Better finance at least 619 ucits equity funds found in breach of key eu disclosure rules as poor enforcement prospers in several key countries database administrator job description

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.

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”.

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