Centralising Financial Supervision in the EU: Legal Limits, Political Tensions, and the Challenge of Competence

By Alex Feeney

In recent months, the European Commission has been drafting plans to bring stock and cryptocurrency exchanges under central supervision, aiming to strengthen the EU’s financial competitiveness amid an expanding US market. The proposal would hand direct oversight to the European Securities and Markets Authority (ESMA) to address the persistent fragmentation of European markets. However, this drive toward greater centralisation is not without issue. In particular, Its legality is questionable under the EU Treaties, especially regarding the scope of competence under Article 114 TFEU, the lawful delegation of powers to EU agencies, and compliance with the principles of subsidiarity and proportionality. Whilst these reforms are legally plausible, success depends heavily on respecting the principles mentioned, as well as dealing with political backlash.

The Commission’s proposal targets the most significant cross-border institutions, such as major trading venues and crypto-asset service providers, while national regulators would retain responsibility for smaller, domestic platforms. The reason for this centralisation is concern over the fragmentation caused by a regulatory structure relying heavily on national authorities, creating inconsistencies and added costs for firms operating across borders. The current situation, with fragmented rules in member states and more than 600 market intermediaries in Europe, increases the cost of raising funds across the EU. ECB President Christine Lagarde stated at the European Banking Congress in November 2023: "Creating a European SEC, for example, by extending the powers of ESMA, could be the answer. It would need a broad mandate, including direct supervision, to mitigate systemic risks posed by large cross-border firms".

The question of said reform’s legality is central to this push for greater supervision. Under the principle of conferral (Article 5 TEU), the Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties. Financial market regulation falls under the EU’s internal market competence, primarily through Article 114 TFEU. This provision empowers the Parliament and Council to adopt measures harmonising national laws to ensure the establishment and proper functioning of the internal market. Yet tension arises over whether “harmonisation” can extend to transferring supervisory structures themselves to ESMA which is a move that could be seen as creating a new, non-conferred competence. While formally anchored in Article 114, the proposal arguably continues a broader functional trend in EU law where the internal market becomes a vehicle for deeper institutional integration. This raises the question of whether legal competence is being interpreted dynamically or opportunistically. Moreover, under the Meroni doctrine, EU institutions cannot delegate broad discretion to agencies in a way that bypasses democratic and institutional accountability. In this sense, granting ESMA direct supervisory powers would represent not merely administrative delegation but a constitutional evolution toward supranational technocracy — testing the boundaries of the EU’s accountability framework. For example, in Case C-270/12 UK v Parliament and Council, the Court upheld ESMA’s limited discretionary powers but stressed that they must be “clearly defined” and subject to review. Granting ESMA direct supervisory powers would therefore constitute a significant delegation, requiring clear limits on scope, objective criteria for intervention, and robust review mechanisms. Equally important are the principles of subsidiarity and proportionality, which require that the EU act only where objectives cannot be adequately achieved by Member States and that its actions do not exceed what is necessary. When applied here, this means assessing whether national regulators can effectively manage cross-border systemic risks and ensuring that any new powers granted to ESMA go no further than is necessary to address those risks. Consequently, the Commission must provide evidence that national fragmentation not only exists but creates genuine obstacles to the internal market’s effective functioning.

These legal complexities are mirrored by political tensions, particularly conflicts between EU institutions and smaller Member States. Smaller financial centres such as Malta and Luxembourg have resisted the reform, fearing a loss of national sovereignty and domestic regulatory influence. The core tension lies between a policy agenda focused on competitiveness and EU-level scale, and a constitutional structure founded upon Member-state sovereignty. The reform thus exposes a paradox of European integration: genuine financial autonomy within the EU can only be achieved through weakening the very national autonomy that underpins its legitimacy. One proposed solution is a form of “bounded delegation,” limiting ESMA’s remit to venues above a certain size or with significant cross-border activity which is a design that could help satisfy proportionality concerns. Subsidiarity concerns should also be addressed through periodic reviews, whilst dispute resolution mechanisms should be introduced in event of disagreement between a national regulator and the ESMA. In practice, subsidiarity and proportionality operate less as hard legal constraints and more as procedural justifications within the political process. The true challenge lies not in legal overreach but in securing political legitimacy among Member States whose regulators risk losing relevance.

The Commission’s ambition to centralise supervision is understandable and could prove effective if implemented in strict alignment with Treaty law. While legally possible, these efforts remain highly conditional: without clear mandates, narrowly defined delegations, and respect for subsidiarity and proportionality, the EU risks legal challenges and political backlash. Ultimately, a framework that confines new powers to systemic, cross-border venues, coupled with robust appeal and review mechanisms, would best strengthen the EU’s market autonomy without breaching Treaty constraints.

Edit by Artyom Timofeev

Image source: https://www.vatcalc.com/eu/eu-reviews-vat-on-crypto-assets/