Below we summarise the material new obligations UCITS management companies and AIFMs (together, “Management Companies”) need to plan for.

New Undue Costs framework

Management Companies will be required to prevent undue costs from being charged to their funds and investors. Costs are “due” only if they:

• are disclosed in the fund’s prospectus or key information document (“KID”)
• are necessary for the fund to operate in line with its investment strategy or regulatory requirements
• are borne by investors in a fair way

Management Companies must conduct an annual assessment of whether undue costs have been charged. Where undue costs are identified, reimbursement to unitholders is mandatory without undue delay. Management Companies must take all reasonable steps to identify unitholders in order to reimburse any amounts unduly charged. Situations where undue costs have been charged must be reported to the home national competent authority (“NCA”), the depositary and the fund’s auditors.

NCAs will also acquire an explicit power to require fund managers to pay compensation to investors where undue costs have been charged.

Value-for-Money assessment for retail-facing funds

This is arguably the most significant new obligation for the funds sector. Management Companies must establish, maintain, operate, and review an effective Value-for-Money (“VfM”) assessment for any UCITS or AIF made available to retail investors for which a PRIIPs KID is required. Where a UCITS or AIF is sold to institutional investors only and is not required to produce a PRIIPs KID, the VfM requirement does not apply. The assessment must be conducted before the fund is authorised and maintained throughout its lifecycle.

The VfM assessment has two limbs:

• a clear identification and quantification of all costs and charges borne by retail investors, the fund’s performance, and any other material benefits
• a determination of whether those costs are justified and proportionate having regard to performance, qualitative features, the fund’s investment objectives and its marketing strategy.

Where marketing costs or inducements are included in the costs borne by investors, these must be separately identified and quantified.

Mandatory peer group comparison

The VfM assessment must include a comparison of the fund’s costs and performance against a peer group of comparable UCITS or AIFs. The peer group must include a representative number of comparable funds marketed in the relevant Member State(s) and, where feasible and proportionate, other Member States. Comparison must extend to individual cost components, not merely total costs.

Peer group eligibility criteria include recommended holding period, risk, investment strategy, marketing strategy, investment objectives, sustainability features and active versus passive management. Peer group data must be drawn from PRIIPs KIDs, ESMA cost and performance statistics, or data made available on a non-discriminatory basis by professional associations.

Where a fund’s costs and performance are at a “significant distance” from its peer group to the detriment of investors, the Management Company must conduct additional testing and provide a detailed substantiated assessment of how it will still deliver VfM. VfM assessments, including any substantiated assessments and remedial actions, must be provided to the relevant NCA upon request. If, following any remedial actions, VfM cannot be demonstrated, the fund may not be made available to retail investors.

Insurance product implications

Where a UCITS or AIF is used as an underlying investment option in an insurance-based investment product, the Management Company must make all relevant VfM assessment information available to the relevant insurance manufacturer. This creates a new information-sharing obligation that will require fund managers to coordinate closely with their insurance sector counterparties.

Management accountability

The board of the Management Company must define, oversee and be accountable for the adequacy and effectiveness of both the undue costs assessment and the VfM assessment. The compliance function must report VfM results and any remedial actions directly to the management body. This documentation must be made available to NCAs on request.

Expanded reporting obligations

Management Companies must report costs and charges (including inducements) borne by investors and fund performance data at fund level (or by share class, where cost structures differ) to their NCA as part of their new UCITS VI regulatory reporting obligations under Article 20a of the UCITS Directive. Equivalent obligations apply to AIFMs under Article 24 of AIFMD. VfM assessment records must be retained for at least five years and up to seven years if required by the NCA.

MiFID II professional client regime changes

The RIS Directive proposes to broaden access to professional client status under MiFID II (Directive 2014/65/EU) by expanding both the categories of per se professional clients and the criteria for elective opt-up. Managers and directors of regulated financial institutions and collective investment schemes who are directly involved in investment activity will be treated as professional clients, while employees of AIFMs involved in the management or marketing of AIFs will be treated as professionals in respect of investments in those AIFs.

For elective professional status, the RIS Directive lowers the portfolio threshold from €500,000 to €250,000 (measured as an average over three years), introduces greater recognition of relevant education, training and professional qualifications and amends the transaction frequency test to better accommodate sophisticated private market investors. New criteria are also introduced for legal entities. Overall, the changes are intended to make it easier for financially sophisticated individuals and entities to qualify as professional clients, thereby broadening the pool of investors who may access products and services targeted at professional investors.

What your firm should do now

It is worth noting that many firms have already embedded annual reviews of fund costs and charges as part of their existing undue costs and VfM frameworks, reflecting ESMA and Central Bank expectations in this area. While the RIS Directive will introduce a more structured and documented VfM regime, including peer-group comparisons and enhanced governance requirements, existing oversight processes are likely to form the starting point for implementation efforts rather than requiring firms to build entirely new frameworks.

Firms should review existing processes and procedures around undue costs monitoring and VfM assessment methodology against the proposed requirements, and consider potential peer group selection criteria and any necessary enhancements to governance arrangements and compliance reporting frameworks. The detailed calibration of the framework is, however, likely to depend on forthcoming Commission delegated acts (Level 2) and any subsequent ESMA guidance (Level 3).

For more information and advice on the RIS Directive, please contact any member of our Asset Management and Investment Funds Group.