The European Securities and Markets Authority (ESMA) has published a keynote speech given by its chairman, Steven Maijoor. The speech covers ESMA’s priorities for 2018 and focuses on ESMA’s work in the area of investment management: costs and charges, stress testing and supervisory convergence in the context of Brexit.

In relation to costs and charges Mr Maijoor mentions that the European Commission has asked ESMA, together with the other European Supervisory Authorities, to issue recurring reports on the cost and past performance of the main categories of retail investment, insurance and pension products. Mr Maijoor explains that ESMA has started work on its part of the mandate and is currently analysing the impact of costs, including explicit and implicit fees and charges levied by the fund industry, but also the implicit effect of inflation, on the returns of investors in EU UCITS. ESMA expects to complete its analysis on UCITS funds by late 2018. In the longer run ESMA will extend its analysis to EU alternative investment funds (AIFs) and structured products, such as structured deposits and structured notes.

Mr Maijoor also discusses closet indexing and states that ESMA is currently liaising with Member State competent authorities (NCAs) to get a comprehensive picture of the outcome of their national initiatives. From ESMA’s perspective, its objective is to ensure that NCAs are taking convergent approaches to situations where deficiencies are identified.

Also, on the issue of costs, Mr Maijoor states that it will soon launch a work stream on performance fees under its supervisory convergence agenda. He states that it has come to ESMA’s attention that national practices on performance fees are not always consistent. The overall objective should be to ensure that performance fee models are fair and consistent with the investment policy of the fund.

In terms of stress testing, Mr Maijoor states that ESMA is working on developing an operational framework for the identification and quantification of potential industry risks to be used in stress simulations. He adds that securities market regulators will benefit from the experience acquired with the Money Market Funds Regulation.

In relation to Brexit Mr Maijoor refers to the general opinion it issued in May and the three sector specific opinions published in July. He makes three important points:

• ESMA considers the opinions to be fully in line with existing Level 1 requirements;
• the opinions in no way undermine the freedom of establishment that is provided by relevant EU legislation. ESMA’s key objective is to ensure that NCAs are consistent in the decisions they take with respect to entities relocating from the UK and that regulatory arbitrage cannot be a driver for the choice of a particular location;
• ESMA recognises that delegation plays a key role in the current industry set-up and that it has contributed to the success of EU funds, particularly UCITS funds, across the globe. ESMA also recognises that delegation of key functions – including to non-EU countries – is expressly foreseen by the UCITS Directive and the Alternative Investment Fund Managers Directive. Mr Maijoor states that the opinions do not call into question the delegation model. Rather, they aim to provide clarity on such elements as the appropriate substantive presence in the home Member State, the importance of oversight arrangements and the role and status of non-EU branches.

View ESMA speech on priorities for 2018, 17 November 2017