Deciphering The Draghi Report Plus Lessons From The Letta Report And Policymakers' Responses In The Context Of The Single Market For Financial Services

RegCORE – Client Alert | Capital Markets Union

QuickTake

The future direction of the EU's Single Market for financial services (across all asset sectors) have been in a state of on-going (and often much needed reform) over the last legislative cycles. As the EU embarks on the next (2024—2029) legislative cycle a number of proposals (in various different shapes and formats) have been addressed to the European Commission and the EU's co-legislators for consideration. All this aim to enhance the EU's competitiveness and drivers of economic growth. Some of these also explore ideas (many of which have existed for the past 20 years) on how to create greater efficiency in respect of the EU's Single Market for financial services.

The discussions address primarily the Capital Markets Union (CMU), albeit with the new current (less catchy but perhaps more (national) politically palatable) rebrand as an "European Savings and Investment Union (E-SIU)". They however do also touch on wider-reaching financial services topics both in terms of market practice and legislative, regulatory and supervisory priorities and practices of European Supervisory Authorities (ESAs) and the interplay with national competent authorities (NCAs) in the European System of Financial Supervision (ESFS).

This Client Alert analyses those key messages that are relevant for financial services firms and market participants as set out in over 1,000 pages of proposals, which include, as at the date of this Client Alert:

1. the Eurogroup Statement on the future of the CMU (Eurogroup CMU Statement) as published in March 2024;¹
2. a report entitled: "Much more than a market; Speed, Security, Solidarity" prepared by former Italian Prime Minister Enrico Letta (the Letta Report) as published in April 2024;²
3. the European Securities and Markets Authority's (ESMA) position paper entitled: "Building More Effective and Attractive Capital Markets in the EU" which includes reflections on the Letta Report (the ESMA CMU Position Paper) as published in May 2024;³
4. The European Commission's "Report on the Future of European Competitiveness", prepared by Mario Draghi, a former president of the European Central Bank (ECB), comprised of two parts: Part A: "A competitiveness strategy for Europe";⁴ and Part B: "In-depth analysis and recommendations"⁵ (collectively herein the Draghi Report); and
5. a letter from the Finance, Economy and Treasury Ministries of France, Italy and Germany addressed to the European Commission's Directorate General for Financial Stability, Financial Services and CMU (DG FISMA) (the GFI – DG FISMA Letter).

Collectively the above, referred to herein as the "Relevant Publications". It should be noted that as this Client Alert went to publication Spain published a formal proposal on 7 October 2024 for a mechanism that would permit three or more Member States to forge ahead with joint initiatives where others are wary. The first proposal is building a pan-EU credit rating system for small to medium sized enterprises (SMEs), which are a core component of the EU's economy and addressed in nearly all of the Relevant Publications.

This Client Alert should be read together with other thematic deep dives on reforms and developments as well as our standalone analysis of all relevant 2025 work programmes from the European Commission, the ESAs – comprised of ESMA and its sister authorities, the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) as well as those of the Banking Union authorities (ECB-SSM and SRB). Readers may also find benefit in consulting "Navigating 2025", a comprehensive playbook providing a more granular annual outlook from PwC Legal's EU RegCORE on the forthcoming regulatory policymaking agenda, the supervisory cycle and assessment of any commonalities and trends across plans for 2025 and beyond.

Overall objectives of the Relevant Publications

When read together, the Relevant Publications present options for a comprehensive strategy to enhance the effectiveness and attractiveness of EU capital markets. The Relevant Publications contain common themes but equally some key differences.

That being said, there is large agreement amongst the Relevant Publications that by addressing regulatory fragmentation, promoting retail investment, leveraging digital solutions and fostering a synergistic relationship between public and private investments, these proposals can create a more dynamic and competitive financial services sector in the EU. The emphasis on regulatory agility, supervisory consistency and market integration is expected to significantly bolster the EU's global competitiveness and support its long-term economic growth objectives. While all of this (welcomingly) makes sense, it is highly important to recognise that many of the examined themes are not new but have been under discussion for 20+ years, with barriers largely blocked by (national) political interests claiming that these are "too big to reform". As set out below many of these are "too big to ignore". Some other items are however simply missed in the Relevant Publications.

Common themes

The Relevant Publications collectively emphasise the need for a more integrated and efficient EU capital market, highlighting several common proposals aimed at achieving this goal. A recurring theme is the necessity to reduce fragmentation within the EU capital markets. Both the ESMA CMU Position Paper and the various reports advocate harmonising regulations and supervisory practices across Member States. This includes the proposal to (further) centralise certain supervisory functions at the EU level, particularly through enhancing the role of ESMA, which should transition from a coordinating body to a single common regulator for all EU security markets, akin to the US' Securities and Exchange Commission. This would involve granting ESMA exclusive supervision over large multinational issuers, major regulated markets and (beyond ESMA's current responsibilities) central counterparty platforms (CCPs).

Another common proposal is the modernisation and simplification of the regulatory framework. The documents call for a shift towards a more principles-based approach in EU legislation, where framework legislation focuses on key strategic policy choices and technical work is delegated to ESMA. This approach aims to enhance regulatory agility, reduce administrative burdens and ensure consistency in implementation across Member States. The emphasis on reducing regulatory complexity is also evident in the call for a systematic review and simplification of existing regulations, with a focus on eliminating unnecessary and overlapping rules.

Additionally, both the "ESMA CMU Position Paper" and the "GFI – DG FISMA Letter" stress the importance of revitalising the securitisation market. They propose targeted reviews of the prudential framework to make securitisation more attractive and efficient, which is seen as a critical step towards advancing the CMU. The enhancement of supervisory consistency and regulatory agility is also a recurring theme, with documents advocating for a more dynamic and responsive regulatory framework that can adapt to market developments and technological innovations.

Differing proposals

While there is significant overlap in the objectives and general strategies proposed, there are also notable differences in the specific approaches and areas of focus. For instance, the ESMA CMU Position Paper places a strong emphasis on broadening investment opportunities for EU citizens by developing simple, cost-efficient investment products and improving financial education. It highlights the potential of long-term investment products and pension systems to mobilise new capital and support economic growth.

In contrast, the Letta Report and the Draghi Report focus more on structural reforms and strategic initiatives at the macro level, such as creating a unified "European Safe Asset" as a means of financing and enhancing the EU's digital and green finance capabilities. The Letta Report also introduces unique proposals such as the establishment, possibly as a 28th Regime, of a European Code of Business Law to provide a unified legal framework for businesses operating within the Single Market. This proposal aims to address the current patchwork of national regulations and enhance legal certainty for businesses – but has historically been viewed (regrettably) by national Member States and other policymakers "as too big to tackle". Additionally, the report emphasises the need for a more active industrial strategy, including public-private partnerships and targeted public subsidies to support green and digital transitions.

The GFI – DG FISMA Letter specifically highlights the need for a comprehensive review of the banking system by 2028, suggesting preliminary steps such as an interim report on the competitiveness of the banking industry by mid-2025. This forward-looking approach aims to ensure that the banking sector remains robust and competitive in the long term.

Impact on the EU's Single Market for financial services

The reforms proposed in the Relevant Publications, certainly if they are able to transition into legislative and regulatory reforms, would have a profound impact on financial services within the EU. The centralisation of supervisory functions under ESMA would likely lead to greater consistency in regulatory enforcement and reduce opportunities for regulatory arbitrage. This could enhance investor confidence and attract more international investment into EU capital markets. The shift towards a principles-based regulatory framework would provide greater flexibility for financial institutions to innovate and adapt to changing market conditions, potentially fostering a more dynamic financial ecosystem.

The focus on simplifying and harmonising regulations would reduce compliance costs for financial institutions, particularly SMEs, which often struggle with the administrative burden of navigating multiple regulatory regimes. The development of a unified European safe asset could provide a stable investment option for institutional investors and support the integration of capital markets.

Moreover, the emphasis on retail investment and financial education could democratise access to capital markets, encouraging more EU citizens to invest their savings in financial assets rather than traditional bank deposits. This shift could unlock significant capital for economic growth and innovation.

However, these reforms also present (several political) challenges. The transition to a centralised supervisory model may face resistance from national regulators and market participants who benefit from the current fragmented system. Ensuring effective coordination between ESMA and NCAs will be crucial to avoid duplication of efforts and ensure smooth implementation of new regulations. This is along with the details proposed in each document below, accordingly "too big to ignore" if CMU/E-SIU is to be the catalyst for overall EU growth that it could deliver.

Key takeaways from the Eurogroup CMU Statement

The Eurogroup's CMU statement outlined a comprehensive and ambitious agenda aimed at creating a more integrated, efficient and resilient capital market in the EU. By focusing on well-known weaknesses such as market integration, sustainable finance, innovation, financial stability and SME financing, the Eurogroup reiterates established commitments to building a robust financial ecosystem that can support the EU's economic and sustainability goals. The successful implementation of these initiatives will require coordinated efforts from policymakers, regulators and market participants to overcome existing challenges and realise the full potential of the CMU. This focused on the following statements (albeit – quite regrettably without many references on how to overcome (national political) barriers that continue to slow or block efficient delivery):

Enhancing market integration and efficiency

One of the primary objectives outlined is the enhancement of market integration and efficiency. The Eurogroup emphasises the need to remove existing barriers that hinder cross-border investments and market operations. This includes harmonising regulatory frameworks, improving supervisory convergence and fostering a more integrated financial infrastructure.

Ultimately the EU should create a competitive, efficient and smart regulatory structure to better channel capital into innovative EU enterprises, increase liquidity, risk taking and risk sharing and boost resilience and financial stability. This also includes (i) developing the EU securitisation market for efficient and transparent risk transfer to suitable parties; (ii) evaluating supply and demand constraints hindering securitisation market growth and (iii) promote supervisory convergence across capital markets more broadly. The Eurogroup calls on the Commission to develop the Single Rulebook further and strengthen ESAs' role and governance arrangements to improve EU supervision, including through a stronger "Single Supervisory Culture" while equally reassessing the regulatory framework to reduce regulatory burden and transaction costs for market participants and create a more attractive capital market for companies through better market infrastructure and convergence. By addressing these issues, the EU aims to create a more seamless and efficient capital market that can better support businesses and investors across Member States.

Promoting sustainable finance

The statement also places significant emphasis on promoting sustainable finance as a core component of the CMU. This involves integrating environmental, social and governance (ESG) considerations into financial decision-making processes. The Eurogroup recognises the importance of mobilising private capital to support the EU's green transition and achieve its climate goals. To this end, the statement calls for the development of robust frameworks and standards that can facilitate the growth of sustainable finance markets, ensuring that they are transparent, reliable and aligned with the EU's sustainability objectives.

Supporting innovation and digitalisation

Innovation and digitalisation were identified as critical drivers for the future of the CMU. The Eurogroup acknowledges the transformative potential of financial technology (FinTech) and digital finance in enhancing market efficiency and accessibility. The statement advocates for the creation of a conducive regulatory environment that encourages innovation while safeguarding financial stability and consumer protection. This includes fostering the development of digital financial services, supporting the adoption of new technologies and addressing the challenges posed by digital transformation.

Strengthening financial stability and resilience

The Eurogroup's statement underscored the importance of strengthening financial stability and resilience within the CMU. This involves enhancing the capacity of financial markets to absorb shocks and maintain their functionality during periods of stress. The statement highlights the need for robust risk management practices, effective supervision and the development of macroprudential tools to mitigate systemic risks. By bolstering financial stability, the EU aims to create a more resilient financial system that can support sustainable economic growth.

Facilitating access to finance for SMEs

Small and medium-sized enterprises (SMEs) are recognised as vital contributors to the EU economy and the statement emphasises the need to improve their access to finance. The Eurogroup called for targeted measures to address the financing challenges faced by SMEs, including the development of alternative financing sources and the enhancement of market-based financing options. By facilitating better access to finance for SMEs, the CMU can help unlock their growth potential and drive economic development across the EU.

Citizens

The Eurogroup called for the creation of better opportunities for EU citizens to accumulate wealth and improve financial security, by increasing direct and indirect retail participation through access to profitable investment opportunities. Potential initiatives relating to this priority area extend to (i) supporting sufficient complementary income streams for an ageing population through wider use of longer-term savings and investment products, including a review of the pan-European pension product (PEPP); and (ii) developing attractive cost-effective and simple cross-border investments or savings products for retail investors.

Key takeaways from the Letta Report

The Letta Report presents a strategic vision as well as the discussion on the need for the Single Market to adapt to global changes and challenges, proposing various strategies to enhance its functionality and resilience. This analysis will delve into the key proposals and their implications for the Single Market, focusing on financial integration, industrial policy and regulatory frameworks. The Letta Report specifically includes proposals for:

Strategic vision for the Single Market

The document underscores the necessity of a robust political commitment to empower a new Single Market framework. This framework aims to protect fundamental freedoms while supporting a dynamic European industrial policy. The emphasis on speed, scale and financial resources is crucial for achieving these objectives. The proposal to connect European capitals with high-speed rail as part of the green and digital transition is particularly noteworthy. This project is envisioned as a pillar of the transition, mobilising resources and delivering benefits across generations.

Introducing a "Fifth Freedom: Research, Innovation and Education"

A significant proposal is the introduction of a fifth freedom within the Single Market, focusing on research, innovation, knowledge and education. This addition aims to transform dispersed knowledge into unified opportunities for growth and inclusivity. The integration of this fifth freedom is expected to foster an ecosystem where knowledge diffusion propels economic vitality, societal advancement and cultural enlightenment. The establishment of a European Knowledge Commons and harmonisation of cross-border data flow mechanisms are pivotal steps in this direction.

Financial integration: transforming CMU into a Savings and Investments Union (i.e. the E-SIU)

The document highlights the critical need for financial integration within the Single Market to achieve broader EU goals. The creation of the E-SIU is proposed to address inefficiencies in the utilisation of private savings within the EU. This Union aims to retain European private savings and attract additional resources from abroad. The integration of financial services is seen as essential for mobilising resources to support the EU's strategic objectives.

State Aid and industrial policy

The document addresses the debate on State Aid, proposing innovative solutions to balance national targeted public support for industry with the need to prevent a fragmentation of the Single Market. A State Aid contribution mechanism is suggested, requiring Member States to allocate a portion of their national funding to pan-European initiatives. This approach aims to overcome distortions in competition and ensure a level playing field within the Single Market.

Public procurement and circular economy

Improving investment efficiency is another key focus. The document advocates for embedding circular economy principles within the Single Market and leveraging public procurement practices to support broader goals. Strengthening administrative capacities is also emphasised to ensure effective deployment of public resources.

Energy integration and infrastructure

The document outlines the importance of a well-integrated energy market for achieving a carbon-free energy system. It calls for enhanced cross-border electricity trading and regional cooperation to optimise infrastructure investments. The establishment of a dedicated cross-border infrastructure fund is proposed to support large-scale projects that are crucial for decarbonisation.

Digital euro and financial autonomy

The introduction of a digital euro is proposed as a means to enhance financial autonomy and improve retail payment infrastructure within the EU. This initiative aims to provide a secure and privacy-compliant pan-European payment solution, reducing reliance on non-European actors and strengthening the resilience of the payment system.

Governance and regulatory frameworks

The Letta Report advocates for a progressive approach to dismantling administrative and regulatory obstacles between national markets. It proposes moving towards a two-layer regulatory approach with a centralised EU authority responsible for ensuring coherence in rules having a Single Market dimension. This approach aims to foster a more integrated and competitive market environment.

Outlook for the Letta Report's proposals

Enrico Letta's document presents a comprehensive vision for the future of the European Single Market, emphasising the need for financial integration, industrial policy innovation and regulatory coherence. The proposals outlined aim to enhance the competitiveness, resilience and inclusivity of the Single Market, positioning it as a cornerstone of European integration and global influence. The successful implementation of these strategies will require strong political commitment, collaboration among Member States and effective governance frameworks.

Key takeaways from ESMA's CMU Position Paper

ESMA's CMU Position Paper outlines 20 recommendations aimed at enhancing the effectiveness and attractiveness of EU capital markets. The recommendations are directed at various stakeholders, including capital market supervisors, Member States, the European Commission, co-legislators and the financial industry. ESMA underscores the importance of developing and integrating EU capital markets to address urgent financing needs and boost the competitiveness of European businesses. ESMA's comprehensive assessment identifies ways to enhance the long-term effectiveness and attractiveness of EU capital markets. The paper emphasises that creating effective and attractive capital markets requires improving the wider market ecosystem and placing investors and companies at its core. ESMA's recommendations focus on three main areas: broadening investment opportunities for EU citizens, boosting financing options for European companies and improving regulatory agility and supervisory consistency. This translates into the following themes:

The state of EU capital markets

The paper highlights the pivotal role of capital markets in financing economic activities, fostering innovation and promoting financial inclusion. Despite Europe's strong history in capital markets, it remains hampered by an over-reliance on the banking system and fragmented markets. The CMU plan aimed to address these structural flaws by diversifying financing sources, improving economic risk sharing and deepening financial integration. However, EU capital markets remain underdeveloped compared to global counterparts, with a declining share of global equity market capitalisation and a fragmented market infrastructure.

Broadening investment opportunities for EU citizens – investment culture and financial education

The paper emphasises the need to mobilise new and long-term capital across different parts of the economy. Broadening the investor base can introduce diverse funding sources and inject liquidity into capital markets. Traditionally, EU households have relied on bank deposits, but shifting even a small percentage of savings into capital market investments could unlock significant funds for economic growth. To instil a greater retail investment culture, suitable investment products, independent advice and appropriate investor protection are essential. Financial education is also crucial to empower citizens to manage their finances effectively. Key recommendations include:

• EU-Label for basic investment products: Creating a voluntary "basic" investment product label for non-complex financial instruments to guide retail investors. This label could be assigned to a sub-category of non-complex financial instruments, such as certain basic UCITS funds, as well as suitable equity and debt securities. The investment products could be selected based on a set of common features related to complexity and cost efficiency.
• Simple Advice Category: Establishing a simplified advice segment for retail investors with basic investment needs. ESMA recommended that the Commission should consider creating a simplified and streamlined advice segment or guided execution for retail investors with basic investment needs. This advice could be based on a streamlined suitability assessment and lighter reporting requirements.
• Digital solutions: Promoting digital solutions to enhance investor confidence and engagement.
• Pensions and long-term savings: Assessing long-term savings trends and pension systems to contribute to capital market development. ESMA recommended that the European Commission and member states should examine the contribution a revived PEPP or other pan-European long-term savings and investment products could make to EU capital markets.
• Tax incentives: Re-evaluating tax incentives to encourage retail investment in capital markets.
• Employee share schemes: Promoting employee share ownership to diversify household savings and incentivise employee performance.
• Financial education: Continuing efforts to improve financial education across the EU.

Boosting the financing of European companies – diversifying financing options

The CMU project aimed to develop greater access to diverse financing sources, especially for SMEs and startups. However, European businesses still rely heavily on bank financing. To attract more funding for European companies, measures should be taken to make investing in EU markets more appealing. This includes improving public equity financing, supporting corporate debt and private financing options and enhancing the securitisation market. Key recommendations include:

• Pan-European markets: Fostering dedicated markets (including in particular segments) with sufficient size, liquidity and visibility at an EU-wide scale to attract international and EU investors. Such market segments could be further focused on specialised or critical industries in the EU or be based on size or specific needs, such as SMEs and thus go beyond the concept of SME Growth Markets (as permitted under MiFIR/MiIFD II).
• Equity funding: Mobilising institutional and retail equity capital through dedicated funds.
• Securitisation market: Revitalising the EU securitisation market through a comprehensive review of the current framework and in particular prudential treatments, due diligence rules for institutional investors, reporting requirements for certain assets, the consistency of the STS-criteria and the supervisory process.
• Pan-European trading partnerships: Improving connectivity and simplification of trading and post-trading landscapes. ESMA recommended that the Commission should step-up its evaluation of whether regulatory obligations specifically applicable to listed companies strike the right balance compared to those applicable to unlisted companies. ESMA expressed a view that the Commission, Member States and NCAs should reduce and avoid disincentives that discourage companies from listing. These include but are not limited to, existing and new disclosure and/or conduct requirements in particular where they are not justifiable from an investor protection system.
• Ecosystem for listed companies: Ensuring a balanced ecosystem for public companies to incentivise listing.
• Harmonising related law: Further harmonising corporate law affecting the investment chain.
• Green finance: Promoting EU capital markets as a hub for green finance.

Improving regulatory agility, supervisory consistency and global competitiveness through principles based approach

The paper calls for enhancing regulatory agility and supervisory consistency to navigate market developments effectively. The current regulatory framework should evolve to become more flexible, dynamic, harmonised and responsive to the demands of a rapidly evolving financial ecosystem. Key recommendations include:

• Modernising regulatory framework: Adopting a principles-based approach to legislation and enhancing ESMA's powers. This would involve using a greater amount of framework legislation focusing on the key strategic policy choices of co-legislators, with technical work delegated to ESMA.
• Holistic regulation review: Streamlining the Single Rulebook to address inconsistencies and complexities, continue to propose legislation in the form of EU regulations rather than directives as well as reduction of national options and discretions. Moreover, legislative and regulatory rulemaking should provide for a phased or staggered implementation or could indicate that the legislation becomes effective a certain period after implementing measures have been completed.
• Forbearance powers: Implementing effective regulatory forbearance powers for ESMA such as No Action Letters and other supervisory tools to allow ESMA to temporarily suspend the application of provisions in EU law. This power would be limited to use in exceptional circumstances, where this is deemed necessary to avoid clearly identified disruption or risks to EU financial markets and investors.
• Supervisory consistency: Enhancing cooperation among national authorities (not just NCAs) and centralising certain supervisory tasks as well as building out a Single Supervisory Culture. ESMA recommended that it should progressively evolve from coordination and exchange of supervisory information towards: (1) facilitating more cooperation and joint supervisory work amongst NCAs, especially on large, cross-border firms; (2) carrying out more central work on selected tasks to increase efficiencies, integration and optimisation; (3) centralising certain supervisory data collection and processing; and (4) fostering harmonised enforcement outcomes through enhanced cooperation and convergence.
• Direct EU-Level supervision: Evaluating areas that may benefit from direct EU-level supervision. This specifically has been floated to include "large" pan-European market infrastructure or crypto-asset service providers. ESMA has also queried that the EU's approach to non-EU providers of financial services in the EU, in particular those providing critical services should be reviewed. Accordingly, the EU's co-legislators should consider enhancing ESMA's role as a gatekeeper to EU capital markets in this context, including expanding direct supervision where appropriate.
• Global competitiveness: Incorporating mechanisms to support the competitiveness of EU capital markets.

Outlook for ESMA's CMU Position Paper's proposals

ESMA's position paper presents a comprehensive roadmap for strengthening EU capital markets by addressing structural flaws, broadening investment opportunities, boosting financing options and improving regulatory agility and supervisory consistency. The successful implementation of these recommendations will require coordinated efforts from all stakeholders involved. By fostering a more integrated and efficient market ecosystem, the EU can better serve its citizens and businesses, ultimately enhancing its global competitiveness in the financial sector.

Key takeaways from the Draghi Report
Both Part A and Part B of the Draghi Report provide an in-depth examination of the challenges and strategies necessary to enhance European competitiveness in the global market. The analysis identifies three primary areas for action: closing the innovation gap, coordinating decarbonisation with competitiveness and increasing security while reducing dependencies.

Part A specifically assesses:

• Economic stagnation and innovation gap: The document highlights that Europe is experiencing economic stagnation when compared to the United States, primarily due to slower productivity growth and missed opportunities in technological advancements. The EU's innovation gap is a significant concern, with only four of the world's top 50 tech companies being European. The document suggests that Europe needs to radically change its approach to innovation by accelerating technological and scientific innovation, improving the pipeline from innovation to commercialisation and removing barriers that prevent innovative companies from growing.
• Geopolitical strategy and security: The document underscores the rising physical security threats and the need for a genuine EU foreign economic policy to retain freedom. It also highlights the fragmented nature of the EU's defence industry, which hinders its ability to produce at scale. Increasing collaborative procurement and favouring competitive European defence companies are essential steps. This would require amendments to existing procurement laws to facilitate joint defence projects. Developing a comprehensive foreign economic policy that coordinates preferential trade agreements and direct investment with resource-rich nations will necessitate new legislative frameworks.
• Barriers to competitiveness: The document identifies three main barriers to European competitiveness: lack of focus, wasting common resources and lack of coordination where it matters. The slow and disaggregated policymaking process in the EU needs reform. Streamlining decision-making processes and reducing veto points could be achieved through legislative changes. The dilution of collective spending power across multiple national and EU instruments calls for a more unified approach. This could involve legislative reforms to consolidate funding mechanisms.
• Regulatory burden: The document points out that regulatory burdens are particularly costly for SMEs and digital sectors. More than half of SMEs in Europe flag regulatory obstacles as their greatest challenge. This calls for a review and potential overhaul of existing regulations to make them more SME-friendly.
• Intellectual Property Rights (IPR): Simplifying procedures for managing IPRs and adopting the Unitary Patent across all EU Member States could significantly lower application costs for young companies and offer uniform protection.
• Decarbonisation and energy policy: The document emphasises the need for Europe to bring down high energy prices while continuing to decarbonise and shift to a circular economy. The energy landscape has changed irreversibly with the Russian invasion of Ukraine, leading to higher energy prices in Europe compared to other regions.
• Energy Market Regulation: The EU should decouple the remuneration of renewable energy and nuclear from fossil-fuel generation by building on tools like Power Purchase Agreements (PPAs) and Contracts for Difference (CfDs). This would require new legislative frameworks to support these mechanisms.
• Financing the EU's investment needs: The document discusses how the EU should finance the massive investments needed for transforming the economy. It suggests that while private sector investment is crucial, public-sector support will also be necessary. On CMU Part A advocates for integrating Europe's capital markets to better channel high household savings towards productive investments will require legislative reforms aimed at creating a genuine CMU. On common safe assets Part A advocates that funding joint investment projects could follow existing templates like the Next Generation EU programme but would require robust fiscal rules to ensure sustainability.

Part B's proposals:

Part B specifically provides a thorough examination of sectoral policies aimed at enhancing European competitiveness. It spans various sectors such as energy, critical raw materials, digitalisation, energy-intensive industries, clean technologies, automotive, defence, space, pharma and transport. Additionally, it addresses horizontal policies including innovation acceleration, skills gap closure, investment sustenance, competition revamping and governance strengthening. This includes:

Energy sector analysis

• High volatility and investment uncertainty: The document highlights the detrimental impact of high volatility in energy markets on investment decisions. The increased cost of hedging and the uncertainty surrounding the security of supply raise the overall cost of the energy transition. This volatility also affects government revenues and public investment.
• Energy prices and competitiveness: High energy prices are a significant impediment to investment, with around 60% of European companies citing energy prices as a major barrier in 2023. The document notes that energy costs are a decisive factor in determining the competitiveness of EU activities compared to other regions.
• Dependency on gas imports: The EU's dependency on gas imports and exposure to spot markets is a core issue. The document suggests leveraging the EU's collective bargaining power through initiatives like 'Aggregate EU' to centralise joint purchasing and infrastructure coordination.
• Market mechanisms and pricing: The EU's market mechanisms based on marginal spot pricing result in natural gas driving electricity prices disproportionately. The document recommends regulatory measures to stabilise long-term contracts such as PPAs to hedge against high and volatile prices.
• Carbon costs and financial markets: Higher carbon costs in the EU compared to other regions are embedded in electricity generation costs due to the Emissions Trading System (ETS). The document also points out the concentration of risks in energy futures trading markets and suggests further regulation to mitigate these risks.
• Permitting processes: Lengthy and uncertain permitting processes for new power supply and grids are identified as significant bottlenecks. The document recommends streamlining these processes to accelerate infrastructure development.

Critical raw materials analysis

• Supply chain vulnerabilities: The document underscores the EU's heavy reliance on imports for critical raw materials, with significant concentration in countries like China for rare earths and other minerals. This dependency poses risks for the EU's green and digital transitions.
• Export restrictions and market concentration: Export restrictions on critical raw materials have increased globally, with countries like China imposing significant restrictions. This could lead to higher prices and volatility, affecting the EU's supply chains.
• Domestic production and recycling: The document highlights opportunities for increasing domestic production and recycling of critical raw materials within the EU. It suggests that domestic supply could meet a significant share of the EU's demand by 2030.
• Strategic partnerships and financial solutions: To secure supply chains, the document recommends establishing strategic partnerships with reliable trade partners and developing financial solutions to support investment in critical raw materials. This includes public-private partnerships and leveraging institutions like the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD).
• Value chains: The document calls for a comprehensive strategy covering the entire value chain from mining to recycling. It suggests creating a dedicated EU Critical Raw Material Platform to deliver on this strategy and leverage market power.

Financial and regulatory implications

• Investment incentives: The recommendations emphasise the need for stable long-term contracts and financial instruments to hedge against market volatility. This includes promoting PPAs and CfD to provide price certainty for investors.
• Regulatory harmonisation: Harmonising regulatory frameworks across Member States is crucial for streamlining permitting processes and reducing administrative burdens. The document suggests adopting a technology-neutral approach to leverage all available solutions for decarbonisation.
• Financial market regulation: Further integration of financial market regulation is recommended to mitigate risks associated with speculative behaviours in energy derivatives markets. This includes imposing financial position limits, dynamic caps and ensuring all market participants report their trades to EU regulators.
• Public-Private Partnerships: The document advocates for public-private partnerships to de-risk investments in critical raw materials and energy infrastructure. This approach can mobilise private capital while ensuring strategic alignment with EU policy objectives.

Outlook for the Draghi Report's proposals

The Draghi Report provides a comprehensive roadmap for enhancing European competitiveness through targeted sectoral policies and regulatory reforms. By addressing high energy prices, dependency on imports, market volatility and lengthy permitting processes, the EU can create a more stable investment environment. Additionally, securing supply chains for critical raw materials through strategic partnerships and financial solutions will be essential for supporting the green and digital transitions. Harmonising regulatory frameworks and leveraging public-private partnerships will further strengthen the EU's competitive position in global markets. It remains to be seen how many of the Draghi Report's proposals will be taken up in the EU's Industrial Policy as well as the workplans for DG FISMA.

Key takeaways from the GFI – DG FISMA Letter

The German Finance Ministry, French Treasury and Italian Treasury sent a letter (details of which were made public around 3 October 2024) to DG FISMA Director General, John Berrigan. The EU's three largest Member States (Germany, France and Italy – GFI) commended the European Commission for its significant legislative achievements in the financial services sector during the last legislative cycle. They further note that these achievements have notably strengthened the resilience of banks, enhanced financial stability, promoted transparency, combated money laundering and terrorist financing and protected consumers. However, the letter emphasises that these legislative measures require time for proper implementation and integration by relevant stakeholders to yield the intended results.

Specifically, the GFI – DG FISMA Letter suggests that DG-FISMA and other EU policymakers consider:

Moratorium on new initiatives

The authors advocate for a temporary halt on launching new large-scale initiatives in the financial services sector. This pause is deemed necessary to allow sufficient time for the effective finetuning and/or implementation of recent legislative measures, assess their impact, identify potential gaps and introduce possible adjustments to make, specifically the banking sector, more competitive. The letter makes no statement on cross-border consolidation and instead states that the regulatory framework should remain flexible enough for country-specific characteristics and give "national champions" the opportunity to be globally competitive. The focus should be on ensuring that the existing frameworks are fully operational and effective before embarking on new initiatives.

Emphasis on competitiveness

The letter underscores the importance of enhancing the competitiveness of the European financial sector, in particular in the banking sector. It argues that a more competitive banking system will be better equipped to finance key European goals such as the twin transition, strategic autonomy and defence capabilities. The authors call for a shift in focus towards making the EU's banking systems more competitive on a global scale.

Specific areas of concern

The letter identifies six specific areas that in the author's view require attention:

1. Level playing field in micro-prudential framework: The need to ensure a level playing field vis-a-vis other major jurisdictions in terms of timing of implementation and operational burden, particularly concerning the fundamental review of the trading book and the requirements for a stable net funding ratio.
2. Proportionality and risk-sensitivity in Level 2 and Level 3 acts: Ensuring that acts published by the EBA remain proportionate, risk-sensitive and coherent with legislative outcomes without exceeding what is strictly necessary.
3. Simplification and efficiency: Identifying areas for simplification within the banking prudential and supervisory framework to streamline processes, reduce administrative burdens and add flexibility to rulemaking.
4. Revitalisation of the securitisation market: Supporting the European Council and Eurogroup's position on revitalising the securitisation market as part of advancing the CMU, including a review of the prudential framework and concretely of non-neutrality factors, a simplification of the process for assessing significant risk transfer, more proportionate reporting/disclosure requirements and STS criteria. The EU should also promote platform solutions/EU guarantee scheme(s). In the authors' view, the benefits would be that this could channel private investments in specific areas of interest (also cross-border), enhance transparency and lower transaction costs.
5. Climate and transition risks: Addressing climate and transition risks in a coherent and realistic manner, including evaluating and reviewing the green asset ratio regime applicable to financial institutions. The letter advises reviewing the green asset ratio regime for climate and transition risk due to SMEs, overseas activities and derivatives distorting it.
6. Review of macroprudential framework: Enhancing consistency in the use of existing tools within the macroprudential framework while preserving competitiveness and ensuring a level playing field.

Special mention: Capital Requirements Regulation Review

The letter specifically highlights the importance of the upcoming review mandated by the Capital Requirements Regulation (as amended by Reg. (EU) 2024/1623). This review will assess the overall situation of the banking system in the Single Market and present a report to the European Parliament and Council by the end of 2028. The authors suggest preliminary steps, including an interim report on the competitiveness of the banking sector to be commissioned to a group of experts representing various stakeholders.

While the GFI – DG-FISMA Letter does not put the full brakes on implementation of Basel III Endgame, which has already been delayed due to domestic discussions in the United States, it does call for time for certain existing proposals to be finetuned and implemented. This should not be interpreted as opening a way for a regulatory race to the bottom but rather an ability for firms and NCAs to use the breathing space to bolster compliance with what is already on the plate as well as to adopt greater use of proportionality principles where possible.

Madrid proposes multi-speed EU integration mechanism for joint initiatives

After the GFI-DG FISMA Letter, Spain's Economy and Trade Minister, Carlos Cuerpo, in support of the broad aims of the Draghi and the Letta Reports, proposed a new mechanism, a "competitiveness lab" where three or more EU Member States (also referred to as a mini-coalition) could test ideas for cooperation without the "potential danger of frustration" with the EU's slow decision-making progress. In many ways these mini-coalitions could generate multiple CMU sandboxes.⁶

While this re-opens up a potential for a multi-speed EU on CMU, it does allow for delivery on the EU Treaties' principles for ever deeper union (and thus integration) for those willing to do so. Much in the way the Banking Union has already built stronger integration – even if certain recent confusion in national capitals on the merits of bank mergers and consolidation.

Moreover, moving the threshold to three could increase e[7fficiency for reform and dampen inertia as EU law currently allows enhanced cooperation where at least nine Member States agree on specific initiatives if efforts to secure support for the reforms at EU level have failed. Getting agreement amongst nine Member States is potentially far more difficult than having a lower threshold of three and then building upon that. It should be noted that Spain's suggested idea is one that was previously proposed in February 2024 by France's Bruno Le Maire, who served as Economy and Finance Minister from 2017 to 2024.

In response to the Spanish proposals, Pascal Donohoe, the head of the Eurogroup, was quick to note that the Spanish plan "goes in the right direction" and "is encouraging", he said, it comes "at a time in which we are all reaffirming the value of the single market, the value of a level playing field and the importance of deepening the single market within financial services." "I hope that ideas like this act as a catalyst for deepening our commitment to move forward together and for us all to take a step forward together so that we don't have any risks of fragmentation." "When we see initiatives like this come forward, I always have to reaffirm as president of the Eurogroup that my strong preference is for all countries to move forward together [...] for action to be taken across the entire Eurogroup or even across the entire European Union," ultimately "One country's enhanced cooperation could be another country's risk of single market fragmentation" Donohoe stated.

So, what else is perhaps missing across the proposals in the Relevant Publications?

Despite all the detail in various CMU Action Plans and new plus revamped proposals in the Relevant Publications, the following items are still in some ways missing. This is very much the case when it comes to the (much needed) harmonisation of (i) the practices of listing authorities, (ii) rules on listing venues, (iii) Investor Compensation Scheme Directive protections and (iv) further improve the harmonisation of the Financial Collateral Directive (FCD) and Settlement Finality Directive (SFD) as it relates to the custody and safeguarding of client assets and client money; (v) streamline supply chain finance (vi) foster greater financial literacy; and (vii) roll-out (tax incentivised/wrapper-based) retail investor products (which the PEPP does not fully embody).

The above are certainly points where the EU is far more fragmented when compared to the benchmarks of integration and participation in the case of CMU-related publications and drivers of economic growth in the case of the Draghi and Letta Report's focus. As an example, when it comes to:

1. Practices of listing authorities

The EU's listing authorities are fragmented across the Member States, each with its own regulatory framework and standards. This fragmentation can lead to inconsistencies and inefficiencies in the listing process. ESMA provides some level of oversight and coordination, but its powers are limited compared to national authorities (including beyond NCAs). In contrast both the UK and the US have a central listing authority ensuring a consistent and robust regulatory environment.

2. Rules on listing venues

The EU has multiple listing venues, including national stock exchanges and pan-European platforms. While diversity in listing venues can offer more options, it can also lead to regulatory arbitrage and complexity for issuers and investors. The EU could consider streamlining its listing venue rules to reduce complexity and enhance the attractiveness of its markets. Developing a more unified regulatory framework for listing venues could help mitigate the risks of regulatory arbitrage.

3. Investor Compensation Scheme Directive (ICSD) protections

The EU's ICSD (currently) provides a framework for compensating investors in the event of a firm's failure, but the coverage (EUR 20,000 when compared to bank deposits of EUR 100,000)⁷ and implementation vary across the Member States. The compensation limits and eligibility criteria can differ, leading to potential disparities in investor protection.

In contrast to the EU, the UK's Financial Services Compensation Scheme (FSCS) offers a well-defined and robust compensation mechanism for investors. The FSCS provides clear guidelines on coverage limits (GBP 85,000) and eligibility, ensuring a high level of investor confidence and retail investor participation. Across the Atlantic, the US has the Securities Investor Protection Corporation (SIPC), which offers comprehensive protection for investors in the event of a brokerage firm's failure. The SIPC's coverage limits (USD 500,000 including USD 250,000 for cash claims) and procedures are well-established, providing strong investor protection and thus confidence driving retail investor participation.

The EU should work towards harmonising the implementation of the ICSD across member states to ensure consistent investor protection. Increasing the compensation limits and standardising eligibility criteria could enhance investor confidence in the EU markets. While the EU's proposals for a centralised European Depositor Insurance Scheme (EDIS) remains the missing third pillar for the Banking Union, creating an EDIS for CMU by adapting principles from SIPC to the ICSD would be technically easy (and hopefully not politically problematic) if all investment firms operating in the EU participate in a centralised compensation scheme under the joint oversight of ESMA and the SRB, thus ensuring comprehensive coverage and consistent funding for the scheme and thus, in turn, facilitating greater confidence and retail investor participation.

4. Improve the harmonisation of the FCD and SFD as it relates to the custody and safeguarding of client assets and client money

CMU has unfortunately, despite EU policymakers (and legal commentators)⁸ having spotted the problem over the past 30 years, failed to counteract fragmentation with reforms and harmonisation of rules on collateral, custody and safekeeping of client assets and client money as well as security interests, which all remain drawn along national lines (including the FCD's and SFD's (differing transposition into national laws). This begs the question of "why?" Surprisingly to date the answer to that question has been more along the lines of the adage "if it ain't broke don't fix it" as well as "if it's broke don't shout about it". Even if this is an area that the EU has long had on its horizon, including pre-2008 financial crisis, deferrals and "other priority issues" have taken priority in the legislative and rulemaking agenda of the EU.

All domestic and cross-border financial market transactions, regardless of asset-, client- and/or transaction-type, rest, at some point, upon some form of collateralisation (whether by way of a title transfer basis or a security interest arrangement) of a transaction and (including where there is no collateralisation) the post-trade safekeeping/custody of the relevant asset. As a result, mobilisation of collateral assets, collateralisation more generally and the safekeeping and custody of assets, build an area that is fundamental to the functioning of EU and global financial markets. Overall demand for collateral assets and ease of mobility across borders has increased due to regulatory changes requiring greater collateralisation.

Fragmentation of laws, regulatory rules and their concepts as well as supervisory approaches can lead to divergences and thus barriers across the Single Market for financial services. Borders and barriers are costly not only in terms of reducing the efficiency of the EU's core principles of free movement of capital but also by increased costs of compliance. A couple of key steps can help achieve this greater harmonisation, namely:

1. develop and implement standardised definitions and terminology across the Member States to ensure uniform understanding and application of key concepts related to (i) security interests (a simple pledge (using the market term) can differ in legal rights between jurisdictions), (ii) collateral, client assets and client money and (iii) what rights (including rehypothecation) may be exercised by whom, when and on what basis;
2. align legal requirements and procedures (or at least create an EU-hosted database) for the creation, perfection, notification and enforcement of security interests to reduce discrepancies and enhance legal certainty; and
3. establish interoperability between national Member States' centralised registries for security interests and collateral arrangements to facilitate transparency and ease of access to information for all market participants presented in a standardised format.

5. Streamline supply chain finance

Supply chain finance (SCF) is a critical component of the financial ecosystem, enabling (real economy) businesses to optimise their working capital and improve liquidity by monetising trade finance exposures and receivables from SCF providers. The legislative and regulatory frameworks applicable to SCF are fragmented and can create inconsistencies and thus increased complexities and costs for businesses operating across borders (in the EU and globally). Equally, there is a lack of standardisation on practices and documentation in SCF across the EU. The EU co-legislators could work to create better legal and operational certainty by introducing harmonising legislative and regulatory rulemaking instruments that also help forge greater harmonisation and ultimately standardisation of practices (including the use of electronic signatures and electronic trade documentation standards as contemplated by UNCITRAL's Model Law on Electronic Transferable Records).

6. Foster a more unified approach to financial literacy and investor education

Financial literacy and investor education initiatives are not uniformly implemented across the EU, leading to varying levels of investor awareness and participation. Both the UK and US have comprehensive financial literacy programs that aim to educate investors and promote informed decision-making. The EU should develop a unified approach to financial literacy and investor education, potentially through coordinated efforts by ESMA and national authorities.

While education is a Member State competence, a centralised body (or potentially within ESMA) could coordinate financial literacy and education initiatives across the EU, including building off work that is underway in developing suggested unified curriculum and standards for education programs. Where there is still further progress to be made is with ESMA or the EU more generally, to launch EU-wide public awareness campaigns to promote the importance of financial literacy and encourage participation in educational programs. These campaigns could utilise various media channels, including social media, television and print, to reach a broad audience. ESMA could assist (or encourage selected vetted vendors to assist) in development and promotion of digital tools and resources, such as online courses, mobile apps and interactive websites, to make financial education accessible to a wider audience. These tools should be user-friendly and available in multiple languages to cater to the diverse EU population.

7. Tax-incentivised retail investor products

The EU lacks a unified (pan-EU or 28^th Regime based), tax-incentivised retail investor product comparable to the UK's ISA or the US' 401(k) plan. While some Member States offer their own tax-incentivised products, the lack of a pan-European solution limits the potential for widespread retail investment. Tax is often a key barrier (often more mental) to increasing retail market participation.

The UK's Individual Savings Account (ISA) is a popular tax-incentivised product that encourages retail investment by offering tax-free returns on savings and investments. ISAs are flexible and accessible, making them an attractive option for a wide range of investors.

The US 401(k) plan is a tax-advantaged retirement savings plan that allows employees to save and invest for retirement with tax benefits. The 401(k) plan is widely used and offers significant incentives for long-term savings and investment.

If the future of CMU is to also embrace the E-SIU and its goal of creating a long-term savings and investment union, then (tax incentivised) retail investor products are an area that the EU policymakers, in discussion with national capitals, cannot afford to ignore.⁹

Outlook and next steps

The proposals set out in the Relevant Publications provide a detailed roadmap for enhancing the EU's Single Market, including, as assessed herein for financial services, their successful implementation will require a concerted effort from all stakeholders involved. ESMA's CMU Position Paper marks the most concrete (and perhaps most sensible) of all the proposals set out in the Relevant Publications.

Both the Letta and Draghi Reports warn as to what is at stake if inaction is permitted to continue. Accordingly, EU policymakers will need to strike a delicate balance with national interests and EU-wide goals, ensuring regulatory agility and consistency while promoting retail investment and tangible meaningful benefits for households and thus the electorate. This is especially the case in light of the items set out in the GFI – DG FISMA Letter and a request for a regulatory pause.

Spain's (welcome) push to move the CMU or if one wishes the E-SIU for those willing to do so is certainly quite sensible provided that it does not lead to adverse fragmentation. Financial services firms and market participants will want to ensure that their views are sufficiently expressed in respective fora as ultimately harmonisation as opposed to fragmentation can certainly drive efficiency and reduce the cost of compliance considerably.

Footnotes

1. Available here and here.

2. Available here.

3. Available here.

4. Available here.

5. Available here.

6. See further details and very good reporting available here.

7. In 2010, the Commission proposed to update the rules in response to complaints about how the ICSD was being applied. In some EU countries, compensation schemes did not have sufficient funds to pay out claims or there were lengthy delays in payouts. Under the new rules proposed by the Commission, investors would be compensated 9 months after the investment firm's failure at the latest. The level of compensation would increase from EUR 20,000 to EUR 50,000. As the proposal was not endorsed at EU level (support was given to bank deposits under the DGSD), the Commission decided to withdraw it in March 2015.

8. Including by various practitioner and academic publications of Michael Huertas.

9. See a number of practitioner publications by Michael Huertas on this topic as published in the Journal of International Banking Law & Regulation

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