Asset managers should be penalised for overcharging, according to an EU watchdog.

(Huw Jones)
Flags of the European Union fly outside the Brussels offices of the European Commission.

The EU is scheduled to release draft regulations next week to enhance investor protection for those who purchase financial products to ensure value for money.

Better clarity in EU investment and market regulation is required, according to the European Securities and Markets Authority (ESMA).

rules governing hedge funds that define "undue costs" to investors.

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According to ESMA, this would make it simpler for authorities to enact enforcement measures against scams.

Verena Ross, chair of ESMA, said in a statement, "If we want to increase retail investors' engagement in capital markets, we need make sure that the projected return of investment products isn't harmed by unnecessary charges.

In the suggestions for the retail investment plan that are expected to be released next week, ESMA expressed confidence that its "opinion" on excessive costs can be taken into account.

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Investors are typically informed of the one-time and ongoing charges associated with funds.

The magnitude of the cost should be taken into account while determining whether a cost is legitimate or excessive because there 

"A cost is eligible but 'undue' in terms of its magnitude, according to ESMA.

In circumstances where excessive costs have been incurred, particularly when costs have been incorrectly assessed to the prejudice of investors, "ESMA deems appropriate to ensure that fund managers reimburse or indemnify investors without undue delay."

According to the watchdog, fund managers should be penalized with a fine that is commensurate to the loss they caused to investors if they violate this regulation knowingly or carelessly.