ESMA issues opinion on ‘undue costs’

by Matthias Plötz 24 May 2023

On the basis of a consultation conducted in 2020, ESMA has issued an opinion to the European Commission regarding the protection of investors from undue costs.

The regulatory authority is concerned about a possible divergence in levels of investor protection. It stated that this could arise from regulatory arbitrage on a national level, caused by a lack of supervisory convergence.

In 2020, ESMA outlined a pricing review framework for costs charged by fund managers. National competent authorities (NCAs) of EU member states carried out the assessment.

Feedback from the NCAs, provided in 2021, suggested that a specification of the notion of “undue costs” could increase regulatory convergence and provide NCAs with sufficient legal basis to enforce actions against market participants in breach.

Against this backdrop, ESMA has requested the European Commission to clarify eligible costs under the AIFMD, in light of the list of costs included in the regulation governing packaged retail and insurance-based investment products (PRIIPs).

To this end, costs should be assessed in relation to the type of fund and its investment policy. In case of related-party transactions, which, according to ESMA, have a particularly high risk of overcharging investors, costs need to be both eligible and equal, or better than market standards.

What’s next?
ESMA has proposed legislative amendments to the AIFMD in the form of regulatory technical standards, which should specify the circumstances in which costs included in PRIIPs should be considered not eligible, as well as discretionary powers for NCAs to grant exceptions.

Further, the regulatory authority stressed increased focus on a GP’s internal compliance function in the form of stringent controls and adequate reporting.

To remedy breaches, ESMA proposed sanctions in the form of minimum percentages, to be enforced by NCAs.

Categories: NewsRegs & ComplianceAIFMDRegulatory update

4 December 2023

Comment: Who’s afraid of the US tax system?

James Debate, corporate senior tax manager at USTAXFS, explains how European PE firms can unpick the US tax system to win over US pension fund investors

4 December 2023

MUFG IS anchors in Malaysia

New office to provide full-service offering across fund accounting, administration and asset servicing

4 December 2023

Quantium partners with Microsoft Azure

Investment management software stores data and has built its investor portal on Microsoft’s cloud computing platform

1 December 2023

Hillhouse opens London office

The London operations team of the investment firm will be led by vice president Hallie Fishman

1 December 2023

ESG, retail investors and you

The latest Efama conference brought together regulators and asset managers who championed the idea for product instead of fund labels and brainstormed ideas for retailisation

30 November 2023

SDCL acquires Volery Capital

Firm aims to expand into US with acquisition which sees Ares Management and Folsom Point Funding continue to hold minority stakes in Volery