Europe’s top regulator for securities and financial markets on Wednesday said it believes there is a need for EU-level legislation to make sure investors do not bear costs that are considered excessive, unnecessary, or unreasonable when they put their money in investment funds.
Existing EU fund laws need to be updated, the European Securities and Markets Authority, or Esma, said in an official 33-page opinion to the European Commission. In its opinion, Esma suggests clarifications of the legislative provisions under the Ucits fund directive and the AIFMD rules for alternative investments relating to the notion of ‘undue costs’.
“If we want to enhance retail investors’ participation in capital markets, we should ensure that the expected return of investment products isn’t impacted by undue costs,” Verena Ross, chair of Esma, said in a statement. “That investors get value for their money is even more important in the current market situation, with heightened inflation and tightening of financial conditions.”
Stems from EU-wide supervisory action
Esma’s opinion follows an EU-wide data collection exercise that asked fund managers to provide detailed insight on the cost structures in their funds before Easter. It also is timed a week before the European Commission will present its long-awaited Retail Investor Strategy.
In Luxembourg, home to about a third of all such funds in Europe, financial supervisor CSSF also took part in the EU-wide fund cost review, a common supervisory action, which took place in 2021. CSSF since then also has ordered investment fund managers of Ucits funds in Luxembourg to review, and if necessary correct, the way they calculate the costs and fees of their investment funds by 1 April.
Esma on Wednesday said its review found ”divergent market practices as to what industry reported as ‘due’ or ’undue’ costs in funds”. Apart from the high investor protection relevance of this matter, Esma said it deems that a lack of supervisory convergence on this topic leaves room for regulatory arbitrage and risks hampering competition in the EU market, it said. Furthermore, it may lead to different levels of investor protection depending on where a fund or fund manager is domiciled.
“With its Opinion to the European Commission on undue costs in funds, Esma calls for legislative amendments to the Ucits Directive and the AIFMD,” said Ross. “By further harmonizing the notion of undue costs among Member States, the proposal aims at preventing investors from being charged with undue costs and ensuring appropriate compensation for investors.”
Esma has created a dedicated web page for more information on its cost actions.