On 4 June 2020, the European Securities and Markets Authority (ESMA) published a supervisory briefing (Briefing) aiming to reduce the risk of regulatory arbitrage and to ensure equal levels of investor protection regarding cost-related regulations under the Undertakings for the Collective Investment in Transferable Securities (UCITS) regime and Alternative Investment Funds (AIFs).
The briefing is also aimed at providing market participants with indications of NCAs’ expectations and compliant practices regarding the cost-related provisions of the UCITS and AIFMD frameworks, a very welcome development considering the ambiguous and onerous nature of certain policies adopted by NCAs in this area.
This initiative was prompted by ESMA’s first annual statistical report on costs and performance of retail investment products, which demonstrated a significant impact of costs on the final returns for investors under UCITS and AIFs. The analysis also indicated that there is a lack of convergence in the way the notion of “undue costs” is interpreted across the EU, the admission that is often considered ambiguous by NCAs and more broadly the supervisory approach to cost-related provisions between UCITS and AIFs.
Inevitably differences in the regulatory rule book of cost oversight for managers gives an opportunity for arbitrage and this is generally a practice that ESMA is keen to stamp out, especially when retail investors are involved. Such arbitrage is also considered to hamper the holy grail of ESMA’s remit, ie the promotion of the orderly markets and rules-based competition in the EU single market. Lastly, ESMA is keen to stamp out disparities of NCA regulation and oversight between the member states.
Moving forward the Briefing should be considered good bedtime reading for any asset manager looking to set up an AIF or UCITS in the short to medium term.
ESMA’s press release can be found here.
The Briefing can be found here.
ESMA’s first annual statistical report can be found here.