Thursday November 30 2017

News Source: Fund Regulation

Focus: Closet Trackers

Type: General

Country: European Union

Steven Maijoor in his keynote address discussed Closet Indexing and ESMA work in the area.

Closet indexing is a phenomenon that generated a significant amount of discussion among stakeholders when it came to the attention of commentators and regulators a couple of years ago. He stressed two key points of concern that arise from closet indexing activity: funds that are closet indexers are not only likely to be charging unduly high fees, but they are also failing to deliver the service to which they committed themselves in their offering documents. Efforts by supervisors to tackle closet indexing should address these two aspects.

At the ESMA level ESMA immediately saw the potential importance of this issue from an investor protection perspective and decided to analyse it further. This led to the publication of a statement in February of last year. The outcome of their analysis was that there might be a small, but not insignificant number of funds in the EU equity fund sector that may be closet index trackers. Although it generated headlines at the time, ESMA were very deliberate in formulating a cautious conclusion in their statement. This is due to the fact that statistical analysis can only give an overall indication of the existence of closet indexing activity. ESMA agreed, therefore, that national competent authorities (NCAs) would pick up the baton and look into the matter further within their domestic markets. Since publication of the statement a significant amount of work has been carried out at national level by the NCAs, some of which has already been disclosed to stakeholders.

In terms of next steps, ESMA are now liaising with NCAs to get a comprehensive picture of the outcome of their national initiatives. From ESMA’s perspective, their objective is to ensure that NCAs are taking convergent approaches to situations where deficiencies are identified. In a single market where cross-border distribution of funds is widespread, ESMA believe it is a key part of ESMA’s role to try to ensure that investors are treated fairly across all Member States.

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