“Put retail investors at the core of capital markets”: Esma chair

Esma chair Verena Ross presented 20 strategic recommendations at the ICMA conference to enhance the robustness and attractiveness of EU capital markets, focusing on investor support and financial education, market liquidity, diversified funding options and regulatory improvements.

In a keynote speech at the International Capital Market Association conference on 23 May 2024, European Securities and Markets Authority (Esma) chair Verena Ross unveiled an Esma position paper, which provides a detailed analysis and strategic recommendations to bolster European Union capital markets. Ross that the current legislative cycle, coupled with the impending EU elections, presents a critical juncture to enact substantial reforms aimed at enhancing EU capital markets. She underscored the collective urgency shared by stakeholders to bolster these markets, focusing on facilitating financing for Europe while prioritising the interests of citizens and businesses.

Urgency

Ross emphasised the pressing need to improve EU capital markets, underscoring their critical role in supporting Europe’s financing needs. “There is an urgent need to improve EU capital markets, to support the financing for Europe, putting citizens and businesses at its heart,” she stated. This urgency is driven by the recognition that current market structures are inadequate to meet the long-term investment needs required for the green and digital transitions.

Ross highlighted the underutilisation of market-based financing in the EU compared to global counterparts, attributing this trend to the region's heavy reliance on bank financing. She emphasised the importance of diversifying funding sources to enhance the competitiveness of EU markets globally, urging a shift towards investment-driven capital markets.

Strategic recommendations

Ross referred to the Esma position paper, 20 recommendations across three core dimensions: the interests of investors, the needs of businesses and the regulatory and supervisory framework.

She highlighted that these recommendations are designed to “reimagine the functioning of capital markets in the EU today” and collectively aim to create more effective and attractive markets.

Investor-centric approach

To better serve investors, particularly retail investors, Ross advocated for improved access to simple, suitable investment products and independent advice. She noted, “We need to improve citizens’ access to simple, suitable products and independent advice, combined with measures to improve financial education.” Enhancing financial literacy is seen as essential for enabling citizens to make informed decisions, particularly given the current trend of holding substantial assets in bank deposits, which may depreciate in a high-inflation environment. She belives that empowering citizens to navigate diverse savings options could not only provide attractive returns but also foster economic growth and innovation.

Market liquidity

For businesses, the paper calls for diversified funding sources and measures to strengthen the ecosystem for public companies. Ross emphasised the importance of reducing market fragmentation and supporting diverse funding options, including venture capital and private equity. “We must have a capital market that provides diversified funding sources,” remarked Ross, advocating for proactive measures to address barriers to market integration.

Regulatory and supervisory enhancements

The regulatory and supervisory framework is another critical focus area. Ross argued for more agility, responsiveness and consistency in the EU’s regulatory approach. She stated, “We need to look at how legislation is formed in the EU... to reflect the modern realities of how capital markets function.”

The paper suggests granting Esma effective forbearance powers to swiftly handle situations affecting market rules and emphasises the need for a more dynamic regulatory and supervisory model.

For the “proper functioning of capital markets, effective supervision remains pivotal,” noted Ross. She highlighted the potential benefits of shifting the supervision of significant market players to a European level, especially for large entities operating across multiple member states. “A more centralised supervisory model would enable a more holistic overview of the risks they may pose,” she remarked, advocating for enhanced supervisory convergence and cooperation.

Market transparency

Ross highlighted significant progress in addressing market fragmentation through the establishment of consolidated tapes (CTs) for bonds, equities and over-the-counter derivatives. “The creation of consolidated tapes will finally make it possible to assess the evolution of prices and trading across the whole EU market in a timely manner,” she stated. This initiative aims to provide greater transparency and align the EU market more closely with international standards. She emphasised the importance of striking the right balance between transparency and protecting liquidity providers from undue risk, urging stakeholders to provide feedback on proposed measures.