“In order to promote retail participation in the fund market, continued supervisory attention is needed on the topic of costs and fees in investment funds.”
The European Securities and Markets Authority (ESMA), the EU securities markets regulator, today publishes a report on the Common Supervisory Action (CSA)
on costs and fees for investment funds, that was carried out with
National Competent Authorities (NCAs) during 2021. ESMA highlights, in
the Report, the importance of supervision in ensuring investors are not
charged with undue costs, considering its high impact on investors’
returns.
Verena Ross, Chair, said:
“ESMA, through this CSA, has worked with the NCAs to assess, foster
and enforce supervised entities’ compliance with key cost-related
provisions in the UCITS framework, in particular the obligation of not
charging investors with undue costs. Costs remains a critical component
when evaluating the ultimate benefits of an investment and, as ESMA has
shown in its recent statistical reports, they remain higher for retail
investors than for institutional investors.
“In order to promote retail participation in the fund market,
continued supervisory attention is needed on the topic of costs and fees
in investment funds.”
The CSA Report presents the main results of this exercise, namely:
- There is room for improvement on the application of the ESMA
supervisory briefing on the supervision of costs in UCITS and AIFs,
particularly for smaller management companies;
- Some questions arise concerning compliance with delegation rules
where portfolio managers i.e. delegates, exercise significant influence
or even decide the level of costs;
- Divergent market practices exist as to what industry reported as “due” or “undue” costs;
- Some NCAs discovered conflicts of interest at UCITS managers, in particular in case of related-party transactions;
- In some instances there is a lack of policies and procedures on
efficient portfolio management (EPMs) and lack of clear disclosures as
required under the ESMA Guidelines on ETFs and other UCITS issues; and
- Widespread use of fixed fee splits arrangements for
securities lending continues, with unfavourable results for retail
investors.
On the topic of investor compensation, ESMA stresses the
importance of ensuring that investors are adequately compensated in all
cases where they were charged with undue costs or fees, and also in
cases where there were calculation errors that resulted in a financial
detriment for investors.
Next steps
ESMA invites NCAs to use this opportunity to also consider
enforcement actions in the cases where a significant regulatory breach
was identified, particularly bearing in mind that the area of costs and
fees is a priority due to the high relevance for investor protection.
ESMA and the NCAs will continue working on the topic.
ESMA
© ESMA
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