A few months ago, the European Commission (the ‘Commission’) officially launched a major new EU policy initiative. It proposed to establish an EU-wide Capital Markets Union (CMU). The CMU is a flagship initiative of the Commission. It has ambitious objectives. The project is about completing a single EU capital market, but it is also about reducing Europe’s reliance on bank finance; help the real economy – especially SMEs – to gain access to capital; and help investors to gain access to a wider range of investment opportunities. These objectives reflect the Commission’s attempt to foster jobs, growth and entrepreneurship in a post-financial crisis era and to address the risks for Europe’s businesses and economies of mainly relying on banks for external funding.
To kick-start the policy process, the Commission published a so-called ‘Green Paper’ on building a CMU in February. The Green Paper reflects the Commission’s first thoughts on a possible agenda for establishing a CMU. It marked the beginning of a formal consultation process which closed in May. Currently, the Commission is evaluating responses to the consultation. It is expected that it will come forward with an action plan in September. The aim of this brief comment is to offer some thoughts on the CMU initiative and especially the access-to-finance problematic for SMEs which the CMU seeks to address.
- CMU and SMEs
Improving access to finance for SMEs has been a long-standing ambition of the Commission. It has proved to be an elusive goal. Bank finance continues to be the prevailing source of funding for SMEs in the EU. To cut the story short, it is likely that banks will continue being key players in the SME funding market in Europe even once a CMU is established. In saying this, I am not seeking to dismiss the CMU project or to suggest that the CMU cannot contribute to improving access to finance for a proportion of SMEs. There is clearly scope for improvement and the Commission, in its Green Paper, was right to consider action. It has long been known that the SME funding market suffers from a number of ills. Among these ills are information asymmetries. The CMU offers an opportunity to address such ills. Having said this, information problems in the SME funding market affect both supply and demand side and it is worth noting that the Green Paper had comparatively little to say about information problems on the latter side: i.e., affecting those SMEs which seek external funding. In relation to the latter, the Green Paper noted that:
‘[b]anks could be encouraged to provide better feedback to SMEs whose credit applications are declined and to raise awareness about alternative financing opportunities for SMEs whose credit was declined’.
These suggestions raise a number of comments. First and foremost, they strike on as rather timid proposals. The reference to banks being ‘encouraged’ appears to be a nod to self-regulation. In fact however EU capital requirements legislation already includes a ‘feedback’ provision on credit decisions by banks: Article 431(4) of Capital Requirements Regulation requires banks, if requested, to explain their rating decisions for loans. Regarding the Commission’s other suggestion – ie, to encourage banks to ‘raise awareness about alternative finance opportunities’ for SMEs – it is worth noting that this approach has already been tried out at the national level. Thus, in 2010 major UK high street banks committed to a number of measures with a view to help businesses in search of finance. These commitments were set out in a taskforce report. With respect to information problems, the report concluded:
‘Customers need to know what to do, and where to go, if the bank declines a credit application or offers an alternative finance solution. The Taskforce banks have agreed to commit to providing proactive and clear information on what alternative sources of finance and other help might be available. … Our signpost initiative sets out the minimum standard of service customers will get, either verbally or in writing. If their loan application is unsuccessful, they will be told why and they will then be guided to alternative sources of help and advice, including how to improve their creditworthiness. …’.
However, these commitments appear to have largely failed to deliver results in the UK. The 2014 SME Finance Monitor reported in relation to businesses, whose loan applications had been declined, that only 9% had been offered an alternative form of funding or suggested alternative sources of external finance by the bank. On the quality of the advice that these applicants received, it noted that:
‘Two thirds (61%) thought that the advice their lender had offered at that stage had been poor, 14% thought it had been good while 9% had not been offered any advice’.
Finally, according to the Finance Monitor, only 11% of unsuccessful applicants had been referred to ‘any other sources of help or advice’ by the bank.
As far as the CMU is concerned, the above findings suggest that a more intrusive approach is required if the EU wants to resolve information problems affecting SMEs in Europe. In a recent paper on the CMU, I have therefore advocated a form of ‘supply side driven matchmaking’, as a means to improve information issues affecting SMEs in the SME funding market in Europe. For this purpose, I have drawn on legislative arrangements that were adopted in the UK earlier this year. In essence, at the heart of the proposals is a mandatory referral system under which a designated bank is required to refer certain information about its SME customer’s funding needs to so-called ‘finance platforms’ in case where the customer’s credit application with the bank is deemed unsuccessful. The information in question relates inter alia to the amount and type of funding sought, the length for which the SME has been operating and receiving income, etc. The finance platforms are supposed to function as an access point and help to connect other finance providers (who will be able to access the relevant information) with SMEs. One advantage of the scheme is that SMEs will not have to actively search for alternative sources of funding. Instead of being in an active mode, they will be put in a reactive mode: matchmaking is primarily meant to be supply side driven via finance platforms.
It remains to be seen which (if any) arrangements the Commission will support. However, in any event, the CMU initiative has already proved useful in the sense that it has become a focal point for promoting cooperation on a series of important topics. Hopefully, this momentum will not be lost.
Dr Pierre Schammo
Reader in Law, Durham Law School
 European Commission, Building a Capital Markets Union, (Green Paper, COM(2015) 63 final, February 2015).
 This comment is based on a paper which I presented in April 2015 at a conference on ‘The New Financial Architecture in the Eurozone’, organized by the European University Institute, Robert Schuman Centre for Advanced Studies and Imperial College London, Brevan Howard Centre for Financial Analysis. The paper is entitled ‘Capital Markets Union and Small and Medium-Sized Enterprises (SMEs): a preliminary assessment’. A working version is available on the Social Science Research Network (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2605549)
 For details see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2605549.
 Commission, Building a Capital Markets Union, (n 1) 14.
 Regulation (EU) No 575/2013  OJ L176/1.
 Report of the Business Finance Taskforce ‘Supporting UK business’ (October 2010) 42, available at https://www.betterbusinessfinance.co.uk/images/pdfs/Business_Finance_Taskforce_report.pdf.
 BDRC Continental, SME Finance Monitor Q4 2014, (February 2015), 148 available at http://bdrc-continental.com/products/sme-finance-monitor/.
 s. 5 of the Small Business, Enterprise and Employment Act 2015.