By Christopher P. Buttigieg - Chief Officer Supervision, MFSA

The architecture of the European Capital Markets Union (now the Saving and Investments Union) is undergoing a structural evolution, shifting its centre of gravity from the proliferation of harmonised rules toward the rigorous consistency of their application. To achieve a uniform supervisory landscape across the Union, two competing paradigms emerge, the centralisation of supervision under a singular European authority, or the refinement of supervisory convergence within a decentralised network.

With the exception of a few the direct oversight mandates granted to the European Securities and Markets Authority (ESMA) over specific, systemic sub-sectors, most notably credit rating agencies and trade repositories, the prevailing institutional design remains anchored in the principle of decentralised enforcement. Under this model, National Competent Authorities (NCAs) retain primary jurisdictional responsibility, albeit within a increasingly sophisticated framework of convergent standards.

ESMA has already achieved significant milestones in operationalising this convergence, through inter alia the establishment of a Senior Supervisors Forum, the deployment of sophisticated instruments such as the supervisory convergence heatmap, risk-based supervisory principles, and the development of common practices for the authorisation of Crypto Asset Service Providers (CASPs). This article posits that such integration, buttressed by shared standards, peer accountability, and a unified "supervisory language", is superior to the bureaucratic upheaval of widening centralised supervision by a single, distant supervisor at European level.

The central argument of this article is that through the expansive and strategic application of supervisory convergence tools, ESMA can effectively cultivate a unified institutional culture that replaces the historical fragmentation between national competent authorities with a framework of reciprocal confidence. By fostering this inter-jurisdictional alignment, the Union can achieve a seamless regulatory environment that proactively facilitates cross-border business, thereby fully actualizing the integrated potential of a frictionless Single Market.

What is Supervisory Convergence?

Conceptually, supervisory convergence constitutes a structured methodology aimed at fostering a common supervisory culture and ensuring the uniform application of Union law across diverse national jurisdictions. At the level of ESMA, it operates through a strategic, risk-based deployment of a diversified toolkit categorised into preparatory instruments such as supervisory standard setting, including supervisory briefings, implementation mechanisms for practical monitoring of convergent supervision across the EU, such as peer reviews, and assessment or remediation tools for formal evaluation, such as the breach of union law methodology. By calibrating these tools to specific market risks, ESMA seeks to facilitate a cohesive supervisory environment where NCAs function as an integrated, high-performance network rather than a collection of fragmented supervisors.

Within the ESMA governance structure, the Senior Supervisors Forum (SSF) serves as the primary high-level committee responsible for operationalizing supervisory convergence across the Union. Composed of the Heads of Supervision from National Competent Authorities (NCAs), the SSF is uniquely positioned to bridge the gap between high-level policy and practical implementation, fostering a common supervisory culture through risk-based and outcome-focused cooperation.

The Forum operates through multiple sectoral configurations—covering Markets, Investment Firms, Investment Funds, and a dedicated configuration for Enforcement—to ensure that horizontal convergence tools, such as the Supervisory Convergence Heatmap and Union Strategic Supervisory Priorities (USSPs), are applied consistently across disparate regulatory domains. By providing strategic direction on emerging cross-border risks and facilitating the exchange of best practices, the SSF acts as the institutional engine that ensures NCAs function as a cohesive network, thereby mitigating regulatory arbitrage and strengthening the integrity of the Single Market.

Supervisory Convergence Heat Map and Risk Based Principles

Central to ESMA’s effort in this field is the Supervisory Convergence Heatmap, a sophisticated diagnostic instrument designed to institutionalise a structured, risk-based cycle of oversight. This annual exercise serves as a critical mechanism for risk identification and prioritisation, evaluating threats that possess potentially systemic impacts on investor protection, market orderliness, or financial stability at the European level. By producing this heatmap annually, ESMA ensures a synchronised transition from risk identification to risk mitigation, directly informing ESMA’s Annual Work Programme and feeding into the national risk assessments of NCAs. This iterative process is completed by a rigorous risk measurement phase, where identified threats are continuously monitored through subsequent heatmap iterations or specific exercises like the Annual Union Strategic Supervisory Priorities (USSP) exercise. When paired with ESMA’s broader risk based supervision principles, this framework ensures that oversight is a strategic response to systemic threats, prioritising intensity where the risk to investor protection and market integrity is greatest.

Supervisory Convergence vs Centralisation

Crucially, the continued advancement of supervisory convergence presents a more efficacious and politically viable alternative to the comprehensive centralisation proposals articulated by the Commission in initiatives such as the Market Integration and Supervision Package. By iteratively refining the mechanisms of convergence, ESMA can ensure that a decentralised network of NCAs, coordinated through a common supervisory culture and a rigorous regime of peer accountability, realises the same harmonised outcomes as a singular European supervisor. This approach facilitates deep market integration while circumventing the significant political friction, institutional upheaval, and jurisdictional displacement inherent in the transition to a centralised supervisory monolith.

In this context, an expansive application of ESMA’s peer review mechanism, augmented by the strategic deployment of fast-track assessments, would serve to fortify supervisory convergence by transforming these evaluations into a potent instrument of institutional accountability capable of driving behavioural change. By systematically identifying best practices and remediating idiosyncratic supervisory shortcomings, a broadened peer review mandate ensures that NCAs function as a cohesive unit rather than a fragmented collection of jurisdictions. Ultimately, this approach would achieve a high degree of European convergence while safeguarding the indispensable local market expertise of NCAs, thereby maintaining a unified supervisory front without sacrificing regional nuance.

The digital asset ecosystem provides a compelling empirical case for the efficacy of convergence, specifically, ESMA has strategically deployed supervisory briefings to harmonise the authorisation process for Crypto-Asset Service Providers (CASPs). Within the ESMA toolkit, a supervisory briefing constitutes a non-binding yet highly influential regulatory instrument, engineered to provide NCAs with granular guidance on the consistent oversight of market participants. These briefings serve as a fundamental pillar for fostering a common supervisory culture by establishing standardised frameworks for the application of the Markets in Crypto-Assets (MiCA) regulation and related sectoral mandates. By articulating precise and uniform supervisory expectations across the Union, this mechanism serves as a pre-emptive strike against supervisory arbitrage. Consequently, it ensures that a "passported" license represents a consistent "gold standard" of compliance with the Markets in Crypto Assets Regulation, irrespective of the Member State of issuance.

Strengthening the Supervisory Convergence Framework

To further optimize the efficacy of the decentralised model, it is imperative to transition from a framework of mere coordination to one of deep institutional synergy. While the existing toolkit has laid the necessary foundation, the maturation of the Capital Markets Union necessitates a more proactive calibration of supervisory resources and methodologies. The following section delineates a series of strategic enhancements designed to fortify the convergence framework, transforming the existing network of national regulators into a more integrated, high-performance ecosystem capable of delivering uniform supervisory outcomes across all Member States.

The convergence framework can be augmented through several strategic enhancements that could deepen institutional integration:

Firstly, the centralisation of data, coupled with the creation of harmonised analytical tools, would generate significant economies of scale while ensuring that all NCAs utilise identical evaluative methodologies, thereby guaranteeing convergent analytical outcomes for supervision.

Secondly, reinforcing the supervisory knowledge network through informal interaction, such as specialised workshops and cross-border training, thereby facilitating the organic alignment of professional judgment among national regulators.

Thirdly, establishing a framework for ESMA’s direct participation in national supervisory engagements would provide the Authority with granular insights into the localised nuances of supervision, fostering a more precise Union-wide coordination.

Fourthly, identifying specialised regulatory domains to create "centers of excellence" for research and shared supervision would allow for the concentration of technical expertise, providing NCAs with high-level support and fostering a sophisticated, research driven supervisory culture.

Lastly, by establishing a common risk management framework and a mandatory minimum engagement level, ESMA can ensure that high-risk entities face the same rigorous inspection cycles across the Union.

By strengthening convergence as outlined above, ESMA would effectively be building a supervisory "central nervous system" that ensures the European market is defined by a single, unwavering standard of excellence rather than the accidents of geography.

Conclusion

The ongoing transformation of the European Capital Markets Union (now the Saving and Investments Union) reflects a strategic pivot from the mere approximation of legislative texts to the functional unification of supervisory outcomes. As this article has demonstrated, the structural tension between the centralisation of oversight and the refinement of supervisory convergence represents a defining crossroads for the Internal Market. While centralised mandates exist for specific type of inherently cross-border entities, the overarching success of the European regulatory project remains inextricably linked to the efficacy of the decentralised network of NCAs.

The evidence presented suggests that the expansive and strategic deployment of ESMA’s convergence toolkit, comprising diagnostic instruments like the Supervisory Convergence Heatmap, implementation mechanisms such as peer reviews, and harmonizing guidance like supervisory briefings—offers a demonstrably superior pathway to integration. By fostering a common "supervisory language" and institutionalising a common risk based oversight cycle, ESMA can successfully continue dismantling historical silos and strengthen mutual trust thereby integrating the Union’s financial landscape. The empirical case of MiCA and CASP authorization serves as a vital proof of concept, illustrating how convergence can pre-emptively neutralise regulatory arbitrage and establish a uniform "gold standard" for governance without the political and jurisdictional upheaval of a centralised monolith.

Ultimately, the future of European market integrity lies in the evolution of this decentralised model into a sophisticated "central nervous system" of oversight. Through the proposed enhancements, ranging from the centralisation of data analytics and the establishment of centers of excellence to the reinforcement of supervisory knowledge networks, the Union can achieve the consistency of a single regulator while preserving the indispensable granular expertise of national supervisors. By prioritising shared standards and rigorous peer accountability over bureaucratic consolidation, the European Union can finally realise a truly frictionless Internal Market, defined not by the accidents of geography, but by a single, unwavering standard of supervisory excellence.