A View on possible new regulations for mutual funds in the EU

A View on possible new regulations for mutual funds in the EU

Now that the new European Parliament has been elected and the new members of the European Commission have settled into their new roles, market participants will become curious about what to expect from the new EU government regarding mutual funds. I expect that the European Securities and Markets Authority (ESMA) will start another review of the fees and expenses in the European fund industry, with a focus on performance fees and additional expenses that are not covered within the management fee. These types of fees are handled differently by the local authorities, which may hinder competition in the European fund industry.

That said, I am in favour of such an initiative, as that would open up a level playing field in all EU countries and would increase protections for retail investors. A good example of such regulations regarding performance fees is in Germany, where many funds registered in other European countries (even if they are UCITS compliant) cannot register for sales because rules regarding fee disclosure are so much more robust.

Another example of a fee that may come under scrutiny is the service fee that funds domiciled in France can charge their customers. The French regulator allows funds to charge this fee without disclosing it, even though all services within the fund management and administration process should be covered by the respective disclosed fees; i.e. the management fee, etc.  

In addition, I am sure that the sustainable finance initiatives will have their place in an upcoming review of the UCITS regulation and will force all funds registered for sales in the EU, and obviously the respective fund management companies, to integrate environmental, social and governance (ESG) criteria in their fund management process and to disclose how the respective fund is performing with regard to upcoming EU taxonomy and/or the Sustainable Development Goals (SDGs) of the United Nations.

I could also imagine that ESMA may shine a spotlight on securities lending since it looks like this modern portfolio management technique is not only used to manage portfolios efficiently, but also to enhance the revenues of the fund promoters.

Even as these few topics seem to be easy to achieve for the new European Commission, it might be hard to bring these topics to life since the industry will try to stop as much of these initiatives as possible to protect their revenues. I hope that the new commission will not allow the European asset management industry to get too much influence on the new regulations, as this would mean that investor protection will once again fall behind the interests of the fund promoter.