ESMA publishes follow-up report to the peer review on the Guidelines on ETFs and other UCITS issues

ESMA has released a follow-up report on the Guidelines on ETFs and other UCITS issues. The report assesses the progress made by NCAs in strengthening their supervisory practices and improving internal and external guidance since 2018.
According to the report, NCAs have enhanced their supervisory practices and performed effective supervisory work in the area of ETFs and UCITS. They have implemented measures to address the concerns raised in the 2018 peer review, such as improving disclosures to investors and addressing operational aspects related to costs, fees, and revenues for EPM techniques.
ESMA highlights ongoing concerns regarding the level of costs for some UCITS utilizing EPM techniques. Specifically, it points out cases where costs charged to certain UCITS are significantly higher compared to others, especially when EPM techniques are conducted by the UCITS Management Company or related parties. ESMA emphasizes the need for continued monitoring by NCAs to address this investor protection concern.
The report focuses on the assessment of specific NCAs, namely BaFin (Germany), EFSA (Estonia), CSSF (Luxembourg), AMF (France), CBoI (Ireland), and their respective compliance with the Guidelines. It examines their responses to the peer review findings and recommendations. In addition, it addresses the supervisory work carried out by NCAs in relation to the attribution of revenues and costs derived from securities lending activities by UCITS.
ESMA acknowledges the progress made by the NCAs, particularly BaFin, EFSA, and CSSF, in addressing the identified areas of improvement. It also notes that all relevant NCAs reacted to a research paper by Better Finance, which raised concerns about the variation in gross revenues generated by securities lending transactions returned to UCITS investors.
The report concludes by emphasizing the importance of continued monitoring by NCAs to ensure effective application of the Guidelines and the implementation of appropriate supervisory practices. It suggests that further work may be needed at the EU level, particularly in areas related to costs, fees, and revenues for EPM techniques and instruments.