Capital Markets Union, Securitisation and Small Medium Enterprises

Across the European Union (“EU”), barriers exist that prevent small and medium-sized enterprises (“SMEs”) from raising capital that is required for growth. Banks are lending less and less to SMEs, a trend that is only expected to continue in light of more stringent capital requirements. Regulatory changes, pending or enacted, have inhibited the raising of capital, rather than promoting it. For example, Venture Capital Trusts have been a long-standing provider of funding to SMEs but the recently enacted Finance (No. 2) Act in the UK has effectively restricted what Venture Capital Trusts can invest in. Furthermore, the introduction of MiFID II will result in certain investors being considered as retail rather than institutional, hence limiting what they can invest in.

The US economy is approximately the same size as that of Europe, but European equity and debt markets are less than half and a third of the respective US markets. US SMEs raise around five times as much funding from capital markets compared to their European counterparts. The Capital Markets Union (“CMU”) Action Plan that was published on 30 September 2015 by the European Commission (“EC”) seeks to address this disparity. The CMU Action Plan outlines six objectives which are as follows:

1. Financing for innovation, start-ups, and non-listed companies
2. Making it easier for companies to enter and raise capital on public markets
3. Investing for long-term, infrastructure and sustainable investment
4. Fostering retail and institutional investment
5. Leveraging banking capacity to support the wider economy
6. Facilitating cross-border investing

The Action Plan outlines the means by which entities, including SMEs, can raise capital so as to meet these objectives. While a number of these means are relevant, a key focus of the Action Plan is on re-building2 the securitisation markets to diversify funding sources. The EC seeks to overcome the stigma associated with securitisations following the financial crisis of the late 2000s in order to minimise the complexity associated with them. In order to do this, the EC is proposing to introduce a framework that makes securitisations more attractive to investors by creating criteria for “Simple, Transparent and Standardised” (“STS”) securitisations. This is to make the use of securitisation a sustainable and ‘safe’ source of funding for investors. What constitutes STS is currently being discussed at a panEuropean level as part of an EC legislative proposal for a new Securitisation Regulation and Directive.