Welsh Conservatives in the European Parliament
Dr Kay Swinburne MEP

'Engineering Growth for Small and Mid-Caps', Quoted Company Alliance, London, 27.06.12

Ladies and Gentlemen,
Thank you for inviting me today so I can present you my thoughts on "Europe's role in constructing growth for small and mid-cap companies". I am delighted to see that the QCA and British SMEs are actively engaging with the European Union on this issue. Given the increasing role of the EU in matters of concern to the QCA's members, it is important to ask what Brussels is doing to build an environment in which SMEs can grow and flourish. In the wake of the financial crisis of 2008, the EU has sought to regulate the financial sector with the purpose of making the financial system crisis-proof and to reinforce confidence in European financial markets. The purpose of this barrage of legislation is not to increase the regulatory burden on commercial issuers and in particular small and mid caps, but this is unfortunately often an unintended consequence. We need to ensure that all stakeholders are consulted and that good cost-benefit analysis is done, so that we can achieve better regulation, tailored where possible to exempt smaller issuers.  
Despite the inexorable rise of the EU as the key source of regulation for quoted SMEs, national governments retain many levers through which they can support the sector. It is important that you can identify where European politicians can help and where they cannot. For this reason, I am not going to restrict my remarks to the EU but I will also point to what could and should be done by the UK government to provide quoted SMEs with a favourable environment, and I can assure you that I am working with my Minister to try and get some traction.
Back in my constituency I often get asked why it is so important that small and medium-sized firms flourish. Wouldn't we be better encouraging large foreign companies to invest here? SMEs, quoted or not, form an integral part of the European economy. They account for 99% of enterprises active in the Union and employ around two thirds of the workforce. If each SME in the Union employed only one more person, full employment would be within reach, as the Commission correctly identified. SMEs are one vehicle through which growth can be achieved.
Europe needs the growth potential of SMEs and needs to facilitate their access to capital market financing. Many of today's corporate champions in manufacturing, information technology or biotechnology once started out as small enterprises. By not giving their successors the means to expand their business, especially through easier access to the capital markets, Europe is knowingly taking the risk that the next AstraZeneca or Rolls-Royce will be founded in the US or Brazil, rather than Birmingham or Manchester. A stock market flotation can be a critical step in the development from an SME employing a couple of dozen people to a globally active firm with perhaps thousands of employees. The growth of companies like Amazon and Google, for example, would have been unlikely without capital market funding. The difficult environment for quoted SMEs, on the other hand, is frequently cited as a reason for the advantage that the US has over Europe in developing and commercialising new innovative technologies. Only a few years ago, SMEs accounted for 40% of live patents in the UK - it would be disastrous if the full potential of this intellectual property could not be realised because of a lack of funding! In this context, I would also like to stress that well-regulated secondary markets have an enormous influence on primary market activity. Investors will not participate in IPOs and invest in our European champions in research and technology if our secondary markets are stifled by regulation or not performing efficiently. Why would firms want to list in the first place if it means that they would have to comply with overly complex rules which have a large cost to a growing company? In fact, a vibrant market for listed SMEs can even influence the funding of companies which are currently not accessing capital markets: Venture capital and other seed investors need to be assured of an exit route and the capital markets often provide the best opportunity for return on equity.
While SMEs in general receive a lot of attention in Europe, policy-makers rarely differentiate between SMEs seeking to access capital markets and those that don't. They effectively lump together financially sophisticated high growth companies with two-men convenience stores or hairdressers. This attitude is expressed in a lack of research about quoted SMEs. Too little is known about the way and the reasons why SMEs access capital markets; about their investors; and also about the contribution that small and mid caps make to the European economy. However, what we do know about quoted SMEs suggests that their role is critical to economic growth and as a driver of future innovation. Taking the UK as the best studied example, SMEs account for around 85% of the entire quoted sector and employ more than one million people. Data furthermore show that companies listed on London’s Aim grow particularly strongly in the five years immediately after their listing, both in terms of turnover and employment. In total, Aim-listed firms have been estimated to contribute £12 billion to the UK economy. Simply quantifying the value quoted SMEs are adding as a positive contribution to other EU Member States' economic growth prospects could help focus the minds of policy-makers and build a bigger coalition in support of listed SMEs. I have therefore asked the European Commission to explain what it intends to do to close this knowledge gap. We need reliable information about the problem before we can effectively deal with it, and I look forward to the Commission's response. There are currently three Directorate-Generals dealing working on SME financing issues and we need to ensure a holistic view emerges not the piecemeal efforts we have seen to date.
As a consequence of new European capital requirements for banks and insurers through the implementation of Basel 3 through CRD IV and Solvency 2, bank capital is likely to become scarce and a stock market listing is to become an even more appealing option in the years to come. Higher capital requirements may make the financial system safer and deliver a net benefit to European taxpayers but it will mean that credit for SMEs will become difficult to obtain in the future. Consequently, SMEs will have a greater potential if they are able to access capital markets, both equity and bonds, than firms that rely exclusively on bank lending to finance growth. Basel and Solvency will, however, punish equity investments with higher capital requirements on banks and insurance firms holding them relative to debt investments. We need to ensure that Europe responds to these global standards in a proportionate way when they come into force and try to soften their impact during the implementation phase. However, the times when banks were lending freely to companies will not return any time soon. In such an environment, it is paramount to explore what can be done to facilitate capital market access and to make the lives of listed companies as easy as possible. Other EU initiatives such as the extension of the Solvency 2 regime to pension funds need to be revisited, so as not to further disincentivise investors in our economy. Insurance companies and pension funds are long-term investors and should be encouraged to invest, not flee. Finding access to finance remains one of the key challenges facing growing SMEs in the EU but given the changing regulatory environment, corporate funding is having to become more varied with companies needing themselves to be more adaptable and flexible, including accessing capital markets.
SMEs face two major problems if they decide to list: high costs and low liquidity, as you have heard from other panellists and speakers today.
Listing, legal and disclosure costs reduce significantly the amount firms can raise in an IPO and often even apply on an on-going basis. Since many of these costs are somewhat independent of the size of an issue or issuer, small firms in particular suffer from higher listing compliance costs. In addition, a listing typically entails stricter accounting and corporate governance requirements, the implementation cost of which further reduces the benefit of a listing.
There is however a certain risk that the negative influence that regulation has on SME capital market access is overstated. In fact, strong investor protection regulation and market abuse rules can support investor confidence and therefore investments, despite the compliance burden they put on issuers. Balance and proportionality are the key to a successful SME market.
More attention should be paid to how market structures can be adjusted to help quoted SMEs. The major problem here is the illiquidity of SME stocks. Since it is difficult, especially for larger investors, to buy or sell small and mid caps without affecting the share price, at best these shares trade at a discount vis-à-vis more liquid stocks and are at worst avoided altogether by institutional investors. Small and mid cap liquidity is also not helped by the lack of independent research and the absence of widely used indices covering the sector. Depressed valuations due to a "liquidity risk discount" make further capital raisings by the same or similar companies more expensive. I would suggest that, given these structural issues are a result of market failure, the Commission could look at ways in which it could directly an SME research facility. 
Many European policy-makers are aware of these problems and are ready to acknowledge that SMEs are entirely deserving of the EU's regulatory support. The Commission is in principle committed to improving SME access to funding and has pledged to take the unique needs of the SME sector into account when drafting legislation, in particular relating to financial services. With more reliable information about quoted SMEs, it would be possible to tailor measures even better to specific needs of small and mid caps and in particular to those of high growth stocks.
 In the following part, I will highlight three areas in which, I believe, a conscious effort is being made to build an environment in which small and mid caps can flourish.
Firstly, I would like to talk about the currently ongoing review of the Markets in Financial Instruments Directive, or MiFID II, and the Market Abuse Regulation, which deal with market structures and conduct. As the European Parliament's shadow rapporteur for my political group, the European Conservatives and Reformists, on both dossiers we are doing our utmost to calibrate the legislation according to the needs of smaller companies. MiFID II introduces the option for MTFs to be registered as so-called "SME growth markets". Such a listing should in future reduce the administrative burden on small and mid caps and could shift part of the compliance obligation to the market operator. A new MiFID category will also provide an opportunity for other legislation to make exemptions or special allowances for these markets. The new venue label could go a long way towards giving SMEs greater visibility in the marketplace and provide the support for the development of small and mid cap indices. The introduction of an SME growth market category, however, is only the first step in making the new label viable: subsequent legislation must support these venues and the companies listed on them. This is why I have introduced amendments calling for financial services legislation in the future to be calibrated for these designated growth markets. We need to get the definitions right for these growth markets and we are currently with other shadows to ensure it is workable.
Smaller issuers are particularly affected by those provisions in MiFID II that impact the liquidity of their shares. One positive step in this respect is the fact that MiFID II extends the execution-only provision to growth markets. This should entice retail investors to invest more in growth market-listed shares. MiFID 2 should be an opportunity to move regulatory burden away from smaller stocks and to consider the impact of all market participants such as HFT and the role of market makers.
The Market Abuse Regulation, or MAR is proceeding through the legislative process in step with MiFID II and will in future be extended to cover MTFs, including the SME growth markets on which many SMEs would be listed. This is an important step in increasing investor protection and making investments in quoted SMEs more attractive to retail investors. At the same time, it is positive that MAR remains consistent with MiFID II in exempting issuers listed on growth markets from direct compliance with some of its provisions.
Secondly, the Parliament is working on the reform of the European legislation on initial and on-going disclosure, called the Prospectus and Transparency Directives. Nobody disputes the merits of initial and on-going disclosure in facilitating investment decisions but these disclosure requirements are often onerous and need to be appropriately calibrated. In this vein, SME issuers listing their securities on a number of growth market around the world are often exempt from the obligation to draw up a full prospectus. Thresholds and situations that require the publication of a prospectus have been defined in the EU too to take into account the size of the issuer. In any case, SME issuers should face a lighter prospectus regime. Although these are important steps, the prospectus requirement is at the same time an important investor protection measure and a necessary obligation for listing on a regulated market. Regulated markets generally enjoy greater visibility among investors and provide if we want to build an environment in which small and mid-cap companies can thrive and progress, we need to think hard and carefully about how the transition from SME growth markets to regulated markets can be facilitated.
Another costly feature of a regulated market listing is the ongoing disclosure requirement imposed by the Transparency Directive. Again, the current review process promises some relief. Small issuers on regulated markets will benefit from the abolition of quarterly reporting requirements and the greater standardisation of reporting templates by ESMA, whereas SMEs listing on an SME growth market will likely fall out of the scope of the Transparency Directive. Instead, they will have to comply with the more proportionate disclosure requirements imposed by their market operator and agreed by the national competent authority.
A third area, in which the EU is making a positive difference to quoted SMEs, is accounting and audit. I am sure that you all are well aware of the burden that the application of IFRS places on small and mid caps. Fortunately, the EU has exempted issuers listed on growth markets from compliance with IFRS and has instead proposed a proportional application of the less onerous Accounting Directive. Companies opting for a regulated market listing, however, would not only be covered by IFRS but are also likely to fall within the scope of the new Audit Regulation. This means that they could be restricted in their choice of auditor and receive only limited advisory services from them. Yet even if they choose to list on a regulated market, and thus become public-interest entities subject to stricter rules relating to audits, they are not required to have an audit committee and so would still benefit from the proportional application of auditing standards.
I hope you would agree that these examples demonstrate that the EU is serious about supporting quoted SMEs. Of course, there will always be regulations that could be abolished and restrictions that could be lifted. Let us not forget, though, that investor confidence in European financial markets is the precondition for successful and efficient capital markets and that all market participants have to make a sacrifice in order to maintain this basic confidence. For SMEs, this means putting up with more regulation coming from Brussels than they might deem necessary. Let me also remind you that although the European institutions now play an overwhelming role in the regulation of financial markets, there are limits to the EU's reach.
Taxation is one of those areas in which the EU can not make a difference to quoted SMEs, neither for better nor for worse. Admittedly, the Parliament has just passed a non-binding opinion calling for a European Financial Transaction Tax that would damage liquidity and further reduce the attractiveness of often illiquid small and mid caps. Thankfully, opposition to such a tax is running high and at least a pan-European tax is impossible if the UK, Sweden, the Czech Republic and others stay their course. However, HM Treasury should listen to their own arguments against the EU FTT, namely that it is harmful to economic growth and apply this to the stamp duty on SME shares which puts a further burden on already illiquid small and mid caps. An idea no less controversial than the abolition of stamp duty for SMEs would be a reform of the tax deductibility of interest payments. At present, firms are in effect incentivised to issue debt rather than raise equity. Such government interference not only raises the prospect of capital misallocation, it also reduces investment opportunities for retail investors who are frequently excluded from participation in bond markets. Debt enjoys a favourable tax treatment in other ways as well. Whereas interest from fixed income securities is taxed only once, equities are taxed at the point of purchase and corporate profits, dividend payments and capital gains are each taxed separately! Capital gains tax incentives in particular have proved effective in attracting investment.
If the EU is successful under MiFID 2 and creates an SME growth category then this is the ideal vehicle for the UK and other Member States to stimulate investments flows. Surely in order to encourage the flow of capital, measures could be introduced that would allow an investor in an SME growth market company or index holding a position for, say, 3 years or more to benefit from a tapered capital gains liability. Together with abolishing the stamp duty on SME growth market transactions these direct measures could have a positive impact.
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Welsh Conservatives

The European Commission has today designated European Protected Geographical Indication (PGI) status to the well-known Pembrokeshire Early Potato from West Wales.
The Pembrokeshire Early Potato was one of only three quality farm products whose applications for PGI status were approved today.
The EU PGI schemes protect product names against misuse and under these schemes more than 1200 products are already protected.
Commenting on this announcement from the European Commission today Dr Kay Swinburne MEP – who is from West Wales - said:
"I am delighted to see that this application to have "Pembrokeshire Earlies" added to the register of PGI products has been approved by the European Commission today."

"Achieving this prestigious status is a clear acknowledgment of the high-quality and distinctive produce we continue to deliver in Wales. Pembrokeshire Early Potatoes thoroughly deserve their place alongside the well-known food and drink products from right across the EU which already feature on the PGI register."


Kay was delighted to host an event to celebrate Higher Education, Science and Innovation in Wales last night in the European Parliament.  The event builds on the British Council’s “Strategic Analysis of the Welsh Higher Education Sector, Distinctive Assets”.  A number of experts spoke to share their views of Welsh HE at the event and how it can develop in the future.

In advance of the 'Fox-Hafner Report' vote on the single seat for the European Parliament, Kay and the other UK Conservative MEPs feel it is right to draw attention to the fact that the seven-year cost of the dual-seat arrangement comes to £928,000,000. Since her election to the European Parliament in 2009, Kay has strongly supported bringing the monthly Parliamentary meetings in Strasbourg to an end and therefore saving taxpayers a considerable sum of money.


Kay was delighted to meet Malala Yousafzai, who was awarded the EU's Sakharov Human Rights Prize at the European Parliament today.

Following Malala’s speech to the European Parliament, Kay said, “What an inspirational speech Malala gave to the Members of the European Parliament today. As a mother of young children myself, I hope that they can also aspire to achieve like her. Malala is an exceptional young lady who has overcome adversity by tremendous force of character and a passionate belief in the right of everybody to enjoy and benefit from education.”   


Kay was very pleased to meet with members of the Advanced Manufacturing Research Group at the European Parliament in Brussels, one of four groups set up in key Welsh research strengths to engage with EU research funds. The delegation visiting Brussels included representatives from Cardiff University, Bangor University, Swansea University and Trinity St.Davids University.

In advance of tomorrow's European Council meeting of leaders, Dr Swinburne has echoed the recommendations made in a recent report published by a number of business leaders, which highlights the importance of removing barriers to business competitiveness in Europe and getting rid of burdensome legislation by cutting EU red tape.

Last year Dr Swinburne encouraged businesses in Wales to highlight to the European Commission which over-burdensome regulations they would like to see slashed, by writing to small businesses all over Wales and asking them to tell her their red-tape problems.

Electronic cigarettes no longer face being taken off the shelves by the EU after Conservative MEPs were successful today in amending EU legislation on tobacco labelling.

Conservative MEP's led the amendment to defeat proposals that would have classified e-cigarettes as medicinal products, meaning they would have to undergo an overly burdensome and costly authorisation procedure, which would go beyond the procedures for traditional tobacco products... (Read more under 'Articles')



Welsh Conservative MEP Kay Swinburne has been sitting down with leaders in Europe's biotech field to choose the top five candidates to compete in this year's EuropaBio Most Innovative EU Biotech SME Award.

As a member of this year's judging committee, Kay is once again supporting the EuropaBio award, which has attracted applications from all three sectors of biotechnology - healthcare, industrial and agricultural, from across the EU... (Read more under 'Articles')


WELSH Conservative MEP Dr Kay Swinburne today hailed a vote in the European Parliament as a "wake-up call" in the battle to save Europe's endangered languages.

MEPs meeting in Strasbourg backed a report which calls on governments across the EU to develop action plans to encourage continued linguistic diversity.

The report, written by Corsican MEP François Alfonsi, also says governments should be "more attentive" to threats which may lead to languages becoming extinct.

Dr Swinburne, who was a shadow rapporteur for the report, has argued that Welsh can be seen as a positive example of language revitalisation which communities across the EU should follow... (Read more under 'Articles')

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