The European Securities and Markets Authority (ESMA), which oversees the fund sector, has started to flex its regulatory muscles.

Founded in 2011 in response to the global financial crisis, it has been active in debates recently around the post-Brexit landscape, fund fees, and the overall regulatory framework. So conference was keen to hear the speech given by Steven Maijoor, ESMA’s Chair on Wednesday afternoon.

He started with some bracing words about fund fees. Mentioning ESMA’s first Annual Statistical Report published in January, he said a clear conclusion was that “costs are a significant drain on fund performance.” In particular, retail investors are paying substantially more than institutions he added. He cited the case of the performance of the average equity fund over ten years, with gross returns of 7.3% per annum being cut to 4.4% after fees are taken into account. Yet for institutions the fee cost was about half as much.

Moreover, Mr Maijoor added that passive, index-tracker funds had much lower fees than actively managed funds. This is as well as average passive equity funds over ten years outperforming actively managed products by 5.5%-6.0%. “This raises fundamental questions about active strategies and ESMA and we will report on this around year end,” he said.

He had praise for the Mifid II and Priips regulations which “strengthen requirements around cost transparency,” thus adding to downward pressure on fees. However he admitted there had been teething troubles with Priips, particularly regarding the aim of a achieving common comparisons between the performances of fund, banking and pension products. He said a public consultation is scheduled for Q3 2019, and that recommendations for fundamental reform of Priips could result.

He reminded the audience that work on costs has the ultimate aim of giving funds a bigger role in how people save and how capital is fed into the wider economy. “This is an opportunity for the fund sector,” he concluded.

 

This article is part of our ALFI EAM '19 Newsflash. To start receiving our mailings, subscribe here.

(Image source: ALFI Funds)

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