AGEFI Luxembourg - septembre 2021

AGEFI Luxembourg 34 Septembre 2021 Fonds d’investissement ByGéraldineLÉONARD,Counsel&DavidMAJZOUB, Associate at Arendt &Medernach M uch like the Financial Conduct Authority (FCA) in the UK, ESMAhas been increasingly fo- cusing its attention on the costs and fees of investment funds. ESMAhas identified costs and fees charged by fundmanagers as one of the new “Union Strategic Super- visory Priorities”, stating that this area was a key part of investor protection and that unfair and disproportionate costs and fees would be at investors’ detriment and affect investors’ trust in financial markets (1) . As part of its action to foster convergence on this topic across the EU, ESMA launched, in January 2021, a Common Supervisory Action (“ CSA ”) on the supervision of costs and fees for UCITS, in co- ordination with the National Competent Authori- ties (NCAs) of all EUMember States. Need for convergence across the EU While the UK “value for money” initiative was purelydomestic anddrivenby the need to increase competition where market forces alone did not drive good outcomes for investors, the CSA is co- ordinated by ESMA at the level of all 27 Member States and is driven by the need to increase conver- gence across the EU as regards the supervision of cost-relatedprovisions in theUCITS framework in- cluding the notion of “undue” costs which is inter- preteddifferentlydepending on theMember State. ESMA considers that the lack of convergence may hamper competition in theEUandmight lead todif- ferentlevelsofinvestorprotectionacrosstheEU.This topic is deemed all the more important as costs and fees have a significant impact on investor return (2) . Tools deployed by ESMA to foster convergence In response to this need for convergence, on 4 June 2020, ESMApublished its Supervisory briefing on the supervision of costs in UCITS and AIFs (the “ Supervisory Briefing ”) introducing among oth- ers a number of criteria to identify undue costs within the meaning of the UCITS and theAIFMD frameworks. On 6 January 2021, the CSAwas launched. Its ob- jective is to assess the compliance of UCITS man- agement companies with the relevant cost-related provisions, including the obligation not to charge undue costs (3) , taking into account the guidancepro- vided by the Supervisory Briefing published in 2020. AIFMs are concerned by the Supervisory Briefing but are outside the scope of the CSA. As part of the CSA, in March 2021, NCAs sent out questionnaires (the “ CSA Questionnaires (4) ”) to a number ofmanagement companies under their su- pervision. The CSAQuestionnaires had to be com- pleted by the management companies selected for all the UCITS they manage in the EU. No single supervisory model for costs and fees Despite its action to foster convergence, ESMA re- mains neutral to the supervisory approach under- taken at national level for supervising fees and costs. In the Supervisory Briefing, ESMAhadmen- tioned two potential models: - setting-up a “white list” of fees and costs being a limitative list of fees and costs deemed permissible from a regulatory standpoint, and all costs outside of such list being considered as undue costs; and - determining the features that costs and fees should meet to be deemed acceptable from a regulatory standpoint. ESMA acknowledged the merits of both models but does not express any preference. A variety of supervisory models regarding costs and fees may continue to exist within the EU, subject to the ap- plication of the guidance set out in the Supervisory Briefing. Identification of “undue” costs To determine whether any “undue costs” are charged, ESMA requires a much more complex analysis than merely assessing whether fees and costs are “due” fromapure contractual perspective. Best interest of the fund or its unitholders In its SupervisoryBriefing, ESMAstates that « the no- tion of undue cost should be primarily assessed against what should be considered the best interest of the fund or its unit holders ». Thequestionofwhether costsor fees constitute due or undue costs is closely tied to the question of whether the costs or fees are incurred in the best interest of the fund or its investors. Examples of specific criteria mentioned by ESMA for the identification of “undue” costs The ESMA Supervisory Briefing lists a number of criteria to be taken into account to identify “undue” costs. The criteriamentioned by ESMAinclude, for example (5) : (i) The proportionality of the costs tomarket stan- dards and the type of service provided . To assess this, ESMAsuggests using a table displaying costs of funds with similar investment strategies and characteristics in order to detect outliers. It is expected that an increasingnumber ofmanage- ment companieswill start to assess the proportion- ality of costs and fees to market standards using such a benchmarking method. Challenges may arise in this respect in determining a sufficiently large and relevant peers group. (ii) The consistency of the fee structure with the characteristics of the fund . ESMA states that « higher costs would normally be charged to funds with more complex investment strategies/type of assets » and that « there should be a balance between the complexity of the activities performed and the costs borne by in- vestors ». For instance anactivelymanaged fundwill typically charge higher fees than a passively man- aged fund. In line with this criterion, management companies were asked in the CSAQuestionnaires to describe how they justify the level of ongoing charges charged to the UCITS and unitholders taking into account the strategy of the fund and its risk/return profile or the level of activity against the reference benchmark of the fund. Management companies will need to consider whether the fees charged to the UCITS they man- agedare justifiedby the characteristics of theUCITS (especially where the fees appear to be generally higher than those of other seemingly similar funds). (III) The sustainability of the costs borne by the fund, including those paid to thirdparties, taking into account the expected net return of the fund, its risk profile and investment strategy . The term sustainability in this context is linked to the ability to maintain an appropriate fee structure as time passes and circumstances or expectations evolve. Certain questions of theCSAQuestionnairewould imply that when a fee structure proves to be no longer sustainable, it would need to be reviewed (6) . Need to establish a structuredpricingprocess The Supervisory Briefing repeatedly mentions the need for management companies to put in place a pricingprocess addressing the criteria set out in the Supervisory Briefing for the identification of “undue” costs. Such pricing process should allow a clear identifi- cation and quantification of all costs charged to the fund. The pricing process should clearly set out re- sponsibilities among themanagement bodies of the management company indetermining and review- ing the costs charged to investors and, in case of conflicts of interest, it should ensure that the risk of damage to investors’ interestwill be prevented. The pricing process must also be clearly documented and periodically reviewed. In its website communication dated 25 June 2020, the CSSF stressed the need to put in place a struc- turedpricingprocess and referred to it as a « require- ment ”.Management companieswhichdo not have such a structured pricing process in place yet shouldwork on establishing it. The exact formof such structured pricing process is not expressly specified in the Supervisory Briefing. Weunderstandthatitcouldtaketheformofonepol- icy or a set of policies and procedures. For what it’s worth, the CSAQuestionnaires askedmanagement companies to provide “ all relevant written policies and procedures thatwill enable a supervisory assessment of the respondent’s pricing framework ”. Possible outcomes in case undue costs are revealed ESMAstates that thematerialisationof undue costs may lead to the following actions: a) investor compensation,where allowedunder the national provisions; b) reduction of fees; c) review of disclosure documents; d) communication of good and poor practices by NCAs to market/stakeholders/press. What to expect in Luxembourg The concrete impact and potential outcome of the Supervisory Briefing and the CSA is currently still unknown. As a first step, we would expect that the CSSF re- quests management companies to implement a pricingpolicy, basedon the criteria set out in the Su- pervisory Briefing. At this stage, we would hence strongly recommend management companies to put in place a pricing process and to review the fee structure of the funds theymanage inorder to iden- tify any potential deficiencies in light of the Super- visory Briefing. More generally, it is worth noting that fees and costs are already a topic of scrutiny for the CSSF in the context of the ongoing files (7) . 1) ESMA’s press release of 13 November 2020, 2) ESMA first Annual Statistical Report on the Performance and costs of retail investment products in the EUof 10 Janu- ary 2019 3) Article 22(4) of Commission Directive 2010/43/EU (UCITS Level 2Directive) provides thatMember States shall require management companies to act in such a way as to prevent undue costs being charged to the UCITS and its unitholders 4) The CSAQuestionnaires contain a number of questions regardingefficientportfoliomanagementtechniquesbutthis article does not address this aspect of the CSA 5) The list of criteria included in this article is not compre- hensive.We encourage you to read the Supervisory Briefing in its entirety. 6) The CSAQuestionnaires ask respondents (i) whether they takeintoaccountthefinancialsustainabilityofthecostscharged to investors not only ex ante, but also based on the actual ex post investment results and (ii) whether they review the level ofcostsif,overagivenperiodoftime,theexpostreturnsofthe funddiffer significantly fromthe expected return. 7) See in particular the “Fund Pre-Inception Readiness Re- view” questionnaire published by the CSSF on 30 July 2021. Supervision of costs and fees for UCITS: time to review your pricing process & fee structure Par Alice WANG – Gérante du fonds Quaero Capital Funds (Lux) – China L es entreprises privées en Chine sont florissantes. Elles jouent un rôle crucial pour le bien du pays mais il est important qu’elles restent dans les rangs. Aujourd’hui, les en- jeux s’étendent aux sociétés co- tées sur les places boursières internationales, et particulière- ment les entreprises liées à Inter- net. Jusqu’où le gendarme de Beijing va-t-il aller ? Jeme souviens de la panique des inves- tisseurs occidentaux devant ce qui était perçu alors comme la mort de l’ «entre- prise privée» enChine. On était en 2017. WuXiaohui, le président emblématique d’Anbang, venait d’être arrêté, soup- çonné de détournement de fonds. Le puissant conglomérat privé, troisième assureur du pays, avait été placé sous tutelle de l’Etat. Les craintes de l’Occident étaient cepen- dant infondées. L’ «entreprise privée» n’était pas morte. Elle est encore bel et bien vivante, elle est même florissante. La bonne santé des entreprises privées ne devrait cependant pas laisser de doute sur la direction qu’elles doivent suivre. L’Etat les laisse se développer car elles remplissent une mission cruciale pour la nation. Nous devons nous rappeler que les en- treprises privées représentent 80% de l’emploi urbain en Chine, 90% de la création d’emplois, et que nous esti- mons que la tolérance pour les taux de chômage en Chine serait d’environ 7% avant que l’on commence à voir des troubles civils. Dans le même temps, la Chine se désendette, nous avons assisté à une augmentation significative des écarts de crédit du côté des entreprises d’État et à des défaillances trèsmédiati- sées de mastodontes comme Ever- grande. Il ne s’agit certainement pas d’une tentative de nationalisation oude transfert du soutien vers l’État. Il s’agit plutôt d’un effort global pour réduire le risque dans tous les domaines et là où il s’est le plus accumulé. Prospères et florissantes, ouimais l’Etat veille à cequ’ellesne s’écartent pas du cheminqu’il a tracé Dans la pensée chinoise, il est clair que l’orgueil et la cupidité démesurés d’une entreprise peuvent mettre en péril la sé- curité et la stabilité d’un pays. Il revient donc au gouvernement de rester vigi- lant et de s’assurer que rien ne mette en péril sa «grande stratégie», afin que le pays devienne plus fort en tant que na- tion tout entière, et qu’aucune entité ne puissemettre le reste dupays endanger. Lorsque je faisais mes études à Yale, on discutait souvent du fait que l’Occident, après la guerre froide, semblait avoir perdu sa «grande stratégie», en partie à cause de cycles politiques plus courts et plus divisés, et en partie à cause de la complaisance. Les Chinois disposent d’une feuille de route très claire qui suit la direction stra- tégique tracée par un leader incontesté qui s’assure que la nation tout entière est dans les rangs. À l’époque d’Anbang, la faiblesse de la monnaie était une préoccupation ma- jeure pour le gouvernement ; Wu Xiao- hui s’apprêtait à signer un deal de 14 milliards deUSD ; une telle sortie de ca- pitaux constituait une menace pour la stabilité du pays ; il s’agissait de taper sur les doigts. Lamise sous tutelle d’An- bang a été une frappe chirurgicale des- tinée à servir d’exemple. De ce point de vue, il s’agit d’une mesure à fort retour sur investissement : conformité maxi- male, intervention minimale. Aujourd’hui, les deux questions clés sont la sécurité nationale et la sécurité des données Dans le cas de Didi, le transport est une question de sécurité nationale, et il sem- ble que Didi, ou Uber, dispose de don- nées extrêmement exhaustives. Il est compréhensible que le gouvernement ne souhaite pas qu’un état étranger ait accès à ces données de quelquemanière que ce soit. Le deuxième point sensible concerne la confidentialité des données. Ce pro- blème n’est pas propre à la Chine ; les gouvernements du monde entier se rendent enfin compte que les entre- prises qui détiennent toutes ces don- nées ne sont plus des start-ups. Elles comptent parmi les organisations les plus puissantes du monde. Puissantes au point d’avoir influencé le résultat d’électionsmajeures (on pense bien sûr au rôle de Facebook ou Twitter lors du vote sur le Brexit et de l’élection de Donal Trump). La situation est pour le moins ironique ! Seul un gouvernement qui possède autant de données sur sa propre popu- lation peut comprendre l’étendue du pouvoir de ces plates-formes. Seul un gouvernement qui contrôle réellement la propagande peut comprendre le vé- ritable danger des «algorithmes im- partiaux». Le public a accepté le fait que des en- treprises chinoises soient cotées dans des pays étrangers, avec des action- naires ou des gouvernements qui pourraient avoir le droit ou l’accès à leurs données – tout comme la montée sans entrave des monopoles de l’inter- net. Dans l’esprit de Pékin, il est certai- nement temps de les mettre au pas. Nous restons à l’écart des grands ac- teurs de l’Internet dans le court terme mais pensons que la vague de pression réglementaire chinoise en est à sa fin plutôt qu’à son début. Les entreprises privées en Chine, jusqu’où la liberté?