The EU Commission has proposed to expand the powers of the Paris-based EU Financial Market Authority (ESMA) into areas currently overseen by Luxembourg’s CSSF, putting the country on a potential collision course with its neighbour over the future of financial regulation in the bloc.
At two recent EU summits, Luxembourg Prime Minister Luc Frieden spearheaded the opposition to strengthening ESMA, which he feared would be at the expense of national supervisory authorities, such as the Grand Duchy’s CSSF.
The two summits, at which Paris and Luxembourg held fundamentally different views, ended with a compromise solution that is classic for the EU: the commission should examine the situation and then make appropriate proposals that take into account the “interests of all member states”.
Brussels sticks to centralisation
On Thursday, time was up. The EU commissioner for financial services, Portugal’s Maria Luís Albuquerque, presented plans in Brussels “to remove barriers and realise the full potential of the EU single market for financial services”.
Also read:Luxembourg finance minister says centralised regulation risks ‘burden and complexity’
It is high time to reform the functioning of capital markets in the EU, she said. Anything else would be self-destructive. “The decision to tolerate barriers and fragmentation will only lead to a Europe that invests too little and grows too slowly. And one that loses ground geopolitically and economically.”
“Deeper integration of EU financial markets is not an end in itself, but a means to build a true single market for financial services that makes access to capital markets easier, more efficient and more attractive for investors and companies,” the commission’s explanatory documents state.
A necessary step to overcome the current patchwork is to give “ESMA more responsibility and resources,” according to Albuquerque. “The way it is today is not working,” she said. One problem is the fragmentation of rules in the European market. “We have a common set of rules, but numerous interpretations of them,” and this makes cross-border business more difficult, said the commissioner.
Pragmatic solution
Her solution is for ESMA to be given more supervisory powers, though only over significant, cross-border players.
These would include, for example, certain trading centres, all providers of crypto services and central securities depositories, according to the commission’s press release. The latter take care of the safekeeping and transfer of securities. One of the largest providers in this area is Clearstream, based in Kirchberg.
However, asset management – a key financial service offered in Luxembourg – is to remain under national supervision, Brussels said.
Also read:Luxembourg banks call for ‘smarter’ financial regulation
This differentiation may do little to change the fundamental concern of the Luxembourg government. It continues to suspect that France wants to derive political and economic benefits from the debate on deepening the European single market in the financial sector. And the commission is playing along because, when in doubt, it always tends towards centralisation.
Luxembourg’s concerns
Critics in Luxembourg believe that the French government wants to strengthen the Paris-based ESMA to give the local financial centre a competitive advantage. The fear is that part of the Luxembourg fund industry could follow the new, decisive regulator and migrate to Paris.
The commission’s proposal would ultimately lead to this in the future, even if the supervisory competences for asset management remain in national hands for now, according to critics. By bringing central securities depositories and crypto services under the supervision of ESMA, the Paris-based EU authority would also play an important role in the digitalisation of assets in future. And in Luxembourg, this is believed to be the future of the asset management industry.
The commission’s proposal therefore continues to harbour explosive potential. From Luxembourg’s perspective, there are signs of difficult negotiations ahead for Finance Minister Gilles Roth. The European Parliament and the Council of Member States will now discuss the commission’s proposals.
(This article was published by the Luxemburger Wort. Machine translated, with editing and adaptation by Alex Stevensson.)