Costs and charges of funds in Europe and Luxembourg: supervisory landscape, market trends, and strategic implications

Costs and charges have become a focal point in the European investment fund landscape, driven by growing regulatory scrutiny and heightened investor sensitivity. Fund managers across Europe, particularly in the UCITS space, face intensified supervision by national and European authorities, led by the European Securities and Markets Authority (ESMA) and local regulators such as Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF). 

Background on the Regulatory Framework: ESMA's Common Supervisory Action and the CSSF’s Supervisory Approach in Luxembourg

In 2021, ESMA initiated a Common Supervisory Action (CSA) across Member States targeting funds’ costs and fees. The CSA examined whether funds were:

• Applying only justified and proportionate fees;
• Transparent in their disclosure to investors;
• Ensuring cost governance through internal controls and oversight mechanisms.

The findings published in 2022 highlighted weaknesses, including inconsistent cost disclosures, lack of benchmarking or value assessments, and inadequate pricing governance at the board level.

As a result, ESMA instructed National Competent Authorities (NCAs) to step up supervision and harmonize enforcement.

In its December 2022 report, the CSSF highlighted deficiencies observed in the Luxembourg fund market, such as:

• Bundled “all-in” fees with opaque breakdowns;
• Insufficient board oversight over cost structures;
• Missing documentation supporting fee decisions.

The CSSF emphasized that fund managers must regularly assess and document cost structures, and put mechanisms in place to justify investor charges, including performance fees and third-party expenses.

In November 2024, ESMA initiated a survey¹ to examine the costs associated with investments in AIFs and UCITS, with the goal of providing insights into pricing practices within a crucial segment of EU financial markets.

Subsequently, the CSSF requested a selection of UCITS and AIF managers, along with distributors, to fill out a comprehensive questionnaire through the e-Desk portal. This survey concentrated on all fees, charges, and expenses incurred directly or indirectly by investors, or by the management company/ AIF Managers (AIFMs) related to the operations of the UCITS/AIFs, which are ultimately charged to the fund.

A report utilizing the data collected will be delivered to the European Parliament, the Council, and the European Commission in October 2025. This report will also contribute to an enhanced ESMA market report in 2025, focusing on the costs and performance of EU retail investment products.

Market Trends and Structural Evolution

The European fund market is evolving under a mix of regulatory pressure, investor expectations, and digitalization. Fund managers continue to face margin pressure as fee compression accelerates.

Several key macro-trends are shaping the fee landscape:

• Shift towards ETF and Passive Products: These products generally offer lower Total Expense Ratios (TERs), forcing active managers to justify premium fees through performance and service differentiation;
• Transparency-Driven Demand: In addition to financial returns, investors increasingly demand non-financial performance, as witnessed by the important market share (c. 60% according to Morningstar) of Sustainable Finance Disclosure Regulation (SFDR) Article 8 and Article 9 funds driving more detailed reporting; 
• Digital Transformation: Automation of cost disclosures (e.g., via PRIIPs KIDs and MiFID II templates) improves comparability but demands better data governance;
• Active ETF challenges: one of the major challenges comes from active ETF’s due to their transparency, ongoing tradability and comparable lower TER figures. It is foreseeable that this product line will be the biggest challenge for the traditional fund business going forward.

In today’s dynamic market, peer group comparisons and performance figures help to determine whether a fund offers value for money. Funds exceeding certain cost thresholds need to somehow justify their cost premium to the investors, either through active outperformance, complexity, or added value (e.g., sustainability strategies or specialized structuring).

Constraints and Challenges Faced by Fund Managers

Fund managers must navigate various regulatory constraints. According to the UCITS Directive and ESMA Guidelines, fees must be proportionate and clearly disclosed. MiFID II & PRIIPs require pre-contractual cost disclosure at both ex-ante and ex-post levels. CSSF Circulars enforce enhanced board responsibility and pricing policies.

At the same time, fund managers must also consider operational constraints, such as multi-layered fees (e.g., investment management, distribution, and platform or trading fees) which must be consolidated and tracked, and cross-border distribution adds another layer of complexity due to divergent NCA interpretations.

Despite a clear regulatory roadmap, asset managers encounter various hurdles:

Undue Cost Charges: Due to lack of pricing policies or misalignment between board approval and operational execution the risk of undue costs being charged to investors is concrete.

Technological Shortcomings: Legacy systems are often lacking accurate, timely cost data across products.

Inconsistent Document Disclosures: Discrepancies between various official documents such as KIDs, marketing materials, and investor reports.

Comparison: Failing to conduct peer comparisons and value assessments by managers can increase risk. By not comparing their practices and values to industry peers, fund managers may decrease market shares and miss opportunities to identify and mitigate potential risks, leading to potential increased scrutiny from regulators.

While the ESMA CSA on UCITS costs has largely placed the regulatory spotlight on retail funds, its implications are increasingly influencing the Alternative Investment Fund space. In line with supervisory expectations across Member States –particularly from authorities such as the CSSF –AIF Managers are expected to adopt enhanced scrutiny and transparency around fee structures, investor value, and cost governance.

Although AIFs benefit from broader structuring flexibility compared to UCITS, recent CSSF feedback, ESMA Q&As and the new UCITS/AIFM Directive signal a clear direction: costs must be fair, proportionate, and clearly documented. This includes due diligence fees, performance-linked fees, asset acquisition costs, and third-party delegate charges.

Moreover, value-for-money principles, traditionally associated with UCITS, are gradually permeating AIF expectations –particularly in the context of professional investor protection and cross-border fund distribution.

Industry voices, such as ALFI, emphasize the importance of:

• Robust fee governance policies;
• Board-level oversight and escalation;
• Periodic benchmarking and justification of cost layers, especially in private equity, real estate, infrastructure, and private debt strategies.

For managers, this represents both a challenge and an opportunity: while aligning with evolving supervisory frameworks adds operational complexity, it also enhances investor confidence and positions firms competitively in an environment that increasingly values transparency, consistency, and accountability.

Opportunities and Strategic Recommendations

Amid these challenges, several strategic opportunities have emerged:

Value-for-Money Proposition: Funds that integrate clear cost governance and offer performance net of competitive fees can stand out in crowded markets.

Automation and Digital Reporting: Leveraging RegTech (regulatory technology) to produce machine-readable, audit-proof disclosures enhances efficiency and reduces human error.

ESG Fee Alignment: Through the increase in management fees stemming from the additional commitments from impact-driven investors or through dedicated ESG fees, aligning ESG costs with ESG value creates transparency and satisfies new supervisory expectations.

Fee Restructuring: Some managers are moving toward tiered fee models, performance-linked structures, or even zero-fee share classes with backend revenue models.

Also, considering to proactively update prospectuses and service agreements to reflect these shifts is essential. 

To maintain regulatory alignment and investor trust, fund boards and managers should:

1. Conduct Annual Cost Reviews: Integrate fee review into the fund board's annual agenda
2. Create a Fee Policy Document: Outline methodologies, benchmarks, approval processes
3. Benchmark Fees: Against similar vehicles across domicile and strategy
4. Ensure Data Consistency: Harmonize PRIIPs, and MiFID II templates
5. Engage Third Parties: Use audits or board-level cost review committees to independently challenge processes in place

Conclusion

Costs and charges remain central to fund governance and investors’ trust. The supervisory pressure led by ESMA’s CSA, coupled with CSSF and NCA action, signals a more intrusive, data-driven regulatory future. While constraints are intensifying, the opportunity to enhance transparency, build competitive pricing models, and align with investor needs has never been greater.

Asset managers who act now – by adopting best practices in pricing governance, embracing digital reporting, and prioritizing value for money – will not only meet compliance expectations but will also thrive in an increasingly cost-sensitive European investment environment.