Sven Giegold

Better Finance report: Large share of UCITS equity funds in breach of EU-regulation

Today, Better Financed published research showing that at least 619 UCITS equity funds are in breach of EU disclosure rules for benchmarking. Most of these funds are registered in Luxemburg, the UK and Ireland.


MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group and Parliament’s rapporteur on the UCITS directive commented:

“It is unacceptable that a large number of UCITS equity funds continue to breach EU-regulation on dislosure for benchmarks without facing any consequences from the national supervisors. There is a clear lack of enforcement in several key countries that ESMA will have to address rigourously. Only a determined intervention by ESMA can prevent future regulatory arbitrage and ensure supervisory convergence. This continuing deficiency proves the need for a more European supervision of financial markets and the enforced intervention powers for the ESAs we are advocating in the review of the European System of Financial Supervision.”


The original press release by Better Finance


At least 619 UCITS Equity Funds found in Breach of Key EU Disclosure Rules as Poor Enforcement prospers in Several Key Countries

4 June 2018 –Renewed research by BETTER FINANCE finds that at least 30% of the main actively managed UCITS equity funds (those with a ‘fund benchmark’[1]) still do not comply with key disclosure requirements for benchmarks as stipulated in EU Rules. In the face of persistent poor enforcement in our view in some major fund domiciles, BETTER FINANCE sees no other way but to name the perpetrators and failing jurisdictions it identified.

What started as an investigation into the widespread mis-selling practice known as “closet indexing” (claiming active fund management, whilst in reality merely tracking an index) has now taken on a new dimension. When it replicated the study into closet indexing by the European Securities and Markets Authority (ESMA) in 2017 (and, unlike ESMA, disclosed the names of the 165 UCITS equity funds that were identified according to ESMA’s methods as “potentially” falsely active) BETTER FINANCE regrettably also discovered widespread breaches of key EU disclosure rules for investors. BETTER FINANCE immediately brought this worrying issue to the attention of EU regulators, only to find that more than one year later these violations of EU fund key disclosure rules still endure.

With the exception of the UK’s Financial Conduct Authority (FCA) who recently forced 64 UK domiciled closet index funds to indemnify clients, other national supervisors are dragging their feet. Worse, whereas 93% of the suspicious funds according to ESMA were domiciled in other EU jurisdictions than the UK, at least three national supervisors (those of Luxemburg, Germany and France) reported that they found zero cases of closet indexing, including the one from Luxembourg where 47% of all suspicious funds are nevertheless domiciled.


There may be also value in assessing whether a fund has been able to achieve the objectives referred to in the fund documentation.”

(ESMA recommendation, February 2016 Communication on closet indexing)


More worrying still is the fact that neither the EU supervisor, nor the national ones, addressed the widespread infringements of information disclosure rules for the two-page “Key Investor Information Document” or “KIID”. Last year BETTER FINANCE found that, out of the 165 suspicious equity funds, 67 also failed to disclose their benchmark performance alongside the past performance of the fund, thus precisely preventing investors from trying to follow ESMA’s above-mentioned recommendation, i.e. to assess the fund’s performance against that of its own benchmark.

Recent further research into the issue (January-April 2018) did not lay concerns to rest, as 44 of the 165 potential closet index funds identified at the end of 2016, continue to violate the KIID disclosure rules on benchmark performance. And these are just the tip of the iceberg, as close to 30% of all the main benchmarked UCITS equity funds (more than 2000) do not comply with the KIID benchmark disclosure rules either.

A major part of these non-compliant funds in our view are domiciled in Luxembourg, where 66% of the “potential closet index funds” and 43% (272) of all benchmarked UCITS equity funds reviewed still do not disclose their benchmark performance in their KIID. Overall, 82% of the offenders are from Luxembourg, the UK or Ireland (see table below and annex 1 for further details). By contrast, only 1% of benchmarked UCITS equity funds domiciled in France are in breach in our view and none of those were identified as potential closet indexers. This clearly shows a serious lack of “supervisory convergence” within the EU.

In addition, BETTER FINANCE identified another worrying practice. While most non-compliant funds do not refer to an index at all, 145 other funds explicitly state in their KIIDs that the fund is not managed with reference to a benchmark, which, at the very least, is inconsistent with a public database which clearly reports a fund benchmark for all these funds.

Guillaume Prache, managing Director of BETTER FINANCE, said that “these persistent, widespread and clear breaches of EU investor protection rules in our view, as evidenced by this research,  are yet another call on EU Public Authorities[2] to urgently and adequately stop this ongoing detriment to EU citizens as savers and investors, especially in light of the current debate on the necessary reform of the European System of Financial Supervision”.


WARNING AND DISCLAIMER: All findings based on, and subject to, the ESMA methodology and scope detailed in annex 4 and in particular the fund benchmark information for all funds, are sourced from public websites. BETTER FINANCE does not have the resources by its own to review the more than 2000 prospectuses on its own, and, like ESMA, relied on “fund benchmark” information by Morningstar.

The findings hereupon are based on assumptions and are subject to significant limitations and caveats. Please refer to the methodology attached as Annex 4.


Contact: Chief Communications Officer ǀ Arnaud Houdmont ǀ +32 (0)2 514 37 77 ǀ