Europe’s financial services watchdog says a number of national regulators – including in Luxembourg, the UK and Ireland – need to ensure investors receive money back from Ucits funds that operate efficient portfolio management (EPM) techniques.
The call from the European Securities and Markets Authority (Esma) is one of a number of changes that national regulators should do to improve their supervision of Ucits engaging in EPM. EPM refers to methods, such as the use of derivatives, to control risks and costs.
The requirement that national regulators should ensure that all net revenues resulting from EPM are returned to investors was particularly relevant for Germany and Luxembourg regarding revenue splits between investors, fund managers and their service providers.
Further to this, and mainly in Estonia and the UK, Esma also said there should be a more “systematic and formalised” review of EPM disclosures that are required for investors to better understand EPM processes within a fund, including related risks, costs and fees.
Also, all regulators must provide more comprehensive internal supervisory guidance on costs, fees and revenues regarding EPM.
Another call was to revise existing national exemptions to the guidelines on collateral requirements granted in the UK and Germany so that fund assets can only be used for EPM purposes where Ucits receive high-quality and liquid collateral in accordance with Esma standards.
Steven Maijoor, chair of Esma, said: “This is an important stock-take revealing both good practices and areas where improvements are needed. Ensuring that the use of efficient portfolio management by Ucits is sound and not detrimental to the protection of investors, is important.
“In order to increase supervisory convergence in this important area, Esma has asked
NCAs [national competent authorities] to amend their supervisory practices in specific areas – as a true level playing field is built on consistent application and supervision of the rules.”
Some good practices that Esma identified were in the area of data-driven supervision that helped regulators identify areas where resources needed concentrating.
Also, bespoke reporting tools were highlighted as a good practice by regulators, who used the tools to provide support to and augment oversight of Ucits and adherence to the guidelines.
Esma said a number of regulators had already informed the body of their intention to revise practices to address the findings and Esma said it will follow up on its findings in 24 months.
Ucits funds can use EPM in order to reduce risk and costs, or generate additional capital or income. EPM can include securities lending and the use of financial derivatives.
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