Irish financial services could benefit from new EU initiative

SMEs and the Irish financial services industry are expected to benefit from a new EU proposal designed to wean businesses off traditional bank financing.

Unveiling the proposal for a ‘Capital Markets Union’ today in Brussels, EU Internal Markets Commissioner Jonathan Hill said that the proposal would “help European businesses, and our SMEs in particular, have a wider range of funding sources. “

The proposal also aims to allow companies to tap funding sources from across the European Union as part of a drive towards creating a single market for capital markets. Eventually the Commission wants to introduce pan-European retail services for consumers, such as EU-wide personal pension products and a passport system for investment funds as it strives to break down barriers in the single market.

Among the key focuses of the proposal announced today is a move to develop the European securities market. While securitisation - the process by which loans are pooled together for investors to purchase - would allow banks to free up capital for lending, the development of the industry could benefit the Irish funds industry.

According to the Commission, the EU securitisation markets withstood the financial crisis relatively well, the market has remained subdued while the US market has recovered. “Securitisation can provide an effective mechanism to transfer risk from credit institutions to non- credit institutions, thus increasing the former’s capacity to lend.”

Brian Hayes, a member of the European Parliament's economics committee, said the proposal could have a big impact on the Irish financial services industry, given the importance of the securitisation industry to Ireland.

"Dublin is well-poised to get the benefits from the Capital Markets Union. The emphasis on non-bank lending, models such as crowd funding and venture capital already have a strong foothold in the IFSC," he said, noting that 10 per cent of the submissions received by the European Commission on its capital markets union as part of the consultation process in February emanated from Ireland.

An initiative to encourage investment in infrastructure also forms a central plank of the plan. The Commission is proposing the creation of a new classification for infrastructure as an asset class via an amendment to the Solvency II Delegated Act. “The new infrastructure asset class should not be limited to specific sectors or physical structures, but include all systems and networks that provide and support essential public services,” the proposal states.

In addition, the Commissioner confirmed he is launching a consultation process on venture capital and covered bond markets - both potential source of long-term financing for businesses.

Today's policy announcement may signal a shift in direction in the European Commission's approach to financial services regulation, following the departure of Michel Barnier as internal markets Commissioner last year. The French Commissioner introduced a raft of financial services regulation in the wake of the financial crisis during his five years in the role, clamping down on everything from auditing rules to money market funds and bankers' pay. Lord Hill today confirmed that he is launching a 'call for evidence' on the cumulative impact of EU financial regulation, "to make sure that it is working as intended."

“If there are unnecessary regulatory burdens that are damaging our ability to invest, then I think we should be willing to make amendments,” Lord Hill said today.

The prospect that the British Commissioner may revisit a number of legislative proposals introduced by his predecessor, could be a welcome development for the British government ahead of a referendum on EU membership by 2017. Reduction in “red tape” and bureaucracy, and regulation from Brussels is a key demand of Britain as it seeks to renegotiate its relationship with Brussels.