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 remain 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 in 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 the industry reported as “due” or “undue” costs;
Some NCAs discovered conflicts of interest with UCITS managers, in particular in the case of related-party transactions;
In some instances there is a lack of policies and procedures on efficient portfolio management (EPMs) and a 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 unfavorable 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.