Creating an EU “supervisory efficiency test”

The European Union’s capital-markets supervisory framework is increasingly misaligned with the depth and complexity of today’s integrated financial markets. While regulatory harmonisation has advanced through the Capital Markets Union (CMU) and the Savings and Investment Union (SIU), supervision remains predominantly national, fragmented, and uneven across Member States. This creates notable inconsistencies in enforcement, exposes the EU to regulatory arbitrage, and weakens the credibility and efficiency of the Single Market for financial services.

Unlike banking supervision—centralised after the financial crisis under the Single Supervisory Mechanism (SSM) to address systemic risk—capital-markets supervision must serve multiple objectives: market transparency, investor protection, market orderliness, integrity, and the prevention of regulatory arbitrage. These objectives are inherently interdependent and increasingly cross-border in nature. Yet the EU still relies on 27 national competent authorities applying EU rules with varying intensity and capacity, leading to divergences in outcomes and supervisory effectiveness. ESMA’s direct powers remain limited, often assigned only in response to specific failures rather than as part of a structural strategy. 

To overcome this structural mismatch, the EU should apply a supervisory efficiency test—a functional, evidence-based mechanism to align the level of supervision with the actual degree of market integration for any given financial product, service, or market participant. Such test would assess integration across measurable dimensions such as standardisation of products or services, passporting intensity, market concentration, cross-border investor participation, supervisory landscape, risks of breaches in the level playing field and enforcement fluidity. These indicators would allow an objective integration measurement that can be matched to the most appropriate supervisory model (national, mutual recognition, coordinated supervision, colleges of supervisors, or direct ESMA supervision).

 The increasing complexity and cross border nature of EU financial markets – driven by shifting savings patterns, financial innovation, digitalisation, and the policy ambitions of the SIU – point to a continued trend toward deeper integration. However, this integration is inherently uneven. Not all financial services, products, or actors evolve at the same pace or reach the same level of cross-border penetration. As a result, a one-size-fits-all supervisory model is neither realistic nor efficient. There will continue to be a mix of national, mutually recognised, and supranational supervision across different market segments, depending on the degree of integration and systemic relevance.

An EU “supervisory efficiency test” will allow a supervision linked to market integration

Against this backdrop, the supervisory efficiency test offers a pragmatic and adaptive tool for aligning oversight arrangements with market realities. Its core objective is to periodically assess whether the existing supervisory model for a given product, service, or market player continues to meet its intended goals in an efficient and proportionate manner. Such a test would ideally be triggered at predefined intervals, such as the expiration of a legislative review clause, or in response to significant market developments, regulatory innovations, or shifts in cross-border activity. 

A supervisory efficiency test ensures that supervisory design follows market reality, not political competition. By grounding decisions at demonstrable levels of integration, the test directly supports the core objectives of capital-markets supervision: 

• Transparency: Integrated markets require uniform data, reporting, and disclosure oversight. 
• Investor protection: Cross-border retail and institutional activity demand consistent supervisory intensity. 
• Market functioning: Efficient and orderly market functioning depends on coherent rule enforcement across jurisdictions. 
• Integrity and anti-arbitrage: Proper measurement of integration identifies where divergent national enforcement creates supervisory arbitrage risks. 

Ultimately, the supervisory efficiency test is a tool for supervisory realism. It acknowledges the diversity of European capital markets while recognising the necessity of supervisory convergence in areas where integration is deepest, and risks are most pronounced. It enables the EU to move beyond institutional inertia and make meaningful progress toward a capital markets union that is not only integrated in name, but also coherent in oversight. Embedded into the EU’s legislative review cycle, this test would offer a politically feasible, adaptive path toward more coherent, proportionate, and resilient supervision.