On 31 May 2022, the European Securities and Markets Authority (ESMA) issued a report on the common supervisory action (CSA) on costs and fees for investment funds. The CSA was carried out with Member State competent authorities (NCAs) during 2021. The CSA’s aim was to assess, foster and enforce the compliance of supervised entities with key cost-related provisions in the UCITS framework, in particular, the obligation of not charging investors with undue costs.

The final report presents the main results of the CSA, namely:

  • There is room for improvement on the application of the ESMA supervisory briefing on the supervision of costs in UCITS and alternative investment funds, particularly for smaller management companies.
  • Some questions arise concerning compliance with delegation rules where portfolio managers i.e. delegates, exercise significant influence or even decide the level of costs.
  • Divergent market practices exist as to what industry reported as “due” or “undue” costs.
  • Some NCAs discovered conflicts of interest at UCITS managers, in particular in case of related-party transactions.
  • In some instances there is a lack of policies and procedures on efficient portfolio management and lack of clear disclosures as required under the ESMA guidelines on exchange traded funds and other UCITS issues.
  • Widespread use of fixed fee splits arrangements for securities lending continues, with unfavorable results for retail investors.

In 2020, the topic of costs and fees was identified as a Union Strategic Supervisory Priority (USSP) given its relevance from an investor protection perspective. The work from the CSA will feed into the process of drawing conclusions on the relevant USSP.