On 16 July 2019, ESMA launched a public consultation on draft guidelines for performance fees in undertakings for UCITS ("Guidelines"). ESMA also asks whether the Guidelines should also apply to alternative investment funds marketed to retail investors. ESMA invites feedback by 31 October 2019.
The Guidelines aim to harmonise across the EU the way in which performance fees can be charged to UCITS while ensuring common standards of disclosure by setting out five key elements to promote supervisory convergence in the following areas:
General principles on performance fee calculation methods;
Consistency between the performance model and the fund's investment objectives, strategy and policy;
Performance fee crystallisation frequency;
Circumstances where a performance fee should be payable; and
Disclosure of performance fee model.
One of the key priorities included in ESMA's 2019 Supervisory Convergence Work Programme was to enhance supervisory convergence on performance fee structures and the circumstances in which they are paid.
In developing the Guidelines, ESMA was guided by its 2018 mapping exercise with national competent authorities, which identified that current practices on performance fees vary among EU Member States creating regulatory arbitrage risks and inconsistent investor protection levels. Considering the importance of UCITS cross border distribution, supervisory convergence on this issue is essential to ensure a level playing field in the EU. ESMA also reviewed IOSCO's good practice for fees and expenses of collective investment schemes - FR09/16 August 2016 that are considered best practice.
The Guidelines are preceded by the Central Bank of Ireland 's ("CBI") thematic review of the application of performance fees in Irish Irish UCITS and subsequent letter to industry in September 2018, and the codification of performance fee guidance in the Central Bank UCITS Regulations 20191 ("Regulations") in May 2019 (which contain transitional provisions for existing UCITS to comply with the requirements by 27 November 2020 or such later date as the CBI may specify).
The Guidelines relate to provisions in the UCITS framework (a comprehensive list of which is set out at Annex II of the Guidelines). They apply to UCITS management companies as defined under Article 2(1)(b) of the UCITS Directive and national competent authorities. They also apply to self-managed investment companies (i.e. UCITS which have not...