There is a strong case for the CMU project to continue with the remaining EU members (the ‘EU27’) after the UK leaves. Capital market financing represents a lower proportion of total financing in the EU27 than in the UK, and the need to develop capital markets is correspondingly greater. Moreover, Brexit makes pan-European capital markets supervision in the EU27 more urgent. A relocation of the European hub from London to the continent is most likely in the banking and retail insurance markets, though asset and fund managers might remain in the UK. ESMA Chair Steven Maijoor warned that UK firms would not be allowed to use ‘letterbox’ companies in Europe to preserve their market access. Last year ESMA set out principles for national regulators to observe regarding UK companies seeking to relocate, “to safeguard investor protection, the orderly functioning of financial markets and financial stability” (ESMA 2017).
A single EU supervisor is necessary to avoid the current regulatory fragmentation and ensure that the common rules – notably, the MiFID II provisions that took effect in January 2018 – are consistently applied across the EU. As the influx of businesses from the City of London to continental Europe continues, several EU countries are competing to attract business, prompting the Irish government to complain that a supervisory ‘race to the bottom’ is under way. European officials are concerned that the rules are being enforced unevenly and that local supervisors may be tempted to turn a blind eye in a bid to attract business from London. To address concerns about supervisory arbitrage, the European Commission has proposed giving ESMA an enhanced role in vetting the activities of fund managers and monitoring how local supervisors apply the rules, but this falls short of pan-European oversight powers (European Commission 2017). An effort to overhaul the European Market Infrastructure Regulation (EMIR) to centralize supervision of derivatives clearing houses also fall short of an integrated supervisory and resolution structure (Lannoo 2017).
While the Commission’s proposals would help promote supervisory convergence, they do not go far enough in centralising supervisory power in ESMA. There is room to strengthen ESMA’s direct supervision in areas like accounting rules and practices for listed companies, licensing procedures for EU passport rights, and supervision of all funds listed across borders. ESMA could also be responsible for the direct supervision of all EU-listed companies, or at least for entities that operate across national borders. A more centralised structure would reduce the regulatory and supervisory arbitrage that tends to shift activities to certain jurisdictions. As ESMA’s Chair has pointed out, it is also essential to strengthen ESMA’s sanctioning powers, including the level of fines it can levy in order for the authority to be seen by market participants as a credible supervisor. [...]