Mr. Mark O'Mahoney:

I thank the committee for the opportunity to present. Chambers Ireland is Ireland's largest business network. We represent business throughout Ireland and, what is important in the context of this discussion, we are also a member of the European chamber of commerce. The European Commission’s decision to move towards the establishment of a single capital market is welcome. The development of a fully functioning single market for the movement of capital throughout the 28 member states will support EU competitiveness by facilitating the effective and efficient allocation of capital and ease access to finance for the real economy. Ultimately, an efficient CMU will support the Commission’s priorities of jobs and growth for Europe.

Equity markets in the EU are dwarfed by those in the US and there remains an over-reliance on loan financing, typically from retail banks, to finance SME activity across the EU. The downside of this over-reliance on bank credit became apparent during the financial crisis when banks deleveraged and credit to SMEs was severely constrained across the EU. A capital markets union will facilitate the development of a new range of innovative financing options for European businesses and reduce the unhealthy dependence on bank loan finance.

The Green Paper sets out a comprehensive and ambitious programme which will take some years to implement. There are significant obstacles that will need to be addressed in advance of a full capital markets union being achieved. However, there are areas in which progress can be made in the short to medium term and we believe it is essential that focus is placed on these to deliver benefits in the short term and to generate positive momentum for the project.

The first of these is standardising credit information for SMEs. The development of a common standard on balance sheet information on SMEs across the EU would be useful in allowing for the accurate assessment of investment propositions across borders. However, due to the vast differences that exist between member states, the chances that this is feasible in the medium term are low. A minimum amount of common comparable information across the EU could, however, be developed and shared with interested parties. The European Central Bank could play a role as a co-ordinating body. The standardisation of SME credit information may also become a driver for the development of cross-border peer-to-peer lending mechanisms and other innovative financial services. This aim must be balanced with the recognition that European SMEs are already struggling under a weighty administrative burden, so mandatory public disclosure of company information in addition to national reporting requirements should be opposed.

The development of a European private placement market offers some potential for Irish companies, but it remains highly fragmented and defined by domestic investments. In addition to support for the pan-European corporate private placement market guide covering a voluntary framework for common market standards and best practices which has been endorsed by Europe’s leading central bankers and capital markets players, the EU and national policy-makers should take into account tax legislation, for example, an exemption from withholding tax for private placements. Simple steps such as the utilisation of standardised documentation across the EU would also encourage potential investors to look across borders for opportunities.

If managed correctly, the development of a standardised European-wide securitisation market could be of significant benefit to SMEs. Allowing lenders to pool SME loan portfolios and convert them to securities which can attract investment from those with greater risk tolerance will remove some risk from bank balance sheets and increase the appetite for SME lending. However, clear regulatory oversight of securitisations is essential.

The final point relates to the tax treatment of equity. Despite a general agreement on tax policy being biased against equity, very little has been done to change that. Policy-makers could consider changing the tax treatment of equity to remove the bias. This is particularly relevant in Ireland as we seek to reduce the typical reliance on loan finance to fund projects and introduce innovative new finance products to part-fund capital investments.

The development of the capital markets union will be a long and challenging process, but the benefits to European productivity and competitiveness will be significant. We believe CMU is a worthwhile project. If it is delivered as envisaged, it will unlock investment and facilitate the development of a new range of financing options for European companies in the real economy. There will undoubtedly be benefits for Ireland and Irish companies and opportunities for Ireland to leverage its role as a centre of financial services and a centre of excellence for fund management. A caveat would be that it is difficult to see where some of the proposals would be relevant for the typical Irish SME. Notwithstanding this, it is a positive initiative and we would support its delivery.