An SEC for Europe?

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  Thomas Wulf
  

If one takes a look at the European Union’s capital markets regulators from the outside, one gets easily confused when trying to tell apart the competences of any European regulator and its national equivalents (“NCAs” in the jargon – short for national competent authorities). The confusion starts at the naming end. While the major European regulator goes by the known acronym ESMA (banking regulator EBA; however, holds some sway too), names for NCAs range from CSSF, CMVM, CNMV to FSMA, FSA, FMA, AMF and AFM to name but a few prominent ones that are occasionally used by semi-insiders who are confused which one refers to which country. All of them are, via ESMA, also involved in European affairs. Swiss FINMA and “FISMA”, by the way, are also quite close phonetically while they could not be more different in substance, with FISMA being (as you certainly know) the EU Commission’s General Directorate for financial services (and markets). The challenge, though, does not only lie in deciphering acronyms. Increasingly, questions are being asked on what the specific role of a national regulator still is and – in light of the ambition of the much-heralded EU capital market’s union (CMU) project – should actually be in the future. Views on this are deeply divided between market participants and public policy stakeholders, namely national governments. The challenge can be best looked at, not through the prism of the national authority’s responsibilities, but rather through that of ESMA, given that any enlargement of ESMA’s role necessarily cuts into the one of single country NCAs.

The pressure comes from various sides. There is, most prominently, the obvious need to finally get things done in a global economy which is becoming increasingly fragmented. It is obvious that hardly any project in the European Union has given rise to as much applause and support in the beginning as the Capital Markets Union and its recent, now somewhat ailing side-kick, the Savings and Investment Union (SIU); only to disappoint at every timeline and target repeatedly set, admittedly, with the exception of the MIFID landmark directives in 2004 and 2014. However, some readers would probably even disagree with that. 

The geopolitical climate of today, however, forces every globally relevant marketplace, to which the EU, of course, belongs, to recalibrate resources and relentlessly focus on competitiveness. The snail pace of any progress so far, documented all too evidently in the famous 2025 update to the Draghi report, brings about an untenable situation. Things have to change. What is needed is, as is widely known, an adequate return of risk appetite to the EU capital markets (refer the securitisation debate) coupled with reasonably targeted regulation, borne out of a political appreciation of the financial sector as a valuable part of both economy and society. Sounds big, but individual countries investing in their financial market firepower show that it is possible as Irland, Luxembourg, Sweden, Poland and the Czech Republic have proven. Anything not fit for purpose (as the ill-suited RIS and FIDA rules, which I discussed in the last article) will have to go. My personal prediction is that, ultimately, only a kind of major leap will deliver the necessary impetus. This could be, for example, a successful introduction of EDIS (the European deposit insurance scheme), which has been discussed for years but is still being blocked for purely national reasons. This would be a signal of progress for the EU Banking Union (to which EDIS belongs as a centrepiece) and might well trigger an avalanche of knock-on projects across other areas, such as capital markets.

But back to ESMA.

While the European regulator is certainly not the prime originator of new policy proposals (which is the responsibility of the EU Commission), it has assembled under its roof a wide array of relevant competencies not all of which come into play in the current setup to the extent that they could.

There are reasons for it. The first one being that all national authorities, who are as “members” also the de facto “owners” of ESMA, are eying with great suspicion anything that may interfere with their own activities. However, many of them see that the age of only coordinating regulatory activities in the EU is reaching its limit. Cross-border investment platforms, multicountry app-based payment solutions, an array of crypto assets using cloud-anchored DLT technology, all of which operate easily across the single market in all relevant languages, simply no longer find a match in national regulators, used to dismissing what happens outside their nation’s boundaries as irrelevant. Some of these regulators, however, have understood this and are even pushing for a stronger role of ESMA in clearly defined areas where a cross-border regulator obviously can act and respond more efficiently. As the discussion around the famous European Single Access Point (a central storage hub for regulatory data, which today are spread across different documents) demonstrates: the devil lies in the details, in this case in the nightmare of amending and harmonising internal data processing routines, set up differently by each NCA. But these things can be addressed and especially at the data end – basis for any effective regulatory activity today – multi-pronged AI may be a great helper, in particular, when tackling the EU’s “legal languages” challenge, something neither the US nor China have to haggle with. AI may, of course, help at many other ends, too.

The second reason for ESMA being in the focus is that the complexity of legislation visibly exceeds the technical capabilities of the EU Commission, which the latter would of course fervently deny. However, the many positions written by ESMA over the past years as a response to legislative consultations that were addressed actually at (private) market stakeholders indicate that there is something wrong. ESMA (previously CESR) was always meant to be consulted by the EU Commission as a technical advisory body by way of an institutional process. The fact that an EU authority feels compelled, when voicing a view on new legislative initiatives, to resort to answering open consultations, shows that they did not feel sufficiently listened to or (as in the Retail Investment Strategy) were not even asked to give advice in the first place. This situation is, of course, poison for good statecraft as it fosters institutional vanities and legislative inertia, which is the last thing the EU currently needs. 

A final point is the market pressure itself. In a world where players increasingly look at their domestic sphere – in this context, the sense of the EU’s internal market in financial services – the shortcomings, contradictions and redundancies in the existing rules and administrative procedures become all too evident and subject to increasingly vocal advocacy positions taken by the numerous private sector stakeholders. Business within the wider Western hemisphere is already challenging enough as it is; why add more red tape to the assumingly open internal market in order to protect some vested interests that most likely would get lost due to market pressure over time anyway? The “payment for order flow” topic is a stark reminder of how things can go wrong here. Should the institutions seriously engage in an effort to level the playing fields, assuring the rules are the same for all? ESMA would, of course, be their natural choice for running the exercise.

Finishing, as always, on a positive note, it has not gone unnoticed that the recent proposals made by the EU Commission (!) in their Capital Markets Integration Package of last December, provide ESMA with an executive board replacing their 27-member “one country – one vote” unaminity nightmare. The draft would also allow ESMA to enforce operational oversight over clearly defined parts of the EU’s market infrastructure (such as crypto assets), while also removing a number of distribution obstacles held up by some national regulators via local marketing rules, on the way. This came as a pleasant surprise and has already made way for a full agenda awaiting the successor to the current ESMA chairwoman who will not renew her mandate but leave at the end of October 2026.

Your relentlessly optimistic Brussels observer, 

Thomas Wulf