firms have to respect disclosure, transparency and corporate governance standards. But this is particularly difficult for small and medium size enterprises. For this reason it is important that uniform accounting, disclosure and transparency rules are set for every company. Furthermore a high degree of fragmentation is present within the regulated stock markets and regulatory organisations. Consolidation has to be achieved, not only at market level, but also at a supervisory level through having a unique supervisory authority in order to enhance the market capitalisation and the uniformity of the rules applied. Both factors are driving factors for venture capital.

Certain new forms of funding, such as “incubators” that offer funds and expertise to new-economy companies in return for equities, are not covered by an authorisation framework. They are therefore opening themselves to litigation if deals do not go well. Commercially, the lack of a legislative framework for e-commerce is therefore reducing its potential development. Factors that inhibit the development of e-commerce are the speed of connection to electronic networks, the lack of secure connections, lack of adequate service/products, insufficient knowledge of the process and the lack of security in the transactions. The last two issues are relatively more significant to the developments of e-commerce.

5. Conclusions

The long-term goal of the action to achieve a single market in financial services is to create and develop an efficient capital market. This will both reduce the cost of raising capital and make possible a much faster response to the specific needs of operators on financial markets. Faster response times are critical to achieve competitiveness, and to maintain a competitive advantage, especially for businesses linked with the new economy.

Equity supply has more than doubled over the last decade, due to privatisation and liberalisation, and to the corporate restructuring which has been boosted by the introduction of the single currency. Issuers are becoming more proactive because they are spontaneously offering themselves for market listing.

The cult of equity investment is spreading. In particular, it is becoming a good mechanism for allocating long-term capital within economies. Yet the stock market capitalisation of the EU is approximately half of that of the US. The percentage of cross-border trading is limited and private savings  20 per cent of GDP  are not invested efficiently. As a result, job creation is limited, because returns on private savings and investment decisions are not optimised. The capitalisation of European investment and pension funds and insurance instruments account alone for more than the EU’s GDP.

The current wave of merger proposals is one of the major market-driven forces moving towards specialisation. However, it is not a question of establishing linkages between different technical and operational gateways or strategic linkages between markets, but of achieving an environment within which specialised segments on the supply and the demand sides can operate efficiently. Moreover aborted merger proposals have demonstrated how nationalistic feelings and different economic interests can result in incomplete merger plans. Merger proposals need to involve the creation of a central cross-market counterparty for Europe’s securities markets in order to achieve a complete merger of the settlement and clearing functions.

Beside the creation of the necessary conditions for the development of an efficient capital market, easy access to it has to be guaranteed on competitive terms. Mutual recognition of prospectuses and prudential and supervisory rules based on the principle of the home Member State, would encourage issuers and intermediaries to trade and deal easily cross-border, at lower costs and without discrimination towards foreign financial products.

Beside the implementation of the Financial Services Action Plan, every action undertaken at Community level has to face a trade-off between the maximum harmonisation of business rules within a home-country control system, and a minimum harmonisation approach within a system of national rules in the host country.

There may be situations in which the mutual recognition of the provision of services and products may result in investors suffering from discriminatory behaviour towards foreign companies or service providers because the products offered and authorised by one Member State may not be authorised in another. The result is that, when the mutual recognition of practices based on the principle of the home Member State does not provide an environment based on perfect competition, harmonisation may be required.

On the supply-side, investors must be able to access free investment opportunities without being hampered by legal, administrative or information barriers, nationally or internationally. Better disclosure conditions, the elimination of investment restrictions and the harmonisation of tax treatment throughout the EU, would permit institutional investors, who currently manage a significant amount of savings, to increase potential returns on investment.

Tax harmonisation and the reduction of regulatory and administrative burdens is improving the business environment; however Europe is lacking the development of service markets. Europe’s employment deficit is partly determined by a service gap relative to other economies e.g. the US. The growth of the “new economy” is increasing the need to remove barriers to the trading and supplying of new products. Most of these will have to be conceived as services rather than goods, and most of the traditional ones will have to be reoriented and rethought in order to be supplied as services.