Welcome to the podcast that shares the views of high-level leaders in the European and global financial services industry.

– “Welcome to Shaping Finance, a podcast which offers a platform to high-level decision makers and shapers in international finance. My name is Nicolas Mackel. I’m the CEO of Luxembourg for Finance and the host of this podcast.

I’m particularly pleased to welcome today my friend Michael Cole-Fontayn. Michael is currently the chairman of the AFME, the Association for Financial Markets in Europe. He’s a well-known figure in Europe’s banking industry having served for 35 years in different roles at BNY Mellon, the last seven of which as the Europe and Middle East and Africa chairman. Michael has also a number of other hats as a member of different advisory bodies or charities. He is particularly engaged with different initiatives on skills, as well as on ethics and finance. Welcome to Shaping Finance, Michael.

Michael Cole-Fontayn. – “A huge thank you Nicolas, delighted to be with you.

So AFME has been set up, in fact, during the global financial crisis as a representative body for wholesale capital markets financial services firms in Europe. Could you provide us a little bit of context as to why AFME was founded and what it seeks to achieve.

“Nicolas, you’re correct. AFME was indeed founded a little over 11 years ago now, at the height of the financial crisis. It was a synergy or merger between two organisations that were very broadly occupying the same space, the London International Bankers Association and the Securities Industry Financial Markets Association, or SIFMA Europe. The founding fathers of AFME at the time, the leading lights on the wholesale corporate banking markets of Europe said, "We need something that is an association of all of us reflecting the new reality of European markets." And that’s how the name was born.

So today we represent wholesale financial services businesses. You can see from our board members, all to be found at afme.eu, than it is the heads of wholesale markets within global and regional banks and we seek to represent a voice for wholesale markets with a particular voice from the sell side, those banking organisations who interact with their clients who will be asset owners, major corporations, small and medium enterprises, governments, government institutions, and so on. We’re available to all parties to try and ensure a fair, effective, efficient, transparent, and liquid wholesale markets to serve the needs of society and citizens.

So one topic we’re going to obviously address with you this morning is that of the Capital Markets Union in Europe. Maybe let’s get started by explaining to us why we do need a Capital Markets Union in Europe.

“Well, the history of Europe has been built around member states with their own banking champions. Before the financial crisis, those great banking champions had moved across the border, made acquisitions, developed client bases, and so on. But it was very much focused on lending at its core, and the capital markets businesses were quite underdeveloped and quite nascent. It was very convenient for Europe to outsource a lot of its capital markets activity, the in effect turning the equity and debt of companies into securities that could be actively listed, quoted on, and traded on markets and also their derivatives to hedge risks and also take positions. It was convenient for Europe to outsource to the deemed expert in the region at the time, and that was the city of London in the UK. London has been a global financial centre for many years and now a time for and opportunity for EU-27 to certainly think about how it wants to promote its own capital markets capability.

And the vision within the Member States to create such capital markets became born several years ago now, as Capital Markets Union, we have a banking union of sorts, why do we not have a Capital Markets Union of sorts where we can freely move capital across the markets of Europe to finance European projects? So Capital Markets Union is still in the making, but it is exceptionally important for the resilience and the recovery and the other major issues that are both opportunities and challenges for Europe.

What progress has been made on this project since it was introduced or what is preventing it from being completed?

“Capital Markets Union has made, I would say, steady progress under the two main Commissioners that it has had. It was born under the Commissioner Lord Hill and has been really nurtured into, I would say, adolescence by Commissioner Vice-President Valdis Dombrovskis. It is now transitioned to further mature under Commissioner Moraine McGuinness. The lower hanging fruit and the easier parts of developing capital markets in Europe under the umbrella of Capital Markets Union have been developed. I would say certainly market structures have been established, there are, of course, a long standing market infrastructure in Europe of a very high quality, the central securities depositories, for example, and indeed Luxembourg hosts one of those in Clearstream. Those structures are in place, it is the development of the front-end and the need for markets to mature in their liquidity and capital formation and intermediation and risk-taking that needs to further develop. When I say risk taking, it’s really the management of the risk that needs to be taken in order to facilitate markets.

So capital markets is maturing and together with the necessary completion of Banking Union, will fall a financing union for Europe that will enable it to become more digital, more sustainable, more resilient, and indeed more competitive. So it is an essential European project.

We have currently two big factors affecting capital markets in Europe if we look at the bigger picture. One is the long-term low interest rate environment that has persisted since the end of the last financial crisis and the other is the short-term impact of the coronavirus pandemic and the public support measures to combat it. How do you see these two factors affect the urgency of the Capital Markets Union project?

“Nicolas, I would say there are three issues facing Europe that have given rise to these market conditions. Of course, we are still dealing with the European angle to the hangover from the great financial crisis. But the three issues we’re dealing with is clearly a health crisis as a result of the pandemic, we’re dealing with a financial crisis that has arisen as a result of the pandemic, and we’re dealing with a climate change transition challenge that will turn to a crisis if we do not manage it and invest in the management of the transition with urgency. All of those three are competing at a time for the attention of policy makers.

I think we need to really commend the policy makers in Europe, particularly the official financial institutions, both the ECB, the wise heads at the Member State’s central banks who have collectively worked to introduce monetary policy, at times very innovative monetary policy in order to execute the policy response across the Member States, particularly the 19 member states who are using the Euro and are part of the Euro financial system in order to build a monetary bridge to support businesses and citizens during these exceptional times. As you say, that has led to extraordinary central bank intervention in markets, the purchasing of a significant percentage of available sovereign and sometimes corporate and other related bond portfolios. That has led to, at times, significant dislocation in interest rates at times significantly negative interest rates or distorted interest rates that have distorted attitudes to risk.

The sooner we can normalise monetary policy, the better. Certainly the Member State governments have acted with, in many cases, a very aggressive fiscal policy to support their economies at a national level. The fact that the Council was able to agree on a common pandemic relief package that is now to be allocated across the Member States really right at the height of the crisis, between the slight subsidence of the first spike and the onset of the second spike, has been quite remarkable. This is rewriting European financial history and indeed the European financial future as well. So we hope and aspire that markets will return to an interest rate that price is based on risk rather than as a response to a global health emergency.

You mentioned, before talking about the financial crisis, that there was a hangover still that we were suffering from. There’s another event that probably has caused many of us a hangover that is ongoing, and that is Brexit. How is Brexit going to accelerate the CMU projects? Is there a need to compensate for the loss of access of liquidity pools in London?

“Certainly the need to accelerate CMU has a Brexit angle to it and yet we are still in the very early stages of understanding the consequences of a loss of market access from those institutions that are legal entities based in the UK. All aspects of financial markets, be it insurance, the asset management industry, the service of wholesale markets have been able to transition from having market access to having highly conditioned market access without there being any financial instability or undue concerns. That is a credit to all market participants, but also to the regulatory and supervisory agencies who have been consistent in ensuring that all market participants have been able to prepare themselves for a no/low access event.

Of course it is pleasing that there was a trade and cooperation agreement, it holds nothing for financial services. As we speak, Nicolas, the Commission and the UK treasury are preparing for a meeting sometime this month, in March, in order to discuss a memorandum of understanding that will set a framework for, at the very least, communication, but hopefully build a platform for greater collaboration. I’ve heard your excellent finance minister Pierre Gramegna talk about there used to be a four lane highway, at least if we can have a single road we can build from there. But that memorandum of understanding to share areas of common interest, particularly coordination around supervisory and regulatory understanding of how the EU and the UK intend to position themselves, particularly in areas of digital, particularly in areas of sustainable finance, and particularly in areas of financial and related crime that leads to market abuse and undermining the integrity of markets, this will be a really important first step. But I think it is only a first step and it provides an opportunity to develop that conversation in the post-Brexit environment.

There are obviously quite a lot of topics that we would need to continue our dialogue between the EU and the UK on. I salute, by the way, the fact that you, as a Brit are chairing AFME, an Association for Financial Markets in Europe. That shows that should anyone forget, Britain is still part of Europe and we can certainly use and leverage the expertise that is available in London. One of these topics, for instance is, of course, sustainable finance. And sustainability has become really a guiding principle of the EU if you so want. If you look at the Green Deal for instance, the CMU will play an important role in ensuring that Europe’s recovery is sustainable and that finance is channeled two projects and businesses that are crucial for long-term growth. How will the CMU help ensure that Europe remains a leader in sustainable finance?

“The Commission in many ways is leading the way here by insisting that the pandemic recovery response funds have 37% of the funds that are allocated to the Member States need to have clear governance around them, they constitute green activity, whether that is new investment or ensuring that as businesses open up again that they are supported in their transition planning. I think this is a really strong signal. That theme of resilience, so planetary resilience, health resilience, I would add to that a necessity to focus on market resilience, is going to be a common theme that we will hear a lot more of.

As we think about building forward better, there is going to be a strong element of sustainability in that. There is in particular a need to recapitalise or shall we say more accurately reequitise so much of the global economy. And certainly in Europe, the core of the European manufacturing base is built around small and medium size enterprises. We need to ensure that access to capital is enabled. We know that, from our recent work on the recapitalisation report that can be found on our website, that the equity gap is anywhere between 400 billion and 650 billion euros. This is as part of in excessive of a trillion dollars of recapitalisation that needs to take place throughout Europe and the Member States. At the core of that will be this theme of government support will be available, but prove your sustainability credentials, prove that you’re building resilience, resilience of supply chains, resilience of carbon emissions, reduction into your activities and your future plans. So it’s a daunting time but also an exciting time for management to be reconsidering their plans with their financial markets advisors.

Let’s change a little bit away from the Capital Markets Union. In my introduction of you, I highlighted your work on ethics in finance, what can you tell us about this part of your activity?

“During the great financial crisis, the industry of which I have worked in for nearly 40 years now, behavior left a considerable amount to be desired. The re-regulation of financial markets has been an ongoing theme of the last several years. And my own belief that it takes a very long time to build trust and it is very easy to destroy trust, and the financial crisis and the evidenced behavior of some institutions destroyed trust. I believe that we have to regain that right to be professional. Becoming professional is about developing the knowledge, the qualifications, the education, and indeed the continuous skills in order to be able to give great advice to clients. I privileged to chair an organisation that is dedicated to ensuring knowledge, skills, and behaviors, so integrity and ethics, called the Chartered Institute for Securities and Investment that runs qualifications for financial professionals in the securities markets, both buy side and sell side. That institution is very much enabling individuals to regain and recover their professional status.

Then in the wholesale market, so I’m privileged to be one of the founding members of the fair and effective markets review that led to the creation of the Financial Markets Standards Board, which looks at standards behavior in wholesale markets. The FMSB is very active in working with the banks in the wholesale markets and all the related market participants, whether they’re market financial infrastructure, and indeed looking at some of the new trends, the use of AI and model building for example to identify areas of emerging concerns in markets. Certainly there is a lot of good work that goes on in that organisation.

The standards and statements of good practice that are issued are voluntary, but certainly the regulators are increasingly taking note. And indeed the FX global code that was worked on jointly between the Global Financial Markets Association and the Financial Markets Standards Board was an early example of how standards of adherence to market integrity can be implemented in global markets.

So hopefully this is all contributing to building back trust and allowing the citizen, saver, investor, depositor, pensioner current and future to feel comfortable about investing their hard earned salaries and savings into financial markets. And all of this will help to build the Capital Markets Union.

Important work indeed, Michael. So we come to the end of this podcast and I always ask one last traditional question, which is more on a personal level, namely, whether you have had the opportunity lately to read a book that you would like to recommend to our audience?

“Thank you, Nicolas. Well, I haven’t read it yet but I’m halfway through. And it is Bill Gate’s latest book on how to avoid a climate disaster. And he begins to talk about, in quite simplistic and very accessible ways, his areas of concern and his suggestions as to how and where we can begin to think about solutions and breakthroughs and how both at an individual and a government level we can focus on changing behavior.

He focuses our attention very much on the total global emissions. It’s a 51 billion of tons of emissions of CO₂ that are taking place. And perhaps an area where we are perhaps under focused, largely because it’s the harder area, but it’s the greenhouse gas emissions that come from the making of steel, cement, and plastics is an area. As we think about building forward better, we’re going to be spending a lot in Europe on infrastructure. That’s a lot of cement, a lot of steel, and probably there’ll be a lot of plastic as well, and we need to think about how we can manage the emissions. So I commend this book to you. I’m about a third of the way through it, How to Avoid a Climate Disaster, Bill Gates.”

Well, that’s very good to hear because it’s right on top of my to-read pile and I really look forward to starting it.

Well, thank you very much, Michael, for sharing your insights with us this morning. Thanks also to our listeners who have tuned in again to our podcast. In our next episode, I will be speaking to Rolf Strauch the Chief Economist at the European Stability Mechanism. To stay up to date with our podcast, please feel free to subscribe on iTunes, Spotify, or Google. You can also find more information on our website, luxembourgforfinance.com.