Calling all IFMs, including AIFMs! Have you assessed your fees?

Subsequently, during 2021, ESMA implemented a Common Supervisory Action (CSA), with the relevant NCAs to oversee UCITS costs and fees. 

ESMA published the results of the CSA in a final report (CSA Final Report)^₂ on 31 May 2022, which takes into account the experiences and lessons learned of all EU/EEA NCAs that participated in the exercise, including the CSSF.

On this point, ESMA informed that the level of compliance with the current EU legal framework is satisfactory for most IFMs. However, the exercise also revealed weaknesses in some areas and the need for improvement in other key areas.

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The Supervisory Briefing clarifies the notion of ‘undue costs’, which should be primarily assessed against the ‘best interest’ of the fund or its investors. In this context, any costs charged to the fund or its investors should be consistent with the fund’s investment objective and, moreover, should not prevent the fund from achieving its objective, even if this includes payments to third parties — for instance, the depositary.

Additionally, the IFM’s pricing process should allow an identification and quantification of all costs charged to the fund. The ESMA explains that this refers to fees paid to the IFM or to third parties and/or fees directly paid by the investors, for instance, subscription or redemption fees (avoidance of hidden costs).

In ESMA’s view, a structured pricing process embedded in the IFM’s governance framework is key. Each IFM should develop and frequently review its pricing process taking into account the following dimensions: 

1. investor’s best interest; 
2. proportionality to market standards; 
3. consistency with fund’s characteristics; 
4. sustainability (in relation to expected return); 
5. equal treatment of investors (excl. certain AIFs);
6. cost duplication; 
7. fee caps; 
8. performance fees, 
9. transparency to investors; 
10. reliable and documented data. 

Moreover, ESMA asks NCAs to review the IFMs’ pricing processes at various occasions, including, but not limited to, reviews at different stages of a fund’s lifecycle, during on-site inspections or thematic reviews. 

Some possible impacts of the materialisation of undue costs charged to investors may include investor compensation, reduction of fees, review of disclosure documents, and communication of good and poor practices to the market, stakeholders or press. 

We will be delighted to support you at various stages of this assessment: 

• Review of your current cost setup, including:  

  • Identification of all fees charged to the funds under management (UCITS and AIF); 

  • Mapping with regulatory requirements as well as ESMA’s and the CSSF’s supervisory framework;

  • Compliance analysis (“gap-analysis”).

• Review of your existing pricing process, for instance, decision making, contractual framework and lifecycle management, among others, and, if needed—map out required process changes and implementation support.

• Benchmarking your cost model(s) compared to market peers.

• Drafting or review of your pricing policy in light of the ESMA/CSSF requirements. 

• Case-by-case review of (complex) fee structures and restructuring support.

• Information sessions or training to concerned staff (for example, relationship, sales, and legal teams), board of directors, among others.