The focus on fees and costs in UCITS and AIFs continues to gather momentum.
It has, and continues to be, a key priority at a European level - most recently evidenced by the issuance of the ESMA Opinion on undue costs of UCITS and AIFs, published 17 May 2023 (the "ESMA Opinion").
By way of relevant background, ESMA published a Supervisory Briefing back in June 2020 on the supervision of costs in UCITS and AIFs in which it identified the significant impact of costs on the final returns for investors, as well as noting that there was a lack of convergence on the way the notion of "undue costs" is interpreted across the EU.
In January 2021, ESMA launched a Common Supervisory Action ("CSA") with national competent authorities ("NCAs") on the supervision of costs and fees of UCITS across the EU / EEA. The CSA’s aim was to "assess, foster and enforce the compliance of supervised entities with key cost-related provisions in the UCITS framework, in particular the obligation of not charging investors with undue costs".
From an Irish perspective, following the EU wide review of costs and fees in UCITS through the CSA, the Central Bank issued a Dear CEO letter on 24 March 2023 (the "Dear CEO Letter") wherein it identified a number of deficiencies in the cost and fee structures for funds (both UCITS and AIFs). In particular, the Central Bank noted that managers must undertake an annual review of the costs and fees charged and should have structured, formalised pricing policies and procedures in place.
Circling back to the ESMA Opinion referenced above, ESMA has suggested clarifications to the legislative provisions under the UCITS Directive and the AIFMD relating to the notion of “undue costs”. The proposed clarifications include an obligation on fund management companies to act in such a way to prevent undue costs being charged to a fund and its investors and to develop a pricing process. More significantly, the proposals would obligate managers to indemnify investors where undue costs have been charged.
These proposals stem not only from ESMA's desire to ensure the highest levels of investor protection but its concern that there is a lack of supervisory convergence on the topic which leaves room for regulatory arbitrage and risks – thereby hampering competition in the EU market. ESMA's proposals would allow NCAs to build on the supervisory efforts already deployed to ensure an even higher level of investor protection thanks to a stronger legal hook in the UCITS and AIFMD frameworks.
It is clear that this is a topic that is not going anywhere and Irish fund management companies would be wise to get ahead of the curve and ensure, in the first instance, that they are meeting the expectations of the Central Bank (as outlined in the Dear CEO Letter).
If you would like any further information on the above or require any assistance, please get in touch with your usual Maples Group contact.