I was delighted to be part of the panel at last week's FUNDS by IOB and Certified Investment Fund Director Institute event where we discussed fund fees and costs in the context of:
- ESMA's supervisory briefing on the supervision of costs in UCITS and AIFs published in June 2020;
- the common supervisory action on the supervision of costs and fees of UCITS currently being undertaken across the EU;
- UCITS and AIFMD requirements in respect of undue costs; and
- CP86 and the requirement for management companies to consider fees and charges associated with the funds they manage.
An overview of the value assessment requirements introduced by the UK's Financial Conduct Authority was provided and it was noted that UK investors have broadly welcomed the introduction of these measures. In addition, consideration was given to the evolving performance fee requirements, in particular in the context of UCITS, and the sources of these requirements, notably the Central Bank UCITS Regulations, ESMA's guidelines on performance fees in UCITS and certain types of AIFs and the recently published Central Bank guidance on performance fees of UCITS and certain types of Retail Investor AIFs.
Key points of interest
The publication of ESMA's supervisory briefing in June last year has focused minds on the governance surrounding the supervision of costs and charges within funds. However, it should be noted that ESMA has been analysing reported data and publishing statistical reports on the costs and performance of retail investment products since 2019 and also conducted a survey amongst national competent authorities to assess EU-wide approaches to the supervision of costs. As such, it is unsurprising that the focus of this year's common supervisory action relates to UCITS' costs and fees.
The ESMA briefing itself provides national competent authorities with guidance with regards to the supervision of costs and also gives market participants an indication of the expectations and compliant practices regarding the cost-related provisions of the UCITS and AIFMD frameworks. The briefing is informative as to the areas of focus, in particular from a governance perspective with the primary focus being around placing investors and their best interests at the forefront of these considerations.
There is an overarching requirement when considering the costs and fees of funds to act in the best interests of investors and the following should be taken into account:
- the provision of appropriate disclosures in terms of the fees and costs;
- the reasonableness and proportionality of the costs being charged; and
- the importance of managing potential conflicts of interest.
There was a useful reminder that while the common supervisory action relates to the supervision of UCITS' costs and fees, it also seeks information from entities employing Efficient Portfolio Management ("EPM") techniques in order to assess whether they adhere to the requirements set out in the UCITS framework and ESMA Guidelines on ETFs and other UCITS issues (the "Guidelines"). Interestingly, ESMA's final report on the peer review of the Guidelines published in July 2018 notes that there is significant divergence across member states as to what constitutes EPM techniques. The fees associated with EPM techniques and how such costs are allocated are likely to be an area of focus for national competent authorities as they review the responses received from fund managers.