ESMA identifies areas for further supervisory convergence on compliance and internal audit in the funds sector

⦿ Executive Snapshot

• What: ESMA has published the results of its 2025 Common Supervisory Action on compliance and internal audit functions in the funds sector.
• Who: European Securities and Markets Authority (ESMA) and EU/EEA national supervisors.
• Why it matters: The findings highlight governance weaknesses in fund management, which could impact regulatory compliance and investor confidence.

⦿ Key Developments

• The CSA found that most fund managers comply with key AIFMD and UCITS requirements, indicating a generally positive compliance landscape.
• Significant differences in the quality and practical implementation of policies were observed, varying by the size, nature, and complexity of fund managers.
• ESMA identified governance weaknesses concerning the independence of control functions and oversight by senior management and boards.
• Examples of good and poor practices were documented, providing a benchmark for compliance and internal audit effectiveness.
• NCAs utilized a common assessment framework for supervisory activities throughout 2025, including desk-based reviews and on-site inspections.

⦿ Strategic Context

• The CSA is part of ESMA's ongoing efforts to enhance supervisory convergence across the EU funds sector, ensuring consistent regulatory practices among member states.
• Historical differences in compliance practices among EU fund managers have prompted regulatory bodies to seek greater uniformity in oversight and governance standards.

⦿ Strategic Implications

• Immediate implications include the need for fund managers to address identified breaches and vulnerabilities to maintain compliance and investor trust.
• Long-term, enhanced supervisory convergence may lead to improved governance standards and practices in the EU funds sector, potentially influencing investor behavior and market stability.

⦿ Risks & Constraints

• Potential risks include regulatory pushback from fund managers resistant to change or the implementation of stricter governance measures.
• Variability in the capacity and willingness of national competent authorities (NCAs) to enforce the findings may hinder effective compliance across the sector.

⦿ Watchlist / Forward Signals

• Future developments will include follow-up supervisory actions by NCAs to address the identified weaknesses and ensure timely remedial actions.
• Continued exchanges among NCAs on compliance practices will signal progress towards greater supervisory convergence in the EU funds sector.