European regulators recommend action on investment fund costs

European securities regulators are calling on policymakers to legislate against overpriced investment funds.

In an opinion to the European Commission, the European Securities and Markets Authority (ESMA) recommends clarifying the notion of “undue costs” in securities law, as a means to enhance investor protection and better guard against excessive investment fund costs.

The opinion followed a compliance review by ESMA, which found divergences in how fund costs are treated in different markets.

Not only does the disparate regulation of fund costs pose a potential threat to investors, it allows for regulatory arbitrage and risks hampering competition, the regulator said.

“If we want to enhance retail investors’ participation in capital markets, we should ensure that the expected return of investment products isn’t impacted by undue costs,” said Verena Ross, chair of ESMA, in a release.

To that end, ESMA is calling on the European Commission to introduce legislative reforms that incorporate regulators’ supervisory expectations on fund costs, clarify the legal requirements in this area and harmonize the rules across markets.

“The proposal aims at preventing investors from being charged with undue costs and ensuring appropriate compensation for investors,” Ross said. “That investors get value for their money is even more important in the current market situation, with heightened inflation and tightening of financial conditions.”

The regulators’ submission comes against the backdrop of ongoing work by the European Commission on policy proposals that aim to “empower retail investors and enhance their participation in the capital markets,” ESMA noted.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.