Introducing the Pricing Process: New ESMA Guidance on Fund Costs Reporting

The report’s purpose is to identify, quantify and assess all costs charged to the relevant fund.

New Regulatory Review Mechanism

The range of data that must be captured in the Pricing Process Report is extensive.  It will need to be to put in place and maintained for new and existing funds.

Ten Point Summary

1. Valid costs - are the costs necessary for the fund to operate in line with its investment objective?
2. Reasonable costs – are the costs in line with market standards (note here it suggests an example of a cost analysis table of peer funds)?
3. Appropriate costs – does the fee level correlate with the complexity of the fund's strategy?
4. Sustainable costs – are the costs aligned with expected returns?
5. Fair costs – do the costs result in material prejudice to any class of investor?
6. No duplication of costs – are costs properly and separately accounted for?
7. Capped fees – are these present and if so are they clearly disclosed?
8. Performance fees – are these aligned with ESMA's guidelines, if relevant?
9. Disclosure of costs – are all costs clearly disclosed in line with applicable regulatory requirements?
10. Validation of costs – can the calculations of costs be independently verified?

Where a regulatory review of this process identifies undue costs being charged, ESMA expects the following to be some of the options considered: (i) investor compensation, where allowed; (ii) a reduction in fees; (iii) a review of offering documents; or (iv) national regulator public communications on good / poor practices.

Next Steps and Timing

The Briefing is non-binding and NCAs are not required to indicate formally whether they will comply with it or explain the reasons for not doing so.

In theory, it will require some form of affirmative action by the Central Bank (and the other NCAs) before the guidance will apply to UCITS management companies and AIFMs. Further, it would be reasonable to assume that any such action would be factored into the timing of the application of the requirements.

Further Information

If you would like further information, please liaise with the below or your usual Maples Group contact.