A report published today by a House of Lords sub-committee described efforts by Lord Hill, the European commissioner in charge of capital market reforms across the EU, as a “welcome start”.
According to Hill: “The Capital Markets Union aims to break down the barriers that are blocking cross-border investments in the EU and preventing businesses from getting access to finance.”
It pointed out that the current environment is tough for businesses remaining heavily reliant on banks, and it contrasts the situation in the UK and across the EU with other parts of the world. If EU venture capital markets were as deep as the US, for instance, as much as €90bn more in funds would have been available to companies between 2008 and 2013, it claimed.
The House of Lords report supports the Commission’s proposals, arguing: “A Capital Markets Union is a timely and important initiative.” In the US, 80 per cent of capital funding comes from capital markets and 20 per cent from banks, whereas the reverse is true in the EU. According to the Committee the focus should be on “ensuring protection for investors but also liberating finance”.
The changes would mean that British SMEs are less reliant on the banks for investment. Chairman Lord Harrison told the BBC Today programme: “For many years lights have been going out all over Europe when it comes to funding.”
This initiative, the Committee believes, would “offer fast and efficient credit for small businesses”, and open the door to more of the peer-to-peer and crowdfunding that is common in the US. “We’re talking about fast-growing small businesses who have difficulties in particular,” said Harrison. “We still have the tradition of gong to the local high street bank.”
But the Committee warned that changes must be rolled out carefully. “We interviewed him [Lord Hill] and said ‘Make haste slowly. Do things you can do well early on and then move on to other areas’,” Harrison told the BBC. In particular the Committee would like to see reform to the rules around investment prospectuses addressed first.
The report noteed: “For far too long in the EU we have been reliant on traditional sources of funding, and it is becoming increasingly clear that there is a huge opportunity that lies beyond the banking sector. One need only look at some of our international competitors, such as the US, where alternative credit is now very much part of the funding furniture, and making a real difference.”
Read more about access to finance:
- “Finance matchmaker” to provide UK SMEs access to finance with Workspace and Crowdcube
- Over half of FDs believe access to finance is less of a concern than it was a year ago
- Could online funding hubs help revolutionise local funding?
The government supports the EU initiative and believes that under a new Capital Markets Union, SMEs in Britain could borrow money from sources in other countries across Europe more cheaply and easily – and vice versa. “If we get this right, the benefits to Britain and Europe’s smaller firms could be huge, through opening up new sources of investment and growth across the EU,” said chancellor George Osborne when the initiative was launched in February.
The House of Lords sub-committee also published a number of other findings:
- A Capital Markets Union could be a major engine for stimulating growth in Europe, by diversifying businesses’ access to finance. At the same time, cross-border capital for infrastructure and long term investment needs to be unlocked
- The Commission must strike the right balance between ensuring SMEs access a wider variety of finance, with the need to protect consumers and investors
- The Commission must take account of the specific characteristics of each element of the EU’s capital market, as well as the diverse needs and priorities of different member states
- The Commission’s proposals must be road-tested through intensive impact assessments
- The UK should use its expertise and share best practice with other member states