EC consults on long-term investment

19 Aug 2013

“Fundamentally, however, we need a rebuilding of trust between business and investors – including the various links in the investment chain. This cannot be achieved simply through legislation or technical means alone.” Kevin Desmond, Capital markets director at PwC

The European Commission has launched a Green Paper consultation on how to foster the supply of long-term financing and how to improve and diversify the system of financial intermediation for long-term investment in Europe. The closing date for responses to the consultation is 25 June 2013.

The paper focuses on how to enhance the productive capacity of the economy – how to ensure funds are channelled into, for instance: energy, transport and communication infrastructures; industrial and service facilities; climate change and eco-innovation technologies; education; and research and development. It also addresses the specific challenges for small and medium-sized companies (SMEs) to access bank and non-bank finance, as they are seen as a major source of potential long-term growth.

Internal Market and Services Commissioner Michel Barnier said: “Europe’s economy is facing massive challenges, including large-scale, long-term investment needs. These are essential as a basis for innovation and competitiveness, supporting a return to sustainable growth and jobs in Europe. These needs require long-term financing. Ensuring our economy and our financial sector – including banks and institutional investors such as insurers and pension funds – are capable of funding long-term investments is an important but complex task. We need to identify what barriers exist to long- term financing and what more can be done to overcome them."

The Green Paper gives respondents the chance to challenge the EC’s analysis of the problem and potential remedies in a number of areas, including:

  • Balancing prudential regulation and liquidity requirements for banks and institutional investors with encouraging long-term investment
  • Getting intermediaries in the capital markets to facilitate the flow of funds to long-term investment
  • Developing savings and investment vehicles to allow short-term funds to be transformed into long-term finance
  • Corporation and income tax reforms, including rebalancing the treatment of debt and equity investments

The role of financial and non-financial information in allowing a long-term view is raised in the paper, as is the need to align incentives for asset managers, investors and companies and improve engagement between them.

Responses to the consultation will determine the way forward. Follow-up could take several forms, both legislative and non-legislative. The fact that the Barroso Commission is coming to an end in 2014 could, however, affect the timing of any actions. “Investors need financial stability and confidence in the markets before they can take a long-term view, but they will do so if they think it is in their best interests,” said Kevin Desmond, director in PwC’s Capital Markets Group. “Appropriate regulation and supervision can contribute to this and we are encouraged that the commission recognises the need for a balance between prudential regulation and measures that discourage, or even prevent, appropriate risk-taking.”