On 24 March 2023, the Central Bank published its findings from the 2021 UCITS CSA on costs and fees, noting that 'the oversight and calibration of costs and fees should be made a priority for UCITS' and that certain such matters would 'be an area of focus for the Central Bank in future supervisory engagements' given the level of deficiencies identified.
During the CSA, the Central Bank assessed a sample of 59 UCITS managers' compliance with their obligations not to charge undue costs, to act in investors' best interests and to comply with UCITS rules for use of efficient portfolio management (EPM) techniques and connected party transactions.
While the CSA was specific to UCITS managers, the Central Bank expects AIFMs to also consider the CSA findings and its expectations when setting AIF cost and fee structures.
All fund managers are required to do a gap analysis against the CSA findings and put in place an action plan for any identified gaps by end Q3 2023.
Central Bank's CSA findings align with ESMA's but also include jurisdictional-specific findings
The Central Bank's findings follow on from, and are broadly aligned with, those issued by ESMA in May 2022. Like ESMA, the Central Bank did not find that material undue costs are being charged to investors but did identify deficiencies in UCITS managers governance of fee structures.
The findings are summarised in the table below. Notably however, both regulators have now issued expectations for UCITS managers to:
- ensure undue costs are not charged by having in place formalised, structured pricing process
- carry out periodic (at least annual) reviews of costs and fees to ensure viability and competitiveness over time
- avoid over reliance on the assessment of delegate investment managers and perform independent review of costs and fee structure
- ensure fee structures offer investors return commensurate with risk profile
- establish/improve existing EPM policies and procedures and ensure specific offering document disclosures on the use of such techniques
Going beyond the findings of ESMA, the Central Bank also published CSA findings on the use of fixed operating expense (FOE) models and non-discretionary investment advisory fees by Irish UCITS managers:
Fixed Operating Expense (FOE) models result in relatively higher revenue for fund managers and are supervisory focus: the Central Bank expects FOE models to be reviewed annually, calibrated to minimise the difference between fund expenses and the fixed fee, and operate such that investors are 'fully aware' of all expenses. The Central Bank found that the calibration of FOE levels by relevant sampled managers led to managers almost always receiving additional income (in some cases up to 0.15% of NAV) as a result of using the FOE model. As a result, the Central Bank's future supervisory work programme will focus on FOE models.
Non-discretionary investment advisory fee greater than that of the investment manager indicative of de-facto management role: the Central Bank's CSA findings reiterate its previously published concern arising from fee structures with an investment advisory fee greater than that of the investment manager – this is considered indicative of an inappropriate level of influence/control on the part of the advisor and of a fee structure that is not in the interests of investors. The Central Bank again confirms its expectation that investment advisors are limited to a non-discretionary role, supplementary to that of the investment manager (see Central Bank AIFMD Q&A ID1151 and 2022 Securities Markets Outlook Report for further details of this regulatory concern).
Costs and Fees CSA Findings
The following table includes (i) the CSA findings/expectations common to both the Central Bank and ESMA and (ii) any additional CSA findings/expectations from ESMA (as set out in its May 2022 Final Report).
As the Central Bank's findings require them to be read in conjunction with ESMA's findings, both columns should be taken into account for the gap analysis/action plan required by end Q3 2023.
Both ESMA and the Central Bank expect fund managers to take into account the terms of the June 2020 ESMA Supervisory Briefing on the Supervision of Costs when complying with the following expectations:
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Central Bank / ESMA CSA Findings / Expectations |
Additional ESMA CSA Findings / Expectations |
Pricing process |
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Periodic (at least annual) review of costs and fee structures |
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The purpose of the periodic review should include, where possible, reducing the level of fees and ensuring the viability and competitiveness of the fund over time against peer funds |
Independent (of the delegate investment manager) review |
Fund managers without a documented pricing process tend to over-rely on delegate investment managers for setting fees, indicating a lack of engagement and oversight. Independent reviews of costs and fee structures should be performed and over-reliance on the assessment made by the delegate investment manager should be avoided |
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