The EU wants to centralise financial market supervision under ESMA. Luxembourg and Ireland are pushing back. Both sides are partially right, and neither is asking the harder question.
On 11 March 2026, the finance ministers of Germany, France, Italy, Spain, the Netherlands and Poland sent a letter to the European Commission calling for rapid progress on centralised capital markets supervision under ESMA. The letter, first reported by the Financial Times, was notable for one reason above all: Germany had switched sides. Berlin, which had previously resisted handing oversight of its financial institutions to a Paris-based authority, aligned itself with the bloc’s largest economies. The coalition of six now has the institutional weight to push the Market Integration Package through the Council under qualified majority voting.
Luxembourg and Ireland, which together host around 46% of European UCITS and alternative fund assets according to EFAMA, are not aligned with their larger neighbours. Luxembourg’s Finance Minister Gilles Roth has stated publicly that more centralisation will not, in his view, unlock additional funding for the EU economy, and would impose implementation costs on businesses through the creation of a new institutional structure. Ireland has expressed similar reservations.
Their opposition is understandable. Their argument, however, is incomplete. And so is the argument of the six.
What the package actually proposes
The Market Integration Package, published by the European Commission on 4 December 2025, is among the most consequential restructurings of EU capital markets supervision since MiFID II. It proposes to transfer direct supervisory responsibility for significant trading venues, central counterparties (CCPs), central securities depositories (CSDs) and all crypto-asset service providers from national competent authorities to ESMA. A new Pan-European Market Operator status would allow trading groups to operate across multiple Member States under a single ESMA licence. Of the 14 CCPs currently operating in the EU, it is estimated that around nine would fall under direct ESMA oversight.
For large asset managers, the package stops short of direct supervision but introduces periodic ESMA reviews every three years for managers overseeing more than 300 billion euros in assets operating across multiple Member States. EFAMA, the European fund industry association, has explicitly warned against these reviews, arguing they risk allowing ESMA to second-guess decisions already taken by national supervisors, introducing legal uncertainty without clear supervisory benefit.
The package also creates a new Executive Board at ESMA, replacing the existing Management Board with independent full-time members. This is not a minor governance tweak. It is designed to reduce the influence of national supervisory interests within ESMA’s own decision-making, a structural shift that Luxembourg and Ireland have every reason to note carefully.
The political arithmetic Luxembourg and Ireland cannot escape
The legal basis for the package is Article 114 of the Treaty on the Functioning of the EU, which covers internal market measures and is adopted by qualified majority. There is no veto. Luxembourg and Ireland, with a combined population representing well under 2% of the EU total, cannot form a blocking minority alone. A blocking minority requires at least four Member States representing at least 35% of the EU population.
The Court of Justice reinforced this position in its judgment on short selling, which confirmed that Article 114 can legitimately be used to grant significant supervisory powers to ESMA where this serves the functioning of the internal market. The legal precedent exists. The political coalition of six is substantial. The legislative process will be lengthy, with trilogue negotiations expected to be complex, but the direction of travel is set.
That said, the process of negotiation matters. Luxembourg and Ireland are experienced Brussels operators. The most effective tools available to them are not a frontal veto but precision amendments: higher thresholds for what qualifies as a “significant” trading venue or CCP, stricter criteria for cross-border relevance, retention of market abuse surveillance and emergency powers at national level, clearer proportionality tests, and mandatory periodic reviews of ESMA’s expanded mandate. These are the levers that can reshape the package’s perimeter without changing its headline direction.
The CSSF argument: if it works, why change it
The Luxembourg position is not purely defensive. It rests on a substantive point that deserves more serious engagement than it typically receives in Brussels. The CSSF, as Luxembourg’s national financial regulator, has been evaluated positively by ESMA itself. In November 2025, ESMA published the results of a peer review of depositary supervision across five national regulators, and found the CSSF performing strongly in valuation oversight, due diligence on safekeeping, and asset segregation. ESMA’s own peer review mechanism found the existing system working.
Luxembourg and Ireland did not build their fund industries by ignoring regulation. They built them by implementing EU legislation early, consistently, and without gold-plating, and by developing national regulators with genuine expertise in the products they oversee. The CSSF supervises more than 6,200 billion euros in fund assets. The Central Bank of Ireland oversees one of the largest concentrations of alternative fund managers in the EU. These are not peripheral financial centres with marginal market roles. They are where EU cross-border finance is operationally assembled.
Transferring supervision of the largest infrastructures to Paris does not erase that expertise. But it does dilute the relationship between the entities being supervised and the authority that understands them best. That is a real operational cost, even if it is a difficult one to quantify in a legislative impact assessment.
The harder question neither side is asking
Here is what the debate consistently obscures: supervisory fragmentation is not the primary reason EU capital markets remain fragmented.
The Draghi report, which provides the intellectual framework for the entire Savings and Investments Union initiative, identified three main fault lines in EU capital markets. The lack of a single securities market regulator and a common rulebook. A disintegrated post-trade environment for clearing and settlement. And, critically, the unaligned tax and insolvency regimes across Member States. The European Parliament, in its 2025 report on the Draghi recommendations, was explicit that capital market integration is necessary but not sufficient, and that tax and insolvency regimes remain substantially unaligned.
Withholding tax reclaim procedures across EU Member States remain among the most dysfunctional elements of cross-border investing. An investor in a German fund holding French equities can wait years to reclaim withholding tax owed under treaty obligations. National insolvency frameworks create genuine legal uncertainty for cross-border creditors. These are not ESMA problems. A more powerful ESMA cannot fix them. The Commission’s own impact assessment for the Market Integration Package acknowledged that barriers to integration also stem from divergent national corporate, securities, insolvency and tax laws, yet the package does not address any of these directly.
The political logic is understandable. Tax harmonisation requires unanimity. Insolvency law reform requires political will in Member States with entrenched domestic interests. Giving ESMA more powers requires only a qualified majority and is achievable in the current legislative cycle. So that is what the Commission is doing. The question is whether institutions and investors will end up with a more integrated market as a result, or simply a more centralised supervisor presiding over the same underlying fragmentation.
What this means for the financial industry
For asset managers, fund administrators and financial institutions operating in Luxembourg and Ireland, the practical consequences of the package depend heavily on how the legislative negotiations reshape the final text. The current proposal would bring the largest trading infrastructures under ESMA direct oversight, which affects custodians, depositaries, and counterparties more than it affects fund managers directly. The triennial reviews for large managers are a separate and more immediate concern: they introduce a layer of oversight that duplicates what national regulators already do, without a clear articulation of what supervisory failure they are designed to prevent.
If the package passes in broadly its current form, firms will face a supervisory migration: centralised portals, harmonised fee structures payable to ESMA, and consolidated data requests replacing multiple national interfaces. That transition will take time and resource. If Luxembourg and Ireland succeed in narrowing the perimeter, the practical disruption will be more limited.
What will not change, regardless of outcome, is the need for specialist expertise at the intersection of EU regulatory frameworks and national implementation. A Paris-based supervisor will still apply rules that are interpreted at national level, will still interact with national authorities for market surveillance and emergency powers, and will still require local knowledge to navigate. The administrative centralisation of supervision does not eliminate the regulatory complexity underneath it. Firms that understand this, and staff accordingly, will be better positioned than those that treat the change as purely a question of which regulator to call.
The financial centres that have thrived within the EU have done so not because their regulator happened to be in the same city, but because they built genuine expertise, attracted capable people, and operated close to the products they oversaw. That model does not become obsolete under a more centralised supervisory architecture. It becomes more important. Firms like We Put You in Touch exist precisely because regulatory expertise does not centralise as easily as institutional mandates do.
References
- Reuters / Global Banking and Finance – EU’s six largest economies back centralised market supervision (12 March 2026)
- European Commission – Market Integration Package: Master Regulation COM(2025)940 (4 December 2025)
- Paperjam – Luxembourg et Irlande: comment stopper la prise de pouvoir de l’Esma (March 2026)
- EFAMA – Statement on the European Commission’s Market Integration Package (December 2025)
- PayTechLaw – The EU’s Market Integration Package: an ambitious attempt to turn Europe’s savings into Europe’s growth (March 2026)
- DLA Piper – EU Capital Markets Overhaul: European Commission Publishes Market Integration Package (December 2025)
- Arthur Cox – European Commission’s Market Integration Package: Key Implications for Funds (December 2025)
- Taylor Wessing – EU Markets Integration and Supervision Package: Key Proposals (December 2025)
- ESMA – Peer Review on supervision of depositary obligations (November 2025)
- CSSF – Total net assets of undertakings for collective investment as at 31 January 2026 (February 2026)
- Draghi Report – The Future of European Competitiveness (September 2024): three main fault lines of EU capital markets fragmentation
- European Parliament – Report on facilitating the financing of investments: Draghi Report A10-0124/2025 (2025)
- Jacques Delors Centre – Capital Markets Union: Europe must stop beating around the bush (2024)
- A&O Shearman – Financial Services Horizon Report 2026: Financial Markets Outlook (January 2026)