ESMA consults on performance fee guidelines for retail funds, seeking greater harmonisation

ESMA’s draft guidelines aim to harmonise the way in which performance fees can be charged to the UCITS and its investors while ensuring common standards of disclosure, as current practices vary among EU Member States.

Steven Maijoor, ESMA Chair, said:

“Costs are vital to successful investments and especially so when investing in UCITS. Performance fees are a key feature both for investors and funds alike. However, different practices exist, creating undue risks of regulatory arbitrage and inconsistent levels of investor protection. 

Considering the importance of cross-border distribution for UCITS, ensuring greater supervisory convergence regarding performance fees is essential.”

ESMA’s draft guidelines propose common criteria to promote supervisory convergence 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 performance fee crystallisation and payment;
• the circumstances where a performance fee should be payable; and
• disclosure of the performance fee model.

ESMA is seeking stakeholders’ feedback on the proposals made in the above areas as well as on whether the principles set out in the Guidelines should also be applied to Alternative Investment Funds (AIFs) marketed to retail investors.

The proposed guidelines follow a mapping exercise ESMA conducted in 2018 among national competent authorities (NCAs), which analysed the current national practices for key aspects of performance fees, revealing a lack of harmonisation among EU jurisdictions.

Background

ESMA’s draft guidelines aim to further clarify the provisions of the UCITS Directive, which requires Member States to ensure that a management company acts honestly and fairly in conducting its business activities in the best interests of the UCITS it manages and the integrity of the market. This includes the prevention of undue costs being charged to the UCITS and its unit holders.

In developing its draft guidelines, ESMA also considered the Good Practice for Fees and Expenses of Collective Investment Schemes by the International Organization of Securities Commissions (IOSCO).

Next steps

ESMA will consider the feedback it receives to this consultation in Q4 2019 with a view to finalising the guidelines for publication afterwards.