May 16, 2018 / 9:17 AM / 6 months ago

EU watchdog says funds fee review will help investors

LONDON (Reuters) - The findings of a European Union review of mutual fund costs and fees due later this year will help investors make better choices in a sector whose performance is patchy in parts, a top EU regulator has said.

FILE PHOTO: Steven Maijoor, Chair of the European Securities and Markets Authority, attends the Asian Financial Forum in Hong Kong, China January 15, 2018. REUTERS/Bobby Yip/File Photo

Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), said the review may help shed light on why some “active” funds that charge more for selecting stocks, perform less well than cheaper “passive” funds that track a benchmark.

The bloc wants people to save more for their retirement as governments find it increasingly expensive to support an ageing population. The initial focus is on EU regulated mutual funds known as UCITS.

“By the end of this year we will deliver a review on UCITS costs and charges and their impact on long-term performance,” Maijoor told Reuters during a visit to London.

Costs and charges of EU funds can easily be double the charges in the United States, Maijoor said.

“Giving this information to retail investors helps them to make informed choices,” he said.

Passive investing has increased very substantially because of “persistent problems” with active strategies to outperform passive strategies.

“We are seeing in general that active investment strategies have trouble performing well. Taking into account costs and charges, they typically do not outperform passive investment strategies,” Maijoor said.

NEW KID ON THE BLOC

The EU introduced new transparency rules for retail and insurance based products in January, known as PRIIPs.

It requires firms to publish a key information document, or KID, in a standard format so that investors can compare products more easily.

Andrew Bailey, chief executive of Britain’s Financial Conduct Authority, said last month he was concerned that PRIIPs is not providing useful context for investors.

“There is evidence that funds, for instance from the U.S., are withdrawing from Europe to avoid the burden. I have also heard concerns about performance projections,” Bailey said.

Maijoor said it was too early to judge the performance of the new rules and that more time and evidence were needed.

“We need to better understand what are the issues around implementation,” Maijoor said.

ESMA is looking at “negative” transaction costs, which products come under the scope of PRIIPs, and scenarios of past performance of products.

“With many pieces of legislation, we have issued Q&As and guidelines to support implementation. I cannot exclude that could be happening here. From my perspective that would be business as usual,” Maijoor said.

Reporting by Huw Jones, editing by Louise Heavens

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