The Central Bank of Ireland (CBI) has identified and is investigating 182 UCITS funds it suspects of being "closet trackers", with the funds regulator already forcing boards to take action on the "transparency" of fund documentation.
Following a review of 2,550 Ireland-domiciled UCITS funds marketed as active products, the CBI found 182 met pan-European regulator ESMA's definition of a closet tracker.
The CBI has already made investigations into 62 of the funds so far, with action taken against 57 of them.
In a letter written by Patricia Dunne, head of the CBI's securities and markets supervision division, published on Thursday (18 July), the CBI revealed it is forcing implicated firms to amend their prospectus and KIID, which should then be sent to all investors with details of the CBI's finding.
Those who need changes must do so, and submit to CBI, by 31 March 2020.
The CBI's UCITS review, the results of which was also published today, found investors "were not always given sufficient or accurate information about the fund's investment strategy" in fund documentation, affecting "their ability to make an informed decision on whether to invest in the fund".
It also found instances of poor governance and controls by boards, as well as examples of funds setting a target for outperformance against an index "less than the fee charged to certain share classes in the fund".
In the latter case, the result was that even if the fund delivered returns "at the upper end of its projections", investors in these share classes would not actually realise a positive return against the benchmark, as the fee charged will cancel out any outperformance achieved.
Finally, the CBI also found some cases where no comparator for the past performance section of a KIID, so that investors were not able to determine whether the fund, irrespective of performance, represented good value relative to its benchmark.
Dunne told boards they should consider whether "fees charged on all share classes within each UCITS… are appropriate for the targeted level of outperformance".
She added: "The Central Bank is concerned by the number of transparency issues identified during the review. Boards are reminded of their responsibility for the disclosure and implementation of the investment policy for each managed UCITS, as set out in the prospectus.
"Boards should actively consider the contents and findings [of the CBI] as they carry out their role, and review and revive their prospectus and KIID where necessary".
Dunne told UCITS boards that when considering the accuracy of the content of prospectuses and KIIDs, they should ensure compliance with all applicable legislative requirements and that marketing material provided to investors is consistent with the prospectus and KIID.
In addition, documentation should mention if a fund is constrained to a benchmark, and all performance targets, when used, should be disclosed in a fund's KIID.
Commenting on the outcome of the review, director general of the CBI Derville Rowland said: "This represents our largest data driven review of the funds industry to date and we will follow through with each individual fund where we had findings.
"Investors in UCITS have a right to rely on the information in the prospectus and the KIID and funds have an ongoing duty to ensure that this information is accurate and that the fund is managed in investors' best interests.
"As well as following up with the funds where we had findings, we are requiring all UCITS funds to consider the accuracy of their Prospectus and KIID on an ongoing basis in light of these findings."