ESMA issues opinion on ‘undue costs’

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.

Background
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.