RegSol Blog

Central Bank of Ireland Industry Letter on costs and fees to fund managers

April 2023

On 24th March 2023, the Central Bank of Ireland (“the CBI”) published an industry letter on the 2021 Common Supervisory Action (“CSA”) on costs and fees of UCITs. The letter outlines the CBI’s findings from the CSA and supervisory expectations and key actions for fund managers.

AIF managers should be aware that while the CSA concentrated on the costs and fees of UCITS, the CBI expects that AIFMs will also take the findings and actions in the Letter into account with respect to the costs and fees charged to AIFs.

Scope of the CSA

The CBI undertook the review as part of a European-wide CSA established by ESMA. The CBI assessed UCITS management companies and self-managed investment companies (“Firms”)’s compliance with relevant cost-related provisions in the UCITS framework.

The CSA examined whether Firms, when charging costs to the fund/unitholders:
  • comply in practice with the cost-related disclosure provisions set out in UCITS legislation;
  • act honestly and fairly in conducting their business activities and do so with due skill, care and diligence and in the best interests of their underlying investors; and
  • do not charge investors with undue costs.

CBI Findings

The CBI found several flaws in how funds cost and fee structures were established, which, according to the CBI, raises the likelihood of unfair expenses being imposed on investors. The CBI highlights that while defining the cost and charge structure, firms must consider their duty to act in the best interests of investors, supported by rules and procedures and monitoring from senior management.

Supervisory Expectations

  1. Policies and procedures on costs and fees

    The CBI expects that all Firms have structured and formalised pricing policies and procedures in place, with clear oversight and approval from senior management., enabling the transparent identification and measurement of all costs charged to a fund.

  2. Periodic review of costs and fees

    The CBI expects that all costs are reviewed annually, taking into account the investment objective and strategy of a fund, the target and actual level of performance achieved and the role and responsibilities of service providers. the viability and competitiveness of a fund should be considered as part of the costs review.

  3. Design and oversight of fee structure

    The CBI found that there was an over-reliance by Firms on the assessments made by delegate investment managers for determining the pricing structure of the funds, with limited engagement in the process by some Firms. 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 expects that all fee arrangements regarding securities lending programmes are compliant with ESMA’s expectations and are clearly disclosed within a fund prospectus or supplements as well as being captured in the policies and procedures of a Firm.

  5. Fixed Operating expense (“FOE”) models

    The CBI expects that in cases where a FOE model is being used to give investors protection and certainty about the fees being incurred, those investors should be fully aware of all costs and the model should be calibrated so that any difference is minimised and that investors are not charged excessive costs.

    The CBI also expects that FOE models should be reviewed as part of the annual costs and fees review. The CBI acknowledges that this will be an area of focus un its future supervisory engagements.

  6. Non discretionary investment advisor charge

    The CBI expects that the investment advisor's position will be complementary to the investment managers and non-discretionary in nature. Firms must make sure that the pricing arrangements for non-discretionary advisors are reasonable for the services being rendered.  The CBI expects managers of both UCITS and AIFs to conduct a gap analysis against the findings and expectations detailed in the Letter and where appropriate, put in a place a plan by the end of Q3 2023 to address any deficiencies identified.

The full Letter can be found at:
Industry Letter on Common Supervisory Action on the supervision of Costs and Fees of UCITS