ESMA launches two common supervisory actions (CSA), first on UCITS fees and costs and secondly on MiFID II product governance



Common supervisory actions (CSAs) have grown into an integrative part of the convergence efforts and rulemaking process of the European Securities and Markets Authority (ESMA). For 2021 ESMA has announced that it will review how national competent authorities (NCAs) supervise costs and fees of UCITS1 and MiFID II product governance.2 ESMA is mandated to contribute to a common supervisory practice among NCAs. One of the instruments available for ESMA to contribute to such a supervisory convergence are CSAs.

ESMA will therefore ask NCAs how they supervise compliance with the MiFID II rules on product governance as well as costs and fees of UCITS respectively. This is now the third year that ESMA has used the CSA as an EU-27 wide tool. It is likely that ESMA will apply lessons learned from the first such exercise it launched in June 3, 2019, as adapted to prolonged pandemic preparedness and new remote working realities both at the supervisors and supervised firms that make on-site inspections a different exercise.3 Investment firms must be prepared to respond to inquiries by their regulator. Ultimately, this initiative may lead to new Level 2 and 3 legislative instruments in the respective fields that these 2021 CSAs cover. This Client Alert looks at how these 2021 CSAs might unfold and what firms may want to do to prepare.

Background: MiFID II product governance

CSAs are a common tool for ESMA’s MiFID II convergence efforts. In 2019, ESMA conducted a CSA with the NCAs on the legal framework for appropriateness and execution-only sales,4 the results of which were reflected in the Draft Guidelines of the same name that are currently under consultation.5 In 2020, ESMA launched a CSA with the NCAs on suitability rules.6 Thus, the CSA on MiFID II product governance, announced on February 1, 2021, is already the third CSA in respect to the MiFID II rules.

Product governance within the MiFIR/MiFID II regulatory framework aims at regulating the manufacturing of financial products in order to more strongly align financial products in the market to the needs of retail investors. To achieve this, investment firms that manufacture financial instruments have to define target markets and ensure that products are designed and distributed to meet the needs of that target market and go through a documented product approval process.7 ESMA has identified the target market assessment as the most crucial factor for ensuring a common application and enforcement of the product governance rules across the EU.8 In 2017, ESMA set out Guidelines applicable to both manufacturers and distributors, and in 2020 ESMA published a series of Q&As on product governance as well. During this 2021 CSA, ESMA will consider the application of this guidance assessing:

  • “how manufacturers ensure that financial products’ costs and charges are compatible with the needs, objectives and characteristics of their target market and do not undermine the financial instrument's return expectations;
  • how manufacturers and distributors identify and periodically review the target market and distribution strategy of financial products; and
  • what information is exchanged between manufacturers and distributors and how frequently this is done.”

Background: UCITS’ fees and costs 

In respect of UCITS, ESMA launched a CSA with NCAs on UCITS liquidity risk management in 2020. In 2021, ESMA identified costs and performance of investment products as one of its key strategic priorities,9 a factor which may have given rise to the CSA on risk and fees of UCITS announced on January 6, 2021. 

Under the UCITS Directives, NCAs shall draw up rules of conduct to ensure that management companies act honestly and fairly, with due skill, care and diligence, and in the best interest of the UCITS they manage and the integrity of the market.10 As part of these general duties of conduct, management companies are required to act in such way as to prevent undue costs being charged to the UCITS or its unitholder. 

In its supervisory briefing,11 ESMA found a lack of convergence as to how the concept of undue costs is interpreted by the NCAs, as well as on the supervisory approach in respect to cost-related provisions. Consequently, the supervisory briefing concluded with a set of common criteria for the interpretation of undue costs, including examples of such costs as well as common principles for supervision by the NCAs. The CSA will take on these recommendations as well as the ESMA’s Guidelines on ETFs and other UCITS issues in its CSA.12

Outlook: what firms should be prepared for

The CSAs on MiFID II product governance as well as on UCITS costs and fees will be conducted throughout 2021. The pandemic may change the supervisory dialogues and tone, as on-site visits are no longer possible. It is important to note, however, that ESMA has already in 2020 proven that it can rapidly and remotely review NCAs’ supervisory effectiveness, including large ones such as BaFin. 

While the majority of the burden of the CSA falls on NCAs and ESMA’s supervisory staff, it is likely that in order to be able to respond to ESMA, NCAs will pass enquiries/questions on to the firms that they supervise. Firms should therefore be prepared to respond to such requests and carefully consider how they interact with individual NCAs but equally how they interact with all NCAs. 

Firms will want to ensure they adopt a pan-jurisdiction and thus pan-authority approach to what is likely to be a much sharper degree of supervisory scrutiny. Firms may already want to set up internal steering groups with relevant stakeholders and external counsel to conduct a gap and weakness analysis, so as to either already begin to take remedial action or to be well equipped to potentially “explain or defend” files and practices. 

We equally expect the topics of product governance as well as fees and costs methodology and transparency to have a higher relevance for both ESMA and the NCAs on a more general level during 2021 and beyond. Thus, firms should ensure that they are fully compliant with the product governance or the fees and cost requirements as they apply to their respective businesses. 

With ESMA’s continuing focus on supervisory convergence, notably on investor protection, on the multi-annual supervisory priority list through to 2022 and beyond, the use of CSAs as a tool that ESMA is more confident to use is likely to stay and apply to other thematic areas within ESMA’s mandate.   


  1. Announced on January 6, 2021, available here (last accessed February 10, 2021). 
  2. Announced on February 1, 2021, available here (last accessed February 10, 2021). 
  3. See coverage from our Eurozone Hub here (last accessed February 10, 2021).
  4. See our Eurozone Hub coverage here (last accessed February 10, 2021).
  5. Consultation Paper, Guidelines on certain aspects of the MiFID II appropriateness and execution-only requirements, available here (last accessed February 10, 2021). ESMA invites feedback on the consultation by April 29, 2021.
  6. Announcement available here (last accessed February 10, 2021). 
  7. See Article 16(3) and Article 24(2) MiFID II, which are complemented by Articles 9 and 10 of MIFID Delegated Directive. 
  8. Final Report, Guidelines on MiFID II product governance requirements, dated 2 June 2017, ESMA 35-43-629, p.4, available here (last accessed February 10, 2021). 
  9. See press release here (last accessed February 10, 2021). 
  10. Article 14 (1) of the UCITS Directive as implemented in the Member States.
  11. ESMA, Supervisory briefing on the supervision of costs in UCITS and AIFs, dated 4 June 2020, ESMA 34-39-1042, available here (last accessed February 10, 2021). 
  12. ESMA, Guidelines for competent authorities and UCITS management companies, Guidelines on ETFs and other UCITS issues, dated 1 August 2014, ESMA/2014/937, available here (last accessed February 10, 2021). 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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