ESMA publishes final UCITS performance fee guidance

Out-Law News | 29 Apr 2020 | 10:18 am | 1 min. read

The European Securities and Markets Authority (ESMA) has published new guidelines on the performance fees that managers of certain investment funds can charge to retail investors.

The new guidelines, which apply to funds which are undertakings for collective investment in securities (UCITS) and certain alternative investment funds (AIFs), are designed to harmonise the approach taken to these fees by fund managers across the EU. They cover designing a performance fee model, the circumstances in which performance fees can be paid and disclosure requirements.

The guidelines will now be translated into the official EU languages and published on ESMA's website. National regulators will have two months to notify ESMA on whether they comply or intend to comply with the new guidelines following publication of the translations.

ESMA said in a statement that the guidelines would "ensure a level playing field and a consistent level of protection to retail investors".

"Ensuring greater supervisory convergence regarding performance fees in funds marketed to retail investors is an integral part of ESMA's broader efforts on the cost of retail investment products," it said.

The guidelines are split into five categories: the performance fee calculation method; consistency between the performance fee model and the fund's investment objectives, strategy and policy; performance fee crystallisation frequency; negative performance recovery; and disclosure of the performance fee model.

Significantly the guidelines introduce a strict requirement for fund managers to be conscious of the policies, strategies and objectives of the fund to ensure that these are aligned with and, to an extent, justify the performance fee model being implemented.

The calculation method adopted should be "verifiable and not open to the possibility of manipulation", and designed to ensure that fees are always proportionate to the actual investment performance of the fund. The fund manager should be able to demonstrate how the method chosen "constitutes a reasonable incentive for the manager and is aligned with investors' interests", according to the guidelines.

Performance fees should only be payable where a fund outperforms its reference benchmark over a 'reference period' of at least five years or the life of the fund. This may include where the fund loses money while outperforming the benchmark, although if this is possible a "prominent warning" should be displayed to investors in the key investor information document (KIID). Fees should crystallise no more frequently than once a year.

The KIID should also contain sufficient information about the existence of a performance fee and its potential impact on the investment return, as well as the basis on which the fee is charged and when the fee applies. Where a benchmark is used to measure performance, the name of the benchmark and past performance of the fund against it should also be given, according to the guidelines.