Yesterday, ESMA announced that it will be launching a Common Supervisory Action (CSA) with national competent authorities (NCAs) on the supervision of costs and fees of UCITS across the European Union. The CSA aims to assess the compliance of supervised entities with the relevant cost-related provisions in the UCITS framework, and the obligation of not charging investors with undue costs.
During the CSA, national competent authorities will take into account the supervisory briefing on the supervision of costs published by ESMA in June 2020.
What does the supervisory briefing contain?
The supervisory briefing provides:
- Criteria to assist NCAs in assessing the concept of undue costs and in supervising the obligation to prevent these being charged;
- Guidance to NCAs on their supervision of how costs are charged to investors
- Guidance on the obligation on management companies to prevent undue costs being charged
Pricing Process & Undue Costs
In the briefing ESMA provided a number of key elements which should form part of the periodic review of the pricing process.
The key elements include whether:
- The costs are linked to a service provided in the investor’s best interest.
- The costs are proportionate compared to market standards and to the type of service provided.
- The fee structure is consistent with the characteristics of the fund.
- The costs borne by the fund are sustainable taking also into account the expected net return of the fund.
- The costs ensure investors’ equal treatment.
- There is no duplication of costs.
- A cap on fees is applied and clearly disclosed to investors.
- The performance fee model and its disclosure is compliant with the ESMA Guidelines on performance fees.
- All costs are clearly disclosed.
- The pricing process and all charged costs are based on reliable and documented data.
See more on the key elements here.
Supervision
In the briefing, ESMA state that the national regulators’ supervision should cover:
- Cost disclosure and transparency:
o The existence, nature and amount of the costs/fees are clearly disclosed to investors in a manner that is comprehensive, accurate and understandable;
o The charged costs are consistent with funds’ rules and documentation - Business conduct, strategic risk and reputational risk.
- Pricing processes to ensure that:
o They clearly set out responsibilities among the management bodies of the firm in determining and reviewing the costs charged to investors;
o In case of the existence of conflicts of interest, it ensures that the risk of damage to investors’ interest will be prevented;
o It is clearly documented and periodically reviewed.
Corrective Action
The briefing paper also provides that where undue costs are identified by the NCAs, corrective measures such as fee reduction or investor compensation may be imposed. Therefore, it is imperative that management companies are correctly accessing their value offering.
Our Assessment of Value Reporting Module, powered by whole-of-market data from FE fundinfo, provides firms with a comprehensive and efficient toolkit for conducting their periodic pricing process reviews in a cost-efficient and streamlined way.
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