Experts reject fears new rules will push up fund fees
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European guidance calling for increased transparency from fund managers may not push up fees on low-cost exchange-traded funds as feared, several expert commentators and fund managers have argued.
A consultation paper from the European Securities and Markets Authority has caused a stir by implying fund managers of ETFs and other funds that are compliant with Ucits [Undertakings for Collective Investment in Transferable Securities] rules and that participate in securities lending will have to pour all profits back into the investment, rather than keeping some for themselves.
The Esma paper says: “As far as revenue-sharing arrangements are concerned, Esma recommends that all revenue, net of direct and indirect operational costs, should be returned to the Ucits.”
Later, it says of securities lending and liquidity risks: “Many fund managers keep part of the benefits of security lending; there is no clear rule about passing on these benefits to the investors of the Ucits ETF.”
While some commentators have speculated in the press that this could drive fees higher, others point out that if managers are still able to use returns to cover costs then this wouldn’t necessarily put upward pressure on fees.
However, Deborah Fuhr, partner at research and consulting firm ETFGI believes that if Esma indeeds requires fund managers to give back 100 per cent of security lending profits, it would not increase upward pressure on fees.
Specifically, she claimed the wording in the consultation calls for profits to be given back, implying fund managers could use returns to cover costs and therefore not need to push up fees.
She said: “They keep the costs so what gets delivered into the fund is the profit, so the fund performs better.”
Ms Fuhr added: “The bigger impact is really going to be on traditional Ucits funds. Most Ucits funds have entered into securities lending and traditionally haven’t been as transparent about that.”
Kevin McNulty, chief executive for the International Securities Lending Association, said in a statement that worries over rising fees are unfounded.
He said: “Esma’s guidance on securities lending is designed to create some clear principles that Isla fully supports: that securities lending programmes should be run for the benefit of the Ucits, and that fund managers should not be unduly compensated through the charging of additional fees where there is no explicit and valuable service provided.
However, he added: “There is nothing in the guidance that precludes a securities lending agent, be that fund manager, custodian or third party, from charging a commercial fee for their services. Such fees would be regarded as part of the direct and indirect costs which the guidelines state may be deducted from revenue.”