New powers for Europe's watchdogs 'bad news' for Luxembourg
European financial watchdogs will be given greater powers over cross-border finance under a new proposal from the European Commission that is being described in Luxembourg as a "power grab" which appears to be driven by the French.
The proposal, announced on Wednesday, would enhance the powers and funding of the European Securities and Market Authority (ESMA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Banking Authority (EBA) in a bid to further integrate capital market integration following the UK's departure from the European Union.
"The issue is more to make sure there is an overarching supervisory umbrella for the capital markets union so there are no gaps in supervision across the economy," Pawel Swieboda, deputy head of the European Political Strategy Centre at the European Commission, told the Luxemburger Wort on Wednesday.
The Commission said in its announcement that the watchdogs would "take decisions more independently from national interests" and address cross-border risks between the EU and the rest of the world.
However, in Luxembourg, the announcement has been described as "bad news" and a potential threat to the fund industry.
"It is certainly a power grab for ESMA," said Claude Niedner, partner at Arendt and Medernach, a law firm specialising in investment management.
"It's not good news for Luxembourg because it is the first step of creating a centralised European supervisory authority for the financial markets."
ESMA will be given direct supervision of elements of the capital markets and have a stronger legal basis to enforce "co-ordination" across Europe, which could require national regulators to consult with the watchdog more actively.
Europe's parliament and council must approve the proposal.
"It seems to me this is, to a very very large extent, guided by the French because ESMA has its seat in France," Niedner said.
"France does not necessarily look favourably on this global brand UCITS has, and they probably would wish to become at least the regulatory centre for asset management and maybe also the centre for asset management after UK leaves the EU. Therefore, this also has a very political component."
The Commission said national authorities would still be responsible for the supervision of retail UCITS funds and alternative investment funds. However, the announcement also said the watchdogs would monitor financial firms' use of delegation.
"They will monitor authorities' practices in allowing market players, such as banks, fund managers and investment firms, to delegate and outsource business functions to non-EU countries, to ensure that risks are properly managed and to prevent circumvention of the rules," the press statement said.
The plan could be seen as a "second shot across the bow" for the cross-border fund industry based in Luxembourg, one industry source said. The Grand-Duchy is wary of being caught in the crosshairs of a European regulatory battle over the use of 'delegation'.
The 'delegation' model attracted the attention of ESMA in July when it said extra scrutiny should be applied by regulators when activities are delegated to a "third country", which would include the UK once it leaves the EU in 2019.
The use of 'delegation' is commonplace for Luxembourg funds that outsource investment management back to a home country, such as the UK, the US, Switzerland or Asian countries.
The topic dominated the annual conference of the Association of the Luxembourg Fund Industry this week.
On a panel on Wednesday, Luxembourg's former finance minister Luc Frieden, who is also chairman of the board at the publishing house of the Luxemburger Wort, said the ESMA guidelines were "worrisome".
"I hope those who take the political decision at the end of the day will have realised that this cross-border aspect, including delegation, is part of the very essence of the markets we have built up in the past years," he said.
Luxembourg finance minister Pierre Gramegna vowed earlier in the week to "defend" the country's fund industry during any "uncertainty" created by Brexit, while ALFI chairman Denise Voss said she believed delegation was being scrutinised for political reasons.