How to respond to the CBI’s recent ‘Dear Chair’ letter on costs and fees in UCITS and AIFs

21 April, 2023

In 2021, the Central Bank of Ireland (CBI) reviewed the costs and fees charged to Undertaking for Collective Investment in Transferable Securities (UCITS). This forms part of the European Securities and Markets Authority’s (ESMA) Common Supervisory Action (CSA), which assesses compliance with cost-related provisions in the UCITS framework.

The CBI’s letter highlights the main findings of the inspection, sets out the CBI’s expectations and identifies key actions to be taken by firms. The CBI also expects Alternative Investment Fund Managers (AIFMs) to consider the findings and actions with respect to the costs and fees charged to AIFs.

Key findings

1. Lack of policies and procedures on costs and fees

A significant majority of firms reviewed as part of this CSA sample failed to demonstrate that they have sufficient pricing governance structures in place.

CBI expectations

The CBI expects all firms to have 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.

2. Periodic reviews of costs and fees

Most firms reviewed failed to evidence that their UCITS costs and fees structure was reviewed regularly.

CBI expectations

The CBI expects that all new and existing costs are reviewed annually, taking into account the investment objective and strategy of the fund, the target and actual level of performance achieved and the role and responsibilities of service providers.
Throughout the fund’s life, firms should ensure that the costs and fees are calculated fairly and equitably, serving the best interests of investors. This should be evidenced as part of the review process.
The viability and competitiveness of the fund should be considered as part of this review in terms of the UCITS being capable of providing a positive return to investors.
Periodic independent reviews of costs and fee structures should also be performed to ensure that they continue to offer investors a return commensurate with the fund’s risk profile.

3. Design and oversight of fee structure

In most cases, firms did not have documented pricing policies and processes in place for determining the pricing structure of the funds.

CBI expectations

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’s analysis identified a number of firms that retained significantly more revenue (between 30-40%) than their peers from their securities lending programmes. In addition, the CBI’s analysis demonstrated that a significant majority of firms utilising EPM did not have formalised policies and procedures with sufficient detail in place covering EPM activities.

CBI expectations

The CBI expects that all fee arrangements with respect to securities lending programmes are compliant with ESMA’s expectations and are clearly disclosed within the fund prospectus or supplements, as well as being captured in the policies and procedures of the 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 the fund utilises.
The CBI expects that fee arrangements relating to all EPM activities should be reviewed as part of the annual costs and fees review.

5. Fixed Operating Expense (FOE) models

Several firms in the CSA sample utilise FOE models and confirmed to supervisors that they retain any excess fees when the expenses of the UCITS are below the FOE model cap.

CBI expectations

The CBI expects that, where a FOE model is used to provide investors with protection and certainty with respect to the fees 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 expects FOE models to be reviewed as part of the annual costs and fees review.

6. Non-discretionary investment advisor charge

Supervisors identified several cases where the non-discretionary investment advisor was paid a greater fee than the delegated investment manager.

CBI expectations

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.
With respect to the fees paid to non-discretionary advisors, firms should ensure that the fee arrangements are appropriate for the services provided.

Required action

The CBI requires all firms that manage both UCITS and AIFs to conduct a gap analysis of the findings and expectations outlined in the CBI’s letter. Where appropriate, they must then put a plan in place by the end of Q3 2023 to address any gaps identified.

We are here to help you

At PwC, we have the knowledge and experience to help you conduct an independent gap analysis of your documented fund pricing and fee structure policy. We can also help you perform a peer analysis of fee structures and levels, and review the effectiveness of your reporting structure for monitoring fund fees and costs. Contact us today.