The European Securities and Markets Authority (ESMA) last week announced that it was launching a Common Supervisory Action (CSA) looking at the supervision of costs and fees of UCITS across the EU.
The CSA will be conducted over the course of 2021. Together with the NCAs of the 27 EU Member States, it will take into account ESMA’s Supervisory Briefing on the supervision of costs, published in June 2020, the regulator said.
The overall aim of the CSA is to assess:
- How far ESMA authorised firms comply with the relevant cost-related provisions in the UCITS framework and the obligation not to impose charge undue costs to investors; and
- Whether firms which use Efficient Portfolio Management (EPM) techniques adhere to the requirements set out in the UCITS framework and in the relevant ESMA Guidelines.
‘The work will be done on the basis of a common methodology developed by ESMA,’ the regulator explained, while ‘NCAs will share knowledge and experiences through ESMA to ensure supervisory convergence in how they supervise cost-related issues, and ultimately enhance the protection of investors across the EU.’
ESMA’s latest move will come as little surprise to most participants. European regulators have had fund fees in their crosshairs since a January 2019 statistical report revealed that retail investors were incurring significant costs – potentially in contravention to the UCITS and AIF directives rules against ‘undue costs’.
2020 saw the regulator provide guidance to NCAs on assessing ‘undue costs’ and supervising the obligation to prevent undue costs being charged to investors. This, it was hoped, would avoid regulatory arbitrage and different levels of investor protection across member states in the EU.
Last November, meanwhile, ESMA identified fund costs and performance for retail products as one of the main priorities for NCAs going forward. That means potentially more pressure on UCITS funds in 2021 and beyond.
Although regulators take a positive view of the UCITS directive overall, UCITS will remain a major focus area for the foreseeable future. As well as the new liquidity stress test regulations, which came into force in September last year, the Central Bank of Ireland (CBI) issued a stern Dear Chair letter late last year that warned UCITS funds and management companies of their need to fully comply with CP86.
As always, AQMetrics will be keeping a close eye on any developments in order to inform its clients and audience in the future.