The role of alternative finance in EU Capital Markets Union Presentation to Conference on European Alternative Finance & Marketplace Lending London, 28 May 2015

Main themes in CMU debate 1.Strengthen access to market-based finance for corporate capital-raisers; 2.Create conditions for cross-border investment & remove policy barriers to capital; 3.Facilitate investment by retail and institutional investors & create higher returns needed to finance retirement, 4.Boost investment available for infrastructure; 5.Build a stronger equity culture in Europe and break debt/fixed income dependence.

Reduce dependence on bank loans EU bank lending to business ( )

Availability of bank credit: end 2014 Source: ECB, SAFE survey

EU lag in market-based finance (gap compared to US if normalised as % of GDP) 80bn$ Source: New Financial

SME financing: EU, US compared Stock (end 2013)Flow (2013) USEUUSEU Bank loans (incl securitised) Investment funds Private equity Venture Capital Family & friends Crowd-funding3111 Angel investing Non-bank total Source: AFME "Bridging the Gap"

Europe's broken financial escalator: Risks of excessive dependence on pro-cyclical bank lending now evident; Venture capital as deep as US could have delivered additional €90bn in past 5 years and companies; EU companies raise 1/5 debt finance of US counterparts; EU companies raise capital in US private placement markets with US VC funds; small MS start-ups very constrained; Over-arching objective: contribute to an effective European funding escalator for EU firms. 7

HOW CAN CMU HELP?

Strengthen links in funding chain: 1.Provide enabling policy environment for crowd-funding, P2P (recognise local character and small scale); 2.Support trade finance, invoice discounting & factoring; 3.Help VC funds to achieve scale; 4.Confirm loan-originating powers of (ELTIF/AIF) funds; 5.Develop secondary markets for loans; 6.roll-out private placement (DE and FR success); 7.Simplify 'exit' via public debt and equity markets

Tackle cross-cutting investment barriers 1.Relax regulatory restrictions on institutional investment in equity and VC; 2.Increase access to credit scoring or SME credit- worthiness data; 3.Pragmatic approaches to differences in outcome of insolvency procedures; 4.Tackle discriminatory tax/double taxation and promote supportive tax treatment of equity/VC;

Mitigating related risks: Retail investor exposure: Which types of investment are suitable for direct retail investment? Under which conditions (disclosures, limits, min, entry tickets)? Financial stability implications: Increased equity capital will strengthen loss-absorbption capacity of EU economy; Macropru authorities will want to track credit/liquidity risk, maturity transformation via non-bank channels.

NEXT STEPS TOWARDS CMU?

CMU Action Plan: Prioritise CMU barriers and evaluate need/benefit of EU level action; examine different options before deciding on form (promote 'best practice', project development (e.g. BGF for EU) self- regulation, 'soft law', legislative harmonisation); Pragmatic, evidence-based approach resulting in short-list of actions to deliver decisive impetus to market-based finance; Set out detailed road-map for delivery of selected priorities, regular reporting and strong focus on execution/delivery. 13

Time-line for Action Plan Stake-holder consultationConcluded: 430 responses Stake-holder conference08 June Commission Action PlanSeptember 1st deliverablesAutumn 2015 Outputs: Action Plan, economic analysis, summary of consultation replies