Brexit or no Brexit, free movement of capital across Europe is vital to Britain's success

 
Michelle Carroll
Iconic Brands Of Scotland: Walkers Shortbread
Mid-market firms are more dependent on non-bank finance than others (Source: Getty)

Debate over Brexit has reached fever pitch, with the political, economic and social impacts of remaining in or leaving the EU rightly being discussed at length. But stepping back from In or Out, whatever decision the public makes, it’s essential that Britain retains free access to European markets. And this is no less true of the free movement of capital – and the big gains that will be unlocked through the coming Capital Markets Union (CMU), the EU’s effort to make it easier for firms to raise capital and facilitate cross-border investing.

Within the UK, an over-reliance on big banks helped contribute to the financial meltdown of 2008. When credit dried up, many firms were left seeking new ways of raising finance. Indeed, one legacy of the crash has been the rise of alternative lending.

The statistics are astonishing. Between 2011 and 2013, peer-to-peer lending grew by 1,150 per cent, for example. Last year, Funding Circle, one peer-to-peer lender, reached the £1bn mark of lending to UK businesses (£500m of which came in 2015).

But while much of the finance landscape is on the mend and alternative sources of finance are welcome, there is more that must be done.

The need for alternative sources of lending is most keenly felt by the UK mid-market (companies with revenue of between £10m and £300m). These firms are brimming with entrepreneurial energy and the ambition to scale up. They also play a central role in the UK’s economic success, creating one in four private sector jobs and accounting for one third of UK companies’ total revenues. Last year, the CBI said that, collectively, the UK’s 3,000 mid-market businesses contributed £59bn to the economy between 2010 and 2013, making the crucial difference between recession and recovery. The point is that the UK mid-market is politically and economically important.

Yet according to the CBI’s Stepping Up report, over half of the mid-market companies it surveyed agreed that a lack of long-term finance is a barrier to growth. Policy-makers need to look for solutions – and part of the answer lies with the CMU.

The US economy is approximately the same size as that of Europe, but European equity and debt markets are less than half and a third of the size of the respective US markets. This is important because this is the sort of long-term finance that mid-market firms want to be accessing.

The British Business Bank, for example, has found that mid-market firms are more sophisticated in their approach to finance. Instead of relying purely on traditional bank finance, they use a wide range of sources depending on what they are seeking to fund.

The Capital Markets Union Action Plan, published last year, set out how the EU will attempt to create a single market for capital by breaking down barriers to cross-border investing and unlocking sources of finance complementary to bank finance. One strand of the CMU focuses on rebuilding the securitisation market in order to diversify funding sources.

A new “Simple, Transparent and Standardised” form of securitisation is being developed by the EU which will go straight to the heart of improving access to capital across borders. Securitisation along these lines will contribute towards diversification in funding sources and reduce mid-market firms’ dependence on equity and bank finance. It will also stimulate competition between all forms of funding which should lower the cost of capital. It’s something that BDO has been calling for as part of our New Economy report.

The Brexit debate will escalate in the coming weeks as the referendum draws near. But whatever the outcome, at the heart of UK government policy must be a recognition that free movement of capital across Europe is essential to the success of Britain’s businesses.

BDO’s report – Capital Markets Union, Securitisation and Small and Medium Enterprises – can be downloaded from www.bdo.co.uk/sectors/financial-services. And BDO’s New Economy report can be downloaded at www.bdo.co.uk/neweconomy

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