Pressure growing for further EU legislative action targeting price transparency and competition
For UK funds, fund charges have become a more contentious topic since the FCA’s Asset Management Market Study concluded in June 2017 that the sector’s active funds provide little value for money to retail investors. That contention has come into sharper focus at a European Union level, demonstrated recently by the reported comments of the Chief Executive of a prominent think-tank at an event organised by the European Commission.
Presenting at a public hearing entitled “Making the capital markets union work for retail investors”, on the 29 June, Karel Lannoo of the Centre for European Policy Studies (CEPS) appealed to the European Securities and Markets Authority (ESMA) to “intervene much more” with funds offering products with excessively high charges, even to the point of using its powers under MiFID2 to temporarily ban such products for up to three months. Going even further, Mr Lannoo also opined that ESMA’s powers of intervention be enhanced by legislation that would allow it the ability to more frequently strike down manifestly unfair fee structures.
Commentators may dismiss such comments as sabre-rattling, but the context in which Mr Lannoo’s comments were made is worth noting. In October 2017, ESMA published research revealing that between 2013-2015, fees, charges and inflation reduced investors’ gross returns by an average of 29%, and disproportionately so for retail as against institutional investors. In April 2018, the European Commission found that complex, fragmented and excessive fee structures across European funds are preventing the effective operation of an EU financial services market sufficient to enable retail investors to invest savings rather than hold them on deposit. In addition, ESMA continues to conduct a probe on fund fees and is due to deliver initial reports at the end of the year.
The indications are that post-MiFID2 the asset management industry should remain watchful in Europe (as well as in the UK) for further measures designed to curb excessive fund charges, which ESMA’s study could well recommend at its close at the end of 2018. In the UK, the FCA’s Asset Management Market Study has given the issue of fund charges separate momentum and impetus. Whether funds in the UK also need to be mindful of ESMA’s findings is likely to depend on Brexit arrangements, with it very unlikely that new European legislation will pass into law between the end of 2018 and the UK’s leave date in March 2019.
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