On 4 June, the European Securities and Markets Authority (ESMA) issued a supervisory briefing setting out a common framework for regulators in relation to costs charged by UCITS and AIF managers. The briefing is designed to ensure consistency on how these issues are supervised and that investors are not charged undue costs, as is required under AIFMD and the UCITS Directive.
The briefing focuses on what undue costs are and that this notion should be assessed primarily against the best interests of the fund and its investors. To that end, it should be ensured that:
- Costs should be consistent with the fund’s investment objectives, in particular when payments are made to third parties.
- Managers should be able to identify and quantify all costs charged to the fund, whether they are paid to the manager or a third party.
To assist with this, managers should prepare and review a structured pricing process addressing various factors including whether:
- The costs are necessary to allow the fund to perform its investment objective.
- The costs are proportionate to the market standard and the services provided - this requires an assessment of competitor fees and conflicts (particularly payments to third parties and intra-group payments).
- The fees are consistent with the characteristics of the fund.
- The costs ensure equal treatment for investors.
- There is any duplication of fees.
- A cap is applied and, if so, is it clearly disclosed to investors.
- The performance fees are consistent with ESMA Guidelines (which apply to UCITS and certain AIFs).
- All costs clearly disclosed in line with relevant rules.
In order to supervise undue costs, regulators should review the processes leading to costs being charged to investors on a case by case at various stages, including on authorisation, approval of marketing documents, thematic reviews and during one-on-one inspections.
Whilst there are no specific rule changes, the briefing emphasises the importance of acting in the best interests of investors, transparency and disclosure. This will likely become an area of greater focus for regulators, particularly during initial authorisation and subsequent fund approvals.
Managers should review their costs against the framework and be prepared for regulatory scrutiny in this area going forward.
Supervisory briefing on the supervision of costs in UCITS and AIFs