Supervising Costs in UCITS and AIFs – in for a Penny, in for a Pound!

Earlier this month, ESMA published a supervisory briefing on the supervision of costs in UCITS and AIFs (here) (the “Briefing”) in order to provide guidance to National Competent Authorities (“NCAs”) on the supervision of costs charged to investors by UCITS and/or AIFs and their management companies. The Briefing is also intended to give market participants indications of NCAs’ expectations and compliant practices regarding the cost-related provisions of the UCITS Directive and AIFMD. 

One of the Briefing’s key recommendations is that NCAs require management companies to prepare a pricing process in respect of each of their funds under management. While the Briefing is non-binding, and has not been published on a “comply or explain” basis, we expect that the Central Bank of Ireland (“CBI”) will take on board this recommendation. Consequently, management companies should take the necessary measures to put in place a new pricing process or update their existing one to ensure they comply with the expectations set out in the Briefing. Those management companies putting in place a pricing process for the first time will also need to consider which Designated Person should be responsible for monitoring and overseeing compliance with this obligation, in accordance with the CBI’s Fund Management Companies Guidance (2016).


Pursuant to Commission Directive 2010/43/EU (UCITS Level 2 Directive), Member States must require management companies to act in such a way as to prevent undue costs being charged to the UCITS and its unit holders. Commission Delegated Regulation (EU) No 231/2013 (AIFMD Level 2 Regulation) imposes a similar obligation on AIFMs.

In July 2019 ESMA launched a survey among NCAs on national approaches to the supervision of the cost-related provisions under the UCITS and AIFMD frameworks. The analysis of the survey responses showed that there is a lack of convergence on the way the notion of “undue costs” is interpreted across the EU and on the supervisory approach to the cost-related provisions.

Consequently, to promote supervisory convergence on these issues, the Briefing sets out guidance as to how NCAs should: a) assess the notion of “undue costs”; and b) supervise the obligation to prevent undue costs being charged to investors.

How to Assess the Notion of “Undue Costs”

According to the Briefing, the notion of undue cost should be primarily assessed against what should be considered the best interest of the fund or its unit holders. This means that:

  1. the costs charged to the fund or its unit holders should be consistent with, and should not prevent the achievement of, the fund’s investment objective; and
  2. the pricing process adopted by the management company should allow a clear identification and quantification of all costs charged to the fund.

NCAs are expected to require that management companies develop and periodically review a structured pricing process to ensure that they appropriately supervise that investors are not charged with undue costs. The pricing process should address whether the:

  • costs are linked to a service provided in the investor’s best interest;
  • costs are proportionate compared to market standards and to the type of service provided;
  • fee structure is consistent with the characteristics of the fund;
  • costs borne by the fund, including those paid to third parties (e.g.: depositary), are sustainable;
  • costs ensure investors’ equal treatment and are not of material prejudice to the interests of any class of unit holders or potential unit holders;
  • duplication of costs is avoided and costs are properly separated and accounted for;
  • a cap on fees (e.g.: subscription/redemption fees), if any, is applied and clearly disclosed to investors;
  • the performance fee model and its disclosure is compliant with the ESMA Guidelines on performance fees (in cases where a performance fee is charged);
  • costs are clearly disclosed to investors in line with applicable EU and national rules; and
  • the pricing process and all charged costs are based on reliable and documented data.


NCAs are expected to incorporate the review of management companies’ pricing processes in the different stages of their supervisory activity and the Briefing sets out the aspects that NCAs should take into account in this context, namely:

  • cost disclosure and transparency; and
  • business conduct, strategic risk and reputational risk;

NCAs should also monitor that the management company develops a pricing process that:

  • clearly sets out responsibilities among the management bodies of the firm in determining and reviewing the costs charged to investors;
  • in case of the existence of conflicts of interest, ensures that the risk of damage to investors’ interest will be prevented;
  • is clearly documented and periodically reviewed.

The Briefing also sets out the expected outcomes in instances where an NCA identifies instances of investors being charged undue costs including:

  • investor compensation, where allowed under the national provisions;
  • reduction of fees;
  • review of disclosure documents;
  • communication of good and poor practices by NCAs to market/stakeholders/press, which should assist in acting as a deterrent against managers charging undue costs to investors.


As stated above, while the Briefing is non-binding, we expect that the CBI will fully comply with the relevant requirements and management companies should take the necessary measures to put in place a pricing process that complies with those requirements.

In particular, the Briefing is the latest in a series of measures demonstrating that the CBI is in lock-step with ESMA as regards concerns about the costs associated with collective investment schemes, including regarding performance fees and closet indexing.  Speaking in November 2019, Gerry Cross, Director of Policy and Risk at the CBI commented that ESMA’s work in the areas of fee and performance transparency, was:

“aligned with the Central Bank’s point of view as we believe for investors to have trust in capital markets and to make informed choices about where to put their money, comprehensive and comparable information on costs and performance of investment products is key.”

Moreover, both ESMA and the CBI have taken measures over the last few years to address performance fees and closet indexing, again indicating a commonality of concern in the area of costs and charges. For example, regarding performance fees, at the end of May last year, the CBI codified its guidance on UCITS Performance Fees in Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1))(Undertakings for Collective Investment in Transferable Securities) Regulations 2019. Subsequently, in April 2020, ESMA published its final Guidelines on performance fees in UCITS and certain types of retail AIFs with the aim of harmonising the way fund managers charge performance fees to such funds, as well as the circumstances in which performance fees can be paid. See our briefings here and here.

Regarding closet indexing, in July 2019, the CBI published the outcome of a review of UCITS funds on closet indexing in the form of a “Dear Chair” letter. In the letter, the CBI highlighted key supervisory issues identified from the review and set out certain actions to be taken by UCITS to mitigate these issues.  See our briefing here.  For its part, at the end of March 2019, ESMA published revised Q&A setting out how it expects UCITS management companies to comply with the disclosure obligations relating to benchmarks and past performance set down in Commission Regulation (EU) No 538/2010.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.