ESMA Consults On Draft Guidelines For UCITS Performance Fees

Issue

The European Securities and Markets Authority (ESMA) has published a consultation paper (ESMA34-39-881) that contains draft guidelines on the regulation of certain elements of performance fees applied in the realm of undertakings for collective investment in transferable securities (UCITS). With the draft guidelines, ESMA pursues the objective of aligning the interests of UCITS management companies (ManCos) and UCITS investors through establishing common criteria in the following areas:

general principles on performance fee calculation methods; consistency between the performance fee model and the fund's investment objectives, strategy and policy; frequency for the crystallization of the performance fee; circumstances in which a performance fee should be payable; disclosure of the fee model. The draft guidelines also contain definitions of various terms, such as "excess performance" and "fulcrum fee". UCITS ManCos would always have to be in the position to demonstrate how the performance fee model represents a reasonable incentive and is aligned with investors' interests.

Background

In early 2018, ESMA carried out a mapping exercise among national competent authorities (NCAs) with respect to the current practices regarding performance-based fee models and payments. The exercise showed divergent approaches across EU member states as to performance fee models and circumstances in which performance fees are

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According to ESMA, such discrepancies can result in undesired regulatory arbitrage and inconsistent levels of investor protection in the EU's most prominent investment fund segment, which calls for a push towards greater supervisory convergence in the relevant fields. ESMA estimates that guidelines are the most appropriate instrument to tackle the problem and is now seeking the views of concerned parties via the consultation paper.

ESMA found inspiration for the guidelines in IOSCO's Good Practice for Fees and Expenses of Collective Investment Schemes (FR09/16 August 2016). The guidelines come on the heels of EU efforts to facilitate the cross-border distribution of investment funds (see the texts of the recently adopted Directive and Regulation), as well as financial watchdogs' and investors' increased scrutiny of fee calculation and transparency (see for example Institutional Limited Partner Association's (ILPA) Principles 3.0).

Impact

Although some member states already prescribe computation mechanisms for performance...