Update: UCITS Management Costs and Fees

PUBLISHED: 13th September 2023

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In a previous article, we analysed the Central Bank of Ireland’s key findings arising from its review of management costs and fees charged to UCITS and which were detailed in its Dear Chair letter published on 24 March 2023.

The Central Bank required Boards of Directors of UCITS funds to consider the contents of the letter and to ensure that costs and fees were being properly costed and charged to their funds. Although non-UCITS funds were not part of the review, it was stated that non-UCITS funds were expected to take note of these findings.

The deadline for reviewing and implementing any changes necessary is imminent: UCITS Boards should ensure their quarterly meetings both cover and record this review and decision-making by 30 September 2023.

Summary of Key Actions

Pricing Policies and Procedures

All funds should have in place structured, formalised pricing policies and procedures with clear oversight and approval from senior management that allows for the transparent identification and quantification of all costs charged to the fund.

Policies and Procedures to Design, Oversee and Review Costs and Fees Structures

Funds should have clear policies and procedures in place 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.

Annual Review of Costs and Fees

Annual reviews of costs and fees should be conducted.  Funds should ensure that costs and fees are calculated fairly and equitably, serving the best interests of investors and ensuring that the viability and competitiveness of the fund is considered, taking into account the investment objectives and strategies of the fund, its targets and actual level of performance achieved as well as the role and responsibilities of service providers.

Use of Efficient Portfolio Management (EPM)

All fee arrangements regarding securities-lending programmes should comply with ESMA’s expectations and should be clearly disclosed within the fund's prospectus or supplements and also its policies and procedures. 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 the fund is using.  Fee arrangements relating to all EPM activities should be reviewed as part of the annual costs and fees review.

Use of Fixed Operating Expense (FOE) Models

Where an FOE model is being used to provide investors with protection and certainty with respect to the fees being incurred, investors should be fully aware of all expenses included in such model.  In addition, the model should be calibrated so that any differential is minimised and that undue costs are not charged to investors.  FOE models should be reviewed as part of the annual costs and fees review.

Non-Discretionary Investment Advisor Fees

Noting that some investment advisors were being paid more than investment managers, the Central Bank is keen to ensure that the practices of the service providers of the fund were properly reflected in the fund’s documentation.  It is the Central Bank’s expectation that investment advisors, who do not have discretion on investment decisions, would not be paid more than the investment manager, who have responsibility for a fund’s investment decisions.  The fee arrangement should reflect this.

Further update: ESMA opinion

On 17 May 2023, ESMA published an Opinion “On Undue Costs of UCITS and AIFs”, which sets out suggestions to the European Commission on possible clarifications of the legislative provisions under the UCITS Directive and the AIFMD relating to the classification of “undue costs”.  Suggested amendments to AIFMD include adjusting Article 12 of AIFMD requiring AIFMs to maintain and operate a pricing process that (i) clearly demonstrates that all charged costs are due; and (ii) allocate clear responsibilities to the governing body of the AIFM for determining and reviewing the costs charged to investors.

Next steps

The Central Bank’s review was a call to action.  Fund boards must consider the findings and take action to put a plan in place by the end of Q3 2023 to address any gaps that are identified.  That deadline is 30 September 2023.

Our Asset Management and Investment Fund Team can advise on the implementation of the necessary procedures and policies and governance structures to ensure that the necessary annual review of costs and fees is completed.

For further information, please contact a member of our Team:

David Naughton, Katrina Smyth, Narita Woods, David Williams or Mina Dawood.

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