The European Securities and Markets Authority (ESMA) has set out to clarify the legislation provisions of the UCITS Directive and the AIFMD around ‘undue costs’.
The regulator offered its thoughts in this 33-page document, outlining where it sees room for clarification. “ESMA is of the view that, as a first step, the Commission should clarify the eligibility of costs in light of the list of costs included in the PRIIPs Regulation,” it noted. “This will not only have the benefit of providing clarity on the topic but will also ensure that all costs charged to the fund and its investors will be appropriately disclosed.”
The report added: “The assessment regarding the eligibility of the cost (‘eligibility test’) should also take into account the type of fund, as there are some costs that can be borne by some types of AIFs and their investors, but not by UCITS and their investors. For this reason, and to ensure that the eligibility test is meaningful, it is important for the fund manager to assess the appropriateness of the costs on a case-by-case basis in light of the (i) type of fund and (ii) its investment policy.”
The body also drew attention to its view that the list of PRIIPs is currently very broad. In order to ensure legal certainty on what ESMA says is an undue cost while providing national competent authorities (NCAs) with a stronger legal basis to take enforcement action, it proposed it should be able to develop regulatory technical standards.
These would, said ESMA, “specify the circumstances in which the costs included in the PRIIPs list should be considered as undue/not eligible, also taking into account the investment policy of the funds; and specify under which conditions NCAs may authorise on a case-by-case basis additional cost categories that are not included under Annex VI Part 1.I of the Commission Delegated Regulation (EU) 2017/653.”
Value for money
ESMA chair Verena Ross said: “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. That investors get value for their money is even more important in the current market situation, with heightened inflation and tightening of financial conditions.”
She added: “With its Opinion to the European Commission on undue costs in funds, ESMA calls for legislative amendments to the UCITS Directive and the AIFMD. By further harmonising 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.”