Costs and fees in UCITS – ESMA reports the findings of its CSA

As we reported at the time, on 6 January 2021, ESMA launched a Common Supervisory Action (CSA) on the supervision of costs and fees of UCITS across the EU.

The CSA was conducted by the EU NCAs through the course of 2021 with the aim of assessing

• how far 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.

On 31 May 2022, ESMA published its Final Report (the Report) on the findings from the CSA

What does the Report cover?

The Report sets out ESMA's analysis and conclusions of the CSA along with ESMA’s views on the findings, including

• the process of setting and reviewing fees
• the notion of undue costs
• issues stemming from related party transactions and EPM techniques
• follow-up actions envisaged by NCAs and
• the main lessons learnt.

What are the Report’s main findings?

The key results of the CSA flagged in the Report include:

• ESMA sees room for improvement (particularly on the part of smaller ManCos) in how firms apply ESMA’s June 2020 supervisory briefing on the supervision of costs in UCITS and AIFs
• some questions arose on compliance with delegation rules where portfolio managers (i.e., delegates) were found, in some cases, to exercise significant influence or even decide the level of costs
• it was clear that there are divergent market practices as to what industry reported as “due” or “undue” costs
• in some jurisdictions, NCAs found conflicts of interest at UCITS ManCos, in particular in the case of related-party transactions
• in some instances, ESMA found there was a lack of policies and procedures on EPMs and a lack of clear disclosure as required under ESMA’s Guidelines on ETFs and other UCITS issues
• there was a continuing and widespread use of fixed fee splits arrangements for securities lending – this gave rise to unfavourable results for retail investors and
• when it comes to investor compensation, the Report stresses the importance of firms ensuring that investors are adequately compensated, both where they have been charged undue costs or fees, and where calculation errors led to financial detriment for investors.

Next steps

ESMA and the NCAs will continue working on the issues that have come up as a result of the CSA.

NCAs are invited to take the opportunity to consider enforcement action where the findings identify a significant regulatory breach.

This is especially so given how significant the issue of costs and fees is for investor protection, making this a priority area for ESMA and the NCAs.