The last few years have seen an increased regulatory focus on fees and costs of UCITS funds. In this context, ESMA announced the launch of a common supervisory action ("CSA") with national competent authorities ("NCAs") on the supervision of costs and fees of UCITS across the EU in early January 2021. In its press release relating to this launch, ESMA states that "ensuring greater convergence in the supervision of costs is an integral part of ESMA's broader efforts on the cost of retail investment products and is key to improving investors' confidence in financial markets and reducing costs associated with obtaining financial products. The topic of costs and performance for retail investment products was identified as one of the Union Strategic Supervisory Priorities for NCAs."

This CSA follows on from last year's publication of ESMA's supervisory briefing on the supervision of costs in UCITS and AIFs (see our advisory on this briefing) and the publication by ESMA of annual statistical reports on the cost and performance of EU retail investment products since 2019. The aim of this CSA is to assess the compliance of supervised entities across the EU with the relevant cost-related provisions in the UCITS framework including the obligation not to charge investors undue costs.

On foot of the CSA, the Central Bank of Ireland (the "Central Bank") issued a questionnaire to a number of UCITS management companies and self-managed funds seeking quantitative and qualitative information relating to fees and costs (the "CSA Questionnaire").

With this increased focus on costs and fees at both a European and national level, it is useful to consider the existing requirements, regulatory expectations and next steps for fund management companies.

Existing Requirement


As detailed in the above table, both the UCITS and AIFMD frameworks set out an obligation to ensure that undue costs are not charged to investors. However, until the publication of ESMA's supervisory briefing, there was no guidance as to what this means in practice. The briefing identifies the criteria which NCAs should consider when assessing fund costs and ESMA's expectations in respect of the pricing process that fund management companies should have in place. The overarching consideration is the obligation to act in the best interests of investors and key to this is the idea that all fees and other fund costs are transparent and easily understood by investors. Investors should be able to clearly determine the fees payable to a fund's service providers and the level of costs that a fund is likely to incur.

The key elements that should be considered as part of the pricing process are detailed in the supervisory briefing and include inter alia, the following:

  • whether the costs are proportionate compared to market standards and to the type of service provided
  • whether the costs borne by the fund are sustainable, including those paid to third parties, are sustainable taking also into account the expected net return of the fund;
  • whether the costs ensure investors' equal treatment and do not materially prejudice the interests of any class of shareholders or potential shareholders;
  • whether there is no duplication of costs and costs are properly separated and accounted for; and
  • whether the fee structure is consistent with the characteristics of the fund.

Regulatory Expectations

The CSA and CSA Questionnaire are in keeping with the increased regulatory focus of fees and costs for both UCITS and AIFs. In this regard, the Central Bank's CP86 framework expects fund management companies to request delegate investment managers to report certain information to the board of the fund management company at the launch stage of a fund and on an annual basis. In addition, there is a regulatory expectation on fund management companies that the fees payable to a fund's service providers should be covered in the report/presentation provided prior to a fund's launch and that any changes to such fees should be referenced in the annual presentation to the board.

In July 2019, as part of its industry letter relating to its closet indexing thematic review of Irish UCITS, the Central Bank stated that, in assessing this annual presentation, the board of a fund management company should consider whether funds have delivered on their stated objective and remain a viable and suitable investment for investors, with this review being documented. The letter states that this review should include an assessment of: (i) fund performance; (ii) fee structure; (iii) the investor base of each fund; and (iv) fees charged on all share classes within each fund to determine whether they are appropriate for the targeted level of outperformance of the fund against its benchmark.

The Central Bank has also updated its guidance on performance fees of UCITS and certain types of retail investor AIFs which incorporates ESMA's guidelines on performance fees in UCITS and certain types of AIFs and addresses a number of topics including calculation methodology, annual crystallisation, negative performance recovery and disclosure.

In line with the above developments, two areas of focus in the CSA Questionnaire are: (i) the process around setting and reviewing fees; and (ii) the governance and control mechanisms in place in respect of the pricing process. The CSA Questionnaire asks fund management companies to justify the level of ongoing charges charged to the fund and its share/unitholders compared to the level of activity against the reference benchmark.

The CSA Questionnaire also seeks information from fund management companies in relation to their use of efficient portfolio management techniques. Revenue retained by the fund service providers in this context and direct and indirect operational costs/fees arising from such EPM techniques are two areas of focus.

Next Steps

In order to provide feedback on the results of the CSA Questionnaire, it is likely that the Central Bank will issue further guidance in due course, perhaps in the form of a letter to industry, setting out its findings from the responses received together with action to be taken by fund management companies. In addition, early next year, ESMA will publish its findings from the CSA more generally. In advance of these publications, it would be prudent for fund management companies to review the processes in place in respect of fund fees and costs, both at fund launch stage and during the life of each fund under management and consider whether any enhancements may be required. We have been assisting clients in reviewing these processes and advising on the types of enhancements that could be considered.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.