ESMA publishes report on the Common Supervisory Action

The European Securities and Markets Authority (ESMA) has published a report on the Common Supervisory Action (CSA) on costs and fees for investment funds, that was carried out with National Competent Authorities (NCAs) during 2021.

In its report, the regulator highlights the importance of supervision in ensuring investors are not charged with undue costs, considering high impact on investors’ returns.

Its CSA report states there is room for improvement on the application of the ESMA supervisory briefing on the supervision of costs in UCITS and AIFs, particularly for smaller management companies.

It also raised questions around compliance with delegation rules where portfolio managers exercise significant influence or even decide the level of costs.

Other findings in the report include divergent market practices around “due” or “undue” costs, some NCAs discovered conflicts of interest at UCITS managers and there was widespread use of fixed fee splits arrangements for securities lending.

ESMA chair Verena Ross said, “ESMA, through this CSA, has worked with the NCAs to assess, foster and enforce supervised entities’ compliance with key cost-related provisions in the UCITS framework, in particular the obligation of not charging investors with undue costs. Costs remains a critical component when evaluating the ultimate benefits of an investment and, as ESMA has shown in its recent statistical reports, they remain higher for retail investors than for institutional investors.

“In order to promote retail participation in the fund market, continued supervisory attention is needed on the topic of costs and fees in investment funds.”

The regulator has invited NCAs to consider enforcement actions in the cases where a significant regulatory breach was identified, particularly bearing in mind that the area of costs and fees is a priority due to the high relevance for investor protection.

Earlier in the week, ESMA provided guidance to supervisors for sustainability features in investment funds.

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