ESMA and the future of EU supervision: Why Europe should build on the CSSF model, not replace it

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The European Commission is preparing a proposal to expand central supervision over Europe’s key financial markets, including stock exchanges, clearing houses, and crypto exchanges. The initiative, expected to form part of December’s “Markets Integration Package,” aims to reinforce Europe’s competitiveness and reduce fragmentation across its capital markets.

Europe’s markets are often described as fragmented, with many national regulators and hundreds of trading and post-trading entities. A single EU supervisor, similar to the U.S. Securities and Exchange Commission (SEC), seems the solution to bring more uniformity and global weight.

However, Europe already has national regulators that deliver consistent and effective results. The CSSF in Luxembourg, for instance, has long been recognized for its balanced, pragmatic approach and its ability to combine investor protection with market competitiveness. It is a model that works, not only for Luxembourg but for Europe as a whole.

That is why the real question is not whether Europe should integrate its markets (everyone agrees it should) but how that integration happens. Should Europe build on what already works, like the proven competence and international credibility of national authorities such as the CSSF, or replace them with a distant and costly centralized structure that risks diluting both accountability and expertise?

A push for centralization

The Commission’s plan would expand ESMA’s direct powers to cover “the most significant cross-border entities,” including exchanges, crypto service providers, central clearing counterparties, and central securities depositories.

So far, ESMA’s role has been to ensure convergence through technical standards, guidelines, and peer reviews. Direct supervision is currently limited to rating agencies and trade repositories. Extending its reach to major market infrastructures would move Europe closer to a federal model of financial supervision.

ECB President Christine Lagarde and her predecessor Mario Draghi have both argued that deeper integration is needed for Europe to compete globally. Draghi’s report on competitiveness explicitly called for more centralized supervision.

But there’s a distinction between rule-making and supervision. Effective oversight depends on proximity, market understanding, and the ability to apply rules with pragmatism, qualities that national authorities, and especially the CSSF, have demonstrated consistently.

The CSSF Model: pragmatic and proven

Luxembourg’s CSSF (Commission de Surveillance du Secteur Financier) is widely recognized as one of Europe’s most respected regulators. Its success is not built on rigid box-ticking, but on proportionality and dialogue. The CSSF knows its market actors, understands the cross-border complexity of fund structures, and maintains regular, constructive engagement with the industry.

This model has enabled Luxembourg to supervise one of the world’s largest investment fund centers, more than €5 trillion in assets under management, with a reputation for regulatory rigor and stability.

Replacing that expertise with a centralized bureaucracy risks losing what makes European supervision effective: proximity, agility, and a sense of proportion. A Paris-based ESMA, far removed from local market realities, would find it difficult to provide the same responsiveness.

There’s also the issue of accountability. A central authority risks being too distant from those it supervises. If ESMA imposes one-size-fits-all requirements designed for large exchanges but applied to smaller entities, who takes responsibility? Who do firms turn to for clarification or dialogue?

Fragmentation might not be the problem

The notion that Europe’s supervisory is “fragmented” is often overstated. Coordination mechanisms already exist and work well. ESMA’s Q&As, guidelines, and peer reviews have created a high degree of supervisory convergence. The CSSF, for example, applies EU regulations rigorously, participates actively in ESMA committees, and contributes to shaping EU guidance.

Where differences remain, they often reflect legitimate market realities. Luxembourg’s fund industry operates globally, with investors and service providers across multiple jurisdictions. It is natural that its supervisory approach differs from that of a national regulator focused on domestic retail activity.

Europe’s strength lies in its diversity, in the coexistence of specialized financial centers that serve different segments of the market. Centralizing supervision under one authority risks flattening that diversity and imposing standards that fit no one particularly well.

Political and economic realities

Behind the rhetoric of integration, this debate is also about power. France has long supported a stronger ESMA, headquartered in Paris, as part of its vision for a more centralized European architecture. Germany, once opposed, has recently shown more openness, particularly under Chancellor Friedrich Merz.

For smaller states like Luxembourg and Ireland, the concern is not political but practical. They fear that centralized decision-making in Paris would reflect the interests of larger economies at the expense of smaller, specialized markets.

Costs and industry concerns

Industry participants are equally skeptical. Expanding ESMA’s supervisory remit would inevitably raise compliance costs, as ESMA is financed partly by fees paid by the entities it supervises. “Expanding ESMA’s supervisory responsibilities would mean higher fees paid by the industry,” warned Marin Capelle, policy adviser at EFAMA.

But the concern is not just financial. Firms worry that ESMA’s approach could be less pragmatic than that of national regulators. Luxembourg’s model is built on constant dialogue and a deep understanding of the fund ecosystem. Centralised supervision would risk replacing that culture of engagement with bureaucracy and distance.

Crypto exchanges and post-trading entities, in particular, fear that ESMA’s involvement could slow innovation and create another layer of reporting without tangible benefits. Many operators point out that their existing relationships with national supervisors already work well, and that there’s little evidence centralization would improve outcomes.

What integration should really mean

The Capital Markets Union remains a worthwhile goal: Europe needs deeper capital markets and easier access to cross-border finance. But achieving that does not require tearing down national supervisory systems that already function efficiently.

True integration should focus on eliminating barriers, such as inconsistent insolvency laws, tax frictions, and restrictions on cross-border fund distribution. These are the real obstacles preventing Europe from building a true single market.

Centralizing supervision targets the wrong problem. It treats diversity as fragmentation, when in reality, diversity is Europe’s competitive advantage.

Supervision ultimately rests on trust, between regulators, firms, and investors. The CSSF has earned that trust over decades by being consistent, knowledgeable, and accessible. Its approach reflects Luxembourg’s broader philosophy: regulation should enable, not suffocate.

Transferring supervision to a central authority would undermine that trust without guaranteeing better outcomes. There is no clear evidence that centralized oversight would reduce systemic risk, improve investor protection, or make markets more efficient. More likely, it would lead to duplication, slower decision-making, and uncertainty.

ESMA could, for example, act as an arbitrator in disputes between national authorities, ensuring coherence in cross-border cases without removing supervisory powers from local regulators. It could focus on systemic risk monitoring, data collection, and setting broad principles, while day-to-day supervision remains with the authorities that understand their markets best.

Such an approach would reinforce Europe’s collective strength without sacrificing efficiency. It would preserve what works, the expertise and proportionality of regulators like the CSSF, while addressing legitimate concerns about consistency.

Conclusion: don’t fix what isn’t broken

Europe’s problem is not a lack of centralization but a lack of focus on the right priorities. The EU should concentrate on removing structural barriers to investment, not on adding layers of bureaucracy.

Luxembourg and the CSSF have proven that effective supervision can coexist with competitiveness and innovation. Their model should not be treated as an anomaly to be corrected, but as a reference to be emulated.

Replacing proven national systems with a centralized authority would risk turning one of Europe’s most dynamic financial sectors into an administrative experiment. The EU should focus on fixing what’s broken, not on breaking what already works. Few regulators have demonstrated that balance better than the CSSF.

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The views and opinions expressed in this article are my own and do not reflect the official policy, position, or opinions of any financial institution, or other organization.
The content of this article is based on personal research of the author and understanding of AML (Anti-Money Laundering) and compliance topics.