What You Need To Know
Fund management companies ("FMCs") must ensure that undue costs are not being charged to investors in funds that they manage – this is expressly prescribed in (i) the UCITS Regulations; and (ii) AIFMD Level 2.
Ensuring that investors are not being charged undue costs has been an area of regulatory focus for some time for both the Central Bank of Ireland ("Central Bank") and the European Securities Markets Authority ("ESMA").
Key Regulatory Developments
In July 2019, the Central Bank issued a letter to industry on its thematic review of closet indexing by UCITS highlighting the need for FMCs to review the fee structure and charges on all share classes of their funds on an annual basis. See our previous client update Central Bank Closet-Tracker Review: Focus on Transparency and Governance.
In June 2020 ESMA issued a supervisory briefing requiring FMCs to produce a detailed 10-point "Pricing Process Report" for each AIF or UCITS they managed:
- to identify, quantify and assess all costs charged to the relevant fund; and
- to consider options (such as investor compensation) if undue costs were identified.
See our previous client update Introducing the Pricing Process: New ESMA Guidance on Fund Costs Reporting.
In March 2023, the Central Bank issued a Dear CEO letter following an EU wide review of costs and fees in UCITS. This set outs findings and required actions for FMCs, including conducting a gap analysis of their existing policies and procedures for the design, oversight and regular review of the costs and fees structures. See our previous client update, Central Bank of Ireland Findings Following EU Review of Costs and Fees in UCITS.
Proposed Changes
Current proposals to update the UCITS and AIFMD frameworks aim to clarify and enhance FMCs' obligations on ensuring that investors are not being charged undue costs.
On 17 May 2023, ESMA published an Opinion on undue costs of UCITS and AIFs ("Opinion"). It suggests amendments to AIFMD and the UCITS Directive:
- to require FMCs to act to prevent undue costs being charged to a fund and its investors;
- to develop a pricing process; and
- to reimburse or indemnify investors without undue delay, where undue costs have been charged.
On 24 May 2023, the European Commission published its Retail Investment Strategy which proposes an Omnibus Directive to amend a number of existing legislative frameworks, including AIFMD and the UCITS Directive. The Omnibus Directive builds on the Opinion's proposals with similar amendments being put forward including obligations on FMCs:
- to maintain and operate an effective pricing process;
- to conduct an annual review to determine if undue costs have been charged; and
- to reimburse the fund or investors for undue costs where they are identified.
Next Steps
As detailed in our previous client update, Central Bank of Ireland Findings Following EU Review of Costs and Fees in UCITS, one of the Central Bank's expectations was for FMCs to have structured, formalised pricing policies and procedures in place which would include procedures for the design of cost and fees structures (as well as ongoing review).
We have extensive experience in advising FMCs on undue costs matters, including the application of the relevant regulations and principles and the design and review of policies and procedures.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
