In a letter to funds (5-page / 189KB PDF), following a thematic review in relation to the calculation of UCITS performance fees, the Central Bank indicated it was concerned that performance fees were not being applied consistently and in accordance with its guidance.
UCITS management companies which include self-managed investment funds, or fund management companies, have been asked to review their charging methodologies and confirm their compliance in writing with the guidance to the Central Bank by 30 November 2018. The Central Bank will also contact those individual fund management companies that were the subject of the review directly to address the issues it identified.
In its letter to fund management companies the Central Bank's head of securities and markets supervision Patricia Dunne said that the Central Bank had identified "instances of non-compliance with the guidance" in around 10% of a sample of UCITS sub-funds. Examples included performance fees calculated based on gross asset value rather than net asset value, as required by the guidance; and performance fees calculated based on outperformance of benchmarks or indexes "which did not appear to be relevant in the context of the UCITS policy" or "where it was unclear as to which version of the index was being used".
"We are concerned that the guidance is not being applied in a consistent and comprehensive manner across the industry, which could lead to the overpayment of performance fees by UCITS and their investors," said Derville Rowland, the Central Bank's director general of financial conduct.
"Investors in regulated funds have a right to expect that they will be charged the right fee and that the firms and individuals overseeing this process are operating to a high standard. The findings of this review highlight the need for individuals within regulated firms to be vigilant, especially as we now move to have our guidance on performance fees become binding rules," she said.
"The Central Bank now expects all Fund Management Companies to review their current performance fee calculations and identify any required changes to the existing methodologies taking into account the existing Central Bank guidance and the feedback published following the industry review," said asset management and investment funds expert Gayle Bowen of Pinsent Masons, the law firm behind Out-Law.com.
"Where appropriate, fund management companies may need to identify amendments to fund offering documentation, to identify any instances of improper payment of performance or non-compliance with applicable guidance and to clarify what actions are being taken to remedy discrepancies identified. Fund management companies will need to conduct this review as soon as possible, bearing in mind that any identified issues may form part of future supervisory engagement with the Central Bank," she said.
The Central Bank also identified examples of poor practice by fund depositaries, which are required to verify performance fee calculations and by fund administrators in certain areas of the calculation of UCITS performance fees.
"The Central Bank clearly expects fund management companies to ensure that fund administrators apply a consistent and independent methodology," said asset management and investment funds expert Aongus McCarthy of Pinsent Masons. "In addition, fund management companies will need to review the depositary verification process to ensure that it is completed by the depositary on all UCITS performance fee calculations, prior to payment and is performed on crystallisation, regardless of whether or not a performance fee is due for payment. Fund management companies will need to confirm what checks are already being completed to determine where further improvements can be achieved to ensure that they can demonstrate adherence with the Central Bank's expectations."
"The Central Bank has separately proposed, in a consultation paper known as CP119, that its UCITS requirements be amended to restrict UCITS to crystallising performance fees on no more than an annual basis, with a transitional period applied for existing UCITS to comply with the new obligations. This should also be borne in mind by fund management companies proposing to vary the existing performance fee disclosure at this opportunity to address the latest warning by the Central Bank," he said.