The EU’s new packaged retail and insurance-based investment products (Priips) regulation mandates detailed disclosure of transaction costs in key information documents for the undertaking for collective investment in transferable securities (Ucits) funds and alternative investment funds (AIFs), requiring significant data collection and verification efforts from funds’ management companies, said Efa, a Luxembourg-based fund administration, investor services and regulatory and compliance service provider, in a expert note. These funds, from 1 January 2023, must furnish investors with a Priips KID that includes a detailed disclosure of transaction costs, calculated on an annualised basis from an average over the past three years.
According to Efa, the disclosure of transaction costs under the Priips KID presents a considerable challenge, particularly in terms of data collection and verification required from the management companies of in-scope Ucits. These costs are divided into explicit and implicit types. Explicit costs include brokerage commissions, stamp duties, market taxes and certain fees related to over-the-counter (OTC) derivatives, derived from fund accounting data. Implicit transaction costs, reflecting the difference between the asset’s mid-price at order transmission and its eventual trading price, necessitate a complex calculation process involving data points not traditionally managed by asset managers or fund administrators.
Efa has started including cost information in the Priips KIDs, European Priips Templates and European Mifid Templates it produces. However, the company faces limitations in calculating implicit transaction costs due to the absence of essential data like timestamps and arrival prices. Consequently, Efa has presented its clients with two options: independently calculate these costs and communicate the figures to Efa or seek Efa’s support by providing a detailed set of transaction data for calculating implicit costs as per regulatory requirements.
Ucits funds have a deadline of 31 December 2024 to calculate implicit transaction costs using arrival prices, aligning with Priips regulations. AIFs already within the scope of Priips are expected to have implemented these calculations. This regulatory evolution underscores the increasing scrutiny and demand for transparency in investment product costs, aiming to provide retail investors with clearer insights into their investments and enhance investor protection, albeit at the cost of significant data collection and verification effort by fund management companies.
Efa was established in 1996 and by Universal Investment Group in 2022. It employs roughly 440 staff in the grand duchy.
