 Welcome to the Institute of International European Affairs in Dublin. At least I'm in Dublin. It's virtually in Dublin But today we have a speaker who is we'd like to be I'm sure in Dublin. We welcome Stephen Mayure Have an interesting chat about Capital markets union state of play and the way forward You're all very welcome We're going to talk for you know a while between ourselves, but Halfway through the hour. I'd like to invite you to ask your questions use the Q&A button for that Not the I think it's the Q&A, but yes the Q&A function you're meant to use for that and please identify yourself when you ask questions It makes it more interesting when we Who are you on and what's your affiliation? You can tweet about the event the handle is at IEA Stephen Mayure is with me Notionally or virtually I've known Stephen for about 10 years and see actually we both swam into European financial affairs, you know, he had been in an official capacity before then Stephen has been an academic the University of Maastricht, which of course is a great place to be a An academic from the point of view of European financial integration He then moved from that to the financial markets authority of the Netherlands, but then when the European securities market authority was set up Esma in 2011 he became the first chairperson and That has been his role for the past 10 years. It's coming a role that's coming to an end He's not allowed to take more than two five-year terms So at the end of this month, he will no longer be the chairperson of Esma So we are lucky to have him at this moment to speak to us about something which I think is Essential it is really a core activity of of Esma Esma isn't an institutional anchor. Maybe the institutional anchor Maybe it should become more of an institutional anchor of the Capital Markets Union. Anyway, I can't think of anybody more and Equipped to talk to us about Capital Markets Union where we are where we're going then Stephen Major Stephen do you want to start with a few opening remarks? Absolutely and Thank you very much Patrick for for that introduction Thank you very much also to the Institute of European and international affairs of Ireland for Inviting me to speak as you just said we I would have preferred to be in Dublin I always tried to be in Dublin at least once a year We have as an authority located in Paris. We've always had very good relationship with the relevant interlocutors in in Dublin we have had Obviously the central bank of Ireland which you've had it yourself is a Important member in the board of supervisors of Esma We have had regular contacts with the Ministry of Finance and also obviously the industry the financial industry in Dublin is very important in Ireland is very important and especially the the fund industry so thank you very much for having this opportunity To have a dialogue with with you and let me also Congratulate the Institute with the 30-year anniversary. It is important that we have these type of debates and the Institute has been very important in Supporting the debates. So what I need would like to do is as a few opening remarks briefly Reflects on CMU and I will try to limit to five to ten minutes And the three key elements that I would like to raise around a CMU are first of all and it seems to be so Logical and bread and butter, but you know, what what is the rationale for having a bigger role for capital markets in the EU? secondly a few high-level remarks on the plan as Published by the European Commission In the autumn of last year and then a few concrete action points including also In the area of Supervision, so let me first go to this first point on why is it important to have a bigger role of capital markets in the Financial system and I think the key argument is that is that it would strengthen and improve the financial system and That the current dominant role of the banking sector is making the financial system and ultimately Also, the economy makes it it makes it weaker and it's a it's a structural Weakness that we should try to address and interestingly Also the banking community and the ECB as you know, Patrick has been very supportive Of the capital markets union because indeed seeing That there are some weaknesses with having a relatively large banking sector and a relatively small Capital markets sector. What are these weaknesses? Well, first of all, I think you could make the argument Is that a financial system in which the Banking system plays a very extensive role is also one which is more risky and that if there is a downturn or a crisis has more problems to Recover and and I think the the real life experience has been probably the financial crisis in which we were both involved When we were sitting at the easter be is that the financial crisis in Europe was especially deep and Slow to recover and I think the banking system the very dominant role of the banking system played a role in that The other element of course is is that households And other problem with the European system is that households tend to save through deposits rather than participation In the capital market and we all know from our textbooks from From university from from finance is that in the medium to long term if you want to have better returns on your savings You need to participate in the capital markets and the fact that somehow European households are still over saving in deposits and relatively modest into equity and funds Or even bonds is that that reduces the abilities of households to do on financial planning Is to save for the medium to long term for educational expenses for housing expenses for Retirement and finally probably the remark that I would like to make is that a System in which banks play a dominant role is probably also a system where debt plays a more more important role And so if you want to have a financial system that encourages more innovative economic activities typically innovative economic activities are better off With having a more flexible financing system like for example, you have with equity so that may maybe very briefly but it would be good to you know, happy to discuss that further secondly on the the CMU action plan as it was Disclose and published by the Commission in September of 2020 of last year I think a few high-level remarks. I think the first thing what I thought and think is really good about this is That we are moving away from not only focusing on let's say funding channels So there's been a there's been a big focus in previous in the previous capital markets plan on let's say Let's try to standardize Securitization and let's try to get barriers away across the member states there Or let's try to get barriers away in the fund industry Where there is a problem in Europe is that Irrespective of let's say the convergence issue we have anyhow low levels of capital markets activity across the member states So it is not only a Convergence issue or a harmonization issue. We also have economies where there is inherently low Capital market activities and obviously with integration you get you know benefits of scale and that in itself can increase the scale of the market but we have also systems where The Initial levels of capital market activity is low and I think that relates a lot also to these low participation by households The low prevalence of pension systems where you need to save so there's typically pay as you go systems Which also makes the need for capital markets less and interestingly if you go across the world those countries That have a thriving retail market a thriving household market are typically strongly connected also with generally strong capital markets So if you go to the US the UK, but even in the EU For example in you know, UK and US are known for capital market system where there's deep and liquid markets But also the households the end investors are participating in the capital market An interesting example here is also in Europe is for example, Sweden a relatively small country But with a relatively thriving capital market Why because they have designed a pension system Where there were strong incentives for households to participate in the capital market by giving tax benefits for when you Participate and buy certain funds and I think that is an issue that we need to work on also in the capital market union plan and therefore I'm very happy that the Commission also has this perspective of the household of the end investor in their CMU So and then finally just to go to a few concrete action points because I think ultimately it is also talking about concrete actions Related to my point around the importance of also having this household household perspective and their retail participation There are elements in the action plan and which are very close to the heart of Esma related to for example financial education making sure that people Understand that for financial planning in the medium term to long term It is important to participate in the capital market and not only safe through deposits But also we have emphasized as an authority very much the costs of financial products because If you want retail investors to participate in the capital market, they need to have a relatively easy to understand Efficient financial products that they can buy and one of the problems in the European fund industry, for example, is that we have relatively expensive Products with high cost charges. And that is the reason that we have been focusing as an authority on how can we bring back those costs? How can we make it more efficient and also how can we improve the quality of advice That is delivered to households second concrete action a kind of a different one that I That I would like to mention but it which is close to Esma's activities One issue that is handbrain This is more of an integration argument Within the EU is having cross-border information on issuers So if you want to invest as a irish investor in let's say a smaller List of Dutch company. It is already more complicated to get information on that company And so getting more information across the EU On that would facilitate cross-border investing would be very helpful and therefore I very much support these a proposal for the so-called European single access point where You would bring that information together. So this is around information Which is already available Currently at a national level But you would make that available at the european level and for those of you are more into this To this area, you know that in us you have the so-called ad car system Which plays an important role for investors in getting information on companies to invest in and Is is a key element or a cornerstone for a well-functioning capital market Third and finally obviously as you would expect from my side is Is also talking about supervision First I should say that I think that the obviously Consistent supervision integrated supervision of capital markets is an important condition For capital markets in the sense that if a capital market becomes more important There's going to be more risks and they should be supervised properly And for those of you who know asma well, we typically look into supervision in two ways either You try to supervise it directly at a european level and so in a number of areas Including credit rating agencies Asma is the direct supervisor Why in other areas? We're not the direct supervisors But we have tools to make sure that national supervision is as consistent and as convergence as possible across the member states And so it's asma. We have worked very hard on either Executing new mandates regarding direct supervision as we have regarding credit rating agencies Or executing our powers to make sure that national supervision across the 27 member states Is as consistent as possible? The powers in those areas have gradually improved over the past 10 years And I would hope that these powers would further increase in the years to come Especially as for example With brexit the number of key financial centers will also increase so rather than having one Local financial center that is dominating the landscape In which we had to some extent before brexit and will change where we will have multiple financial centers Including dublin being one of them But then it's important that if we have different financial centers across europe Is that the supervision? Under which they are is that that is consistent So I would hope also from that perspective that the convergence powers will further strengthen And finally on direct supervision and maybe also to stimulate a debate there Although I I know that ccps are not a key market infrastructure in in in dublin I would hope that also there's going to be more markets Direct entities under supervision of esma and I would say that european ccps would be The first logical ones to move to direct european supervision We're already supervising third country ccps And I think it is a bit asymmetric and we're supervising third country ccps But not the european one. So let me stop here Patrick and happy of course to discuss further During the the fireside test and later on during the q&a Thanks very much. You laid out some interesting topics which Dovetail nicely with the thoughts that I had Issues I wanted to raise with you and I'd like to start at the end Where you're talking about a possible greater role for for esma into the into the future. I mean as I remember actually Here at the IIA lampalusi Coming along to to explain to us all and I think I was the chair on that occasion and to explain to us all the His idea of committees for for banking supervisors for security supervisors and for insurance and pension fund supervisors and that that's a long time ago now and Maybe 20 years something like that ago and then the lampalusi committees were strengthened In 2000 after 2009 the rosier Said no, they should be they should have a more structural role and you know staffing and and and greater powers and that happened to For all three to the european banking authority and the aeopa and esma Though in some ways esma may not have been given as much autonomy our power as That's said by some people. I'm not close enough to it but The role of esma As you lay out in your in your You know your annual reports and and so forth There are four dimensions to it And they're quite varied you have assessing risks And by the way, I notice from your latest dashboard there 10 10 sort of risk areas and they're all flashing either Uh orange or red in other words high are very high and five of them are very high So but let's put that aside for a moment. So that's the assessing risks. I think which which you do You have the the formation of the rule book or the A common rule book across europe and you have a key role I think in influencing the commission advising the commission on on What they should put into what is their responsibility and what they should recommend the parliament for for primary Primary legislation and also you have your own authority to do you have there are 28 primary acts of the european union which Come under your your remit. This is a monster challenge to be in charge of so many legislative areas With a comparatively small staff and this um collaborative arrangement basically your deciding body is A committee of all the member states And you chair that committee big committee now and You don't have a vote that you chair you chair the committee So it's it's it's not a structure which is designed for a rapid executive action Then it but which would have to be the case if you were to be given If your esma were to be given greater supervisory powers You can nudge and push and encourage convergence And consistency, but you only have direct powers in very limited areas as you mentioned and you said well Maybe they could could add your old ccp's, but but if we're thinking along a horizon for the next 10 years Probably it could go a lot further than that and probably we should be thinking in terms of something like Esma becoming a european sec Now nobody can can accuse you of of empire building because you're you're you're departing the empire What do you what do you think about that? Is esma something that needs a leap forward in its powers its funding? and And it's mandate So I thank you very much for that question Patrick may So maybe first I I I do get a vote. I I do get to vote now. So I've that has changed That has changed in january 2020 and so I see on certain decisions not all decisions But if it would be around supervision, for example, I can I can vote and all maybe a quick reaction to The key issue in my view in terms of taking decisions Is not so much the fact that we have 27 Because we can we can gather quickly and we can and there's majority voting and so The real issue is more indeed the lack of powers rather than the governments in decision making I think some people think that if esma would become A more direct supervisor than there needs to be, you know a smaller group taking the decisions in reality We are now we know we haven't forced we have we We are directly supervising credit rating agencies the day-to-day supervision Is done by a team within esma and the And when we need to enforce we do we take a decision on the board and actually that has gone quite well I think the real question is around The powers and to what extent should we have further direct supervisory powers? Maybe a few comments on this one. But first of all I agree with you is that the current structure and it will not surprise you is letting the Is letting the current integration of financial markets. So I you know to some extent markets are more integrated than supervision and I I I agree with that view um and And in that sense, I think it's important to realize that people sometimes think about european capital markets as National markets and then suddenly decisions of esma to get involved in national issues But the reality is we have already Very specialized markets across europe and to some extent Amsterdam, dublin, paris and and frankfurt are examples of this in the sense that These are not all national, you know to use this horribly popular term ecosystems This is already a european capital market where we know that luxembourg together with dublin plays a very important role And that in other parts of europe there is a very small industry and that there's already been Benefits to skill economies. There's been the build-up of of expertise But the same you can say regarding trading venues And and also three investment firms. And so yes, I think you could make the argument is that Markets are already more integrated than regulation is and so in that sense We should at least maintain the pace and so to have the picture of the past 10 years When we started we were much smaller and our powers were much more limited 10 years ago So we did only credit rating agencies and our powers to assess national supervisory practices Were much more limited and so in the 10 years there has been a gradual Strengthening of our powers. There's been additional Direct supervision like there's now been added to the the credit rating agencies But also critical benchmarks will be added And there's been also an improvement of powers regarding Convergence, but still if you would look for 10 15 years ahead I still would think that the model will not be a european sec or a european as a zem In the sense that this is around conduct supervision And doing conduct supervision centrally at one place in europe is going to be very difficult And the reason being is that we're talking here around thousands of investment firms Thousands of asset managers And it is difficult and some of them very local very integrated into let's say Working in their their their local language with their clients And so a model where the whole of the financial sector I'm sorry, all of the financial markets all of the securities markets Would be centralized. I would see that is difficult to see and in that sense I think it is important to To realize that Prudential supervision is different from Let's say Conduct of business or investor protection type of supervision if you want to Look into for example retail investment Protection issues you actually need to go file by file and look at you know What has been told to this client which is written in the local language Didn't meet the requirements etc while prudential supervision to some extent is more Homogeneous and in that sense also operationally More easy to organize. So maybe maybe a bit of a complex answer But maybe just to say yes, we should progress. Yes, I think it is laggy But I think even in the more ends model there will still be a relatively significant role for let's say local operations Because of this issue around the fact that complex supervision Retail investments supervision Also relates to thousands of interactions with individual investors And that needs to be you know supervised and addressed and for that you also need to have an understanding. Let's say of the local situation Thank you. Yeah, I see And I've already mentioned the complexity of the legislative structure But there's also the complexity of the reform efforts over the last number of years of the capital markets union initiative 2014 You have a number of of action an action plan at that time some action taken And then then we had the thomas phaser committee of a year or so ago To to you know, re-energize the process which some people characterize as having stalled to some extent And following that visa committee they came up with 17 recommendations And I see that the action plan of the of the commission which was approved by council has 16 action points And I'm wondering it's it's as if It's as if the something that is Really big is being carved into small slices And will they really add up to something big in the end? But is it in are we missing something that's that that should be a big driver by By by just taking little actionable points. Is there a lack of appetite? in the part of the commission the council To to to make a push that would be stronger and more comprehensive and In other words, how do you assess The rate of progress and the design of the progress that is being made now in the second action plan so maybe A few reactions to that point but first of all, I think it's important We're talking about capital markets as if it's a homogeneous activity or a homogeneous economic activity, which is not and so the Capital markets plans will always be a little, you know, we'll always be kind of a shopping list with multiple elements on it because we're talking about trading venues. We're talking about The the fund industry it can be around secretization. It can be around derivatives markets. And so it is The capital markets are not as homogeneous. Let's say as a as the banking sector in terms of political will Where and this is, you know, linking to to to the points that I made earlier in in my contribution What I truly think is needed Is having this increased retail participation? but that is an area where Europe has limited powers because it's around pension systems it is around taxation and you know, like You can raise the question while we can further harmonize and work on financial regulations and supervision Key elements in what drives how a financial system is shaped Are shaped by things that are outside of financial regulation. It is around taxation issues. It is around What are the costs of of starting a new? Business it is around pensions and so And I think that makes it so difficult for the The commission to act in this area is that I think The real game-changers like we have seen, you know, like if you go to a number of individual countries in Europe that have That for example have strong banking system, but that were able to develop A capital market That was not around financial legislation. It was around Issues related to taxation. It was around issues related to pensions How you text pensions? How you text? The holding of stock and obviously that is an area where formally the commission has no powers and so We have progress already a lot and of course you can always do more in terms of harmonizing different rules But the question is isn't the real big big changes that are needed are probably in the areas Which would go, you know, where where the commission has limited powers Yeah, that's um, it's a very interesting point because from my perspective I think there are You mentioned the role of of tax incentives and pension structures the The whole tax and regulatory structure around that But I think also in addition and I agree with that and I think if you can look at not only Your own country and the United Kingdom in Ireland The growth of insurance firms in the 1960s 1970s all was always driven by Tax incentivized you you pretended you're buying an insurance policy Yeah, there was an insurance dimension But it was like small small percentage of of the package and and the main part of the package was An investment savings product, but it was all benefiting from the tax advantage And so so we understood the growth of of insurance like that, but I think there's also another dimension on from the from the Industry side that the existence of large universal banks in in Europe was the way Small medium firms were financed Whereas the in Britain right back into the 19th century and the United States the United States had small banks And some money-centered banks, but basically they were Lefted to the small industry to to finance themselves some other way and that some other way turned up to be through equity markets and Not non banks. And so to some extent to promote The securities markets is to try to To try to limit the activities of the the big universal banks And No, I suppose It's not as if the big universal banks are in the strongest position these years compared to what they were in the past No, but you're right. I think that that element certainly plays a role and But we should realize that also banks will play an important role In in capital market activity although it will be much more less a fee based And it will not be, you know, it will not be reflected in in the balance sheet But it will be more reflected in in profit and loss But obviously capital market activity requires heavy involvement of investment firms Investment firms that are linked and have you know, parts of of banks But but I I I think you're right is that there is also an element of Ultimately, it's also about market shares that are impacted by a bigger capital market