knowledge 29 March 2023 |

Central Bank issues industry letter on costs and fees to fund managers

Managers of AIFs should note that while the CSA focused on costs and fees of UCITS, the CBI expects the findings and actions in the Letter to also be considered by AIFMs with respect to the cost and fees charged to AIFs.

Scope of the CSA

The CBI undertook the review as part of a European-wide CSA established by ESMA.¹ The CBI assessed UCITS management companies and self-managed investment companies (“Firms”)’s compliance with relevant cost-related provisions in the UCITS framework.²

The CSA examined whether Firms, when charging costs to the fund/unitholders:

• comply in practice with the cost-related disclosure provisions set out in UCITS legislation;

• act honestly and fairly in conducting their business activities and do so with due skill, care and diligence and in the best interests of their underlying investors; and

• do not charge investors with undue costs.

CBI findings

The CSA did not identify material undue costs being charged to UCITS, however the CBI identified some deficiencies in setting the cost and fee structure for funds, which, the CBI states, increases the risks of undue costs being imposed on investors. The CBI emphasises that Firms must have regard to their obligation to act in the best interests of investors when setting the cost and fee structure, supported by policies and procedures and oversight from senior management.

Supervisory expectations

1. Policies and procedures on costs and fees

The CBI expects that all Firms have structured and formalised pricing policies and procedures in place with clear oversight and approval from senior management that allows for the transparent identification and quantification of all costs charged to a fund. 

2. Periodic reviews of costs and fees

The CBI expects that all costs are reviewed annually taking into account the investment objective and strategy of a fund, the target and actual level of performance achieved and the role and responsibilities of service providers. Costs and fees should be calculated in a fair and equitable manner, serving the best interests of investors, and this should be shown in the costs review.

The viability and competitiveness of a fund should be considered as part of the costs review, particularly whether the UCITS is capable of providing a positive return to investors. Periodic independent reviews of cost and fee structures should also be performed to ensure that they continue to offer investors a return commensurate with the risk profile of a fund.³

3. Design and oversight of fee structure

The CBI states that in the majority of cases where Firms did not have documented pricing policies and processes in place, there was an over-reliance by Firms on the assessments made by delegate investment managers for determining the pricing structure of the funds, with limited engagement in the process by some Firms.

The CBI requires Firms to have clear policies and procedures for the design, oversight and regular review of the costs and fees structures to ensure they are operating effectively and in the best interests of investors.

4. Efficient portfolio management (“EPM”)

The CBI expects that all fee arrangements regarding securities lending programmes are compliant with ESMA’s expectations⁴ and are clearly disclosed within a fund prospectus or supplements as well as being captured in the policies and procedures of a Firm.

EPM disclosures within fund documentation should clearly describe the EPM strategy, the risks involved and the fee structure relating to the specific EPM techniques, which a fund is utilising.

The CBI also expects that fee arrangements relating to all EPM activities should be reviewed as part of the annual costs and fees review of a fund.

5. Fixed operating expense (“FOE”) models

The CBI expects that where a FOE model is being used to provide investors with protection and certainty concerning the fees being incurred, those investors should be fully aware of all expenses and the model should be calibrated so that any differential is minimised and that undue costs are not charged to investors.

The CBI also expects that FOE models should be reviewed as part of the annual costs and fees review. The CBI acknowledges that this will be an area of focus in its future supervisory engagements.

6. Non-discretionary investment advisor charge

The CBI expects that the role performed by the investment advisor is non-discretionary in nature and an adjunct to the role performed by the investment manager. Regarding fees paid to non-discretionary advisors, Firms should ensure that the fee arrangements are appropriate for the services provided.

Comment and next steps

The CBI expects managers of both UCITS and AIFs to conduct a gap analysis against the findings and expectations detailed in the Letter and where appropriate, put in a place a plan by the end of Q3 2023 to address any deficiencies identified. Fund managers should note that the CBI’s expectations should be read in conjunction with ESMA’s final report on costs and supervision in investment funds (here).

In addition, the CBI states that the content of the Letter should be discussed and considered by the board and appropriate action should be taken without delay.

Also contributed to by Jonathan Murchan