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FRC responds to EC Green Paper: Building a Capital Markets Union

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20 May 2015

The Financial Reporting Council (FRC) has responded to the European Commission (EC) Green Paper: Building a Capital Markets Union. While the FRC welcomes in principle the EC's proposals to lower barriers to access and cross-border investment, and to remove restrictions on investment decisions, it caution against attempts artificially to direct how investors choose to invest their capital.

In its response, the FRC agrees that the issues raised in the Green Paper are important to the future of the European economy.  However, they warn that it is important to recognise the contribution of equity markets in this context and that measures to strengthen bond markets or encourage investment in infrastructure, for example, should not be taken at the expense of those markets.

The FRC also notes that, in its experience, non-legislative approaches to reporting problems can be extremely effective in improving transparency, supporting decision making and contributing to lower costs of capital.

In response to the EC's detailed questions, the FRC notes the following.

  • It does not believe that the need for new EU-wide accounting standards for unlisted SMEs has been demonstrated.  However, if there is clear evidence to suggest that such accounting standards would enable such entities to attract more cross-border investment, it recommends that the EC consider using either an "IFRS minus" (as used in the UK standard FRS 101) or an "IFRS for SMEs plus" (as used in FRS 102) basis to develop these.
  • In its recent project on Smaller listed and AIM company reporting, it has received feedback that some of the disclosures required by IFRSs are often of little interest to investors.  It suggests that the Capital Markets Union provides an opportunity to develop a differentiated disclosure framework for such entities.
  • It believes that the EC should adopt a "comply or explain" approach, similar to that used in the UK Stewardship Code, in implementing its proposed amendments to the Shareholder Rights Directive.
  • It believes that the "Lab" concept used in the UK to promote good practice, innovation and more effective communication in corporate reporting could usefully be adopted across Europe.

The FRC's full response can be downloaded from their website and the Green Paper can be obtained from the EC website.

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