Auditors criticise EU and ESMA over funds market regulation

February 25, 2022

EU-based investors are still at risk of incurring “undue costs” or “biased advice” despite the development of the single market for investment funds, according to a new report.

The European Court of Auditors (ECA) – itself an EU body – published the report on 21 February, in which it stated that “many potential benefits for investors remain untapped”.

The EU wants to develop a cohesive cross-border environment for investment funds to be bought and sold throughout the bloc, but the auditors’ report found that barriers between member states remained, and supervision standards differed, hampering the single market aims.

Investment funds remain predominantly domestic markets, with only Ireland and Luxembourg having major cross-border markets. Approximately 70% of the EU’s funds market is concentrated in Ireland, Luxembourg, France and Germany.

The report praised EU efforts to improve transparency for investors, saying they are “better informed than they used to be about the risks, performance and costs of investments”. However, the ECA said comparing funds across the EU was still difficult and costs varied widely.

The ECA said: “Investors are still not adequately protected against various issues: undue costs arising from opaque selling practices, for example, or biased advice from financial intermediaries leading them towards products which are not well suited to their needs.”

The auditors highlighted greenwashing as a particular problem, with ‘ESG’ and similar terms currently unprotected and unregulated.

The ECA also criticised the effectiveness of the European Securities and Markets Authority (ESMA). While acknowledging its work to “promote supervisory convergence”, the results had been only “slightly better supervision and fewer divergences”, in the eyes of the auditors.

The report said the reliance on “goodwill” of national regulators to comply meant it had limited understanding of how rules were implemented across different member states. ESMA also had no way of measuring supervisory convergence, the ECA said.