Retail investor fund costs need oversight: ESMA

European policymakers are calling on regulators to devote further attention to the costs that retail investors face from the investment fund industry.

The European Securities and Markets Authority (ESMA) published a report detailing the results of a coordinated compliance review of investment fund costs and fees that was carried out by regulators in 2021.

The report finds that there’s “room for improvement” in the oversight of industry costs, particularly among smaller asset managers.

It also found compliance issues with the rules on fund managers delegating cost control; conflicts of interest at fund managers involving related-party transactions; different approaches to whether costs are considered excessive or not; disclosure failings; and securities lending arrangements that deliver “unfavourable results” for retail investors.

In the report, the regulator highlighted the importance of supervision to ensure that investors are not charged “undue” costs, given the significant impact on investors’ returns.

And, it stressed that investors should be compensated in cases where they are hit with excessive costs.

ESMA also called for regulators to consider taking enforcement action to address breaches involving fund costs, citing the issue’s importance to investor protection.

“Costs remains a critical component when evaluating the ultimate benefits of an investment and, as ESMA has shown in its recent statistical reports, they remain higher for retail investors than for institutional investors,” said Verena Ross, chair of ESMA, in a release.

“In order to promote retail participation in the fund market, continued supervisory attention is needed on the topic of costs and fees in investment funds,” she added.

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.