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ESMA Consultation Paper – Guidelines on Performance Fees in UCITS

ESMA Consultation Paper – Guidelines on Performance Fees in UCITS
  • United Kingdom
  • Financial services and markets regulation
  • Financial institutions



On 16 July 2019 the European Securities and Markets Authority (“ESMA”) launched a public consultation in respect of draft guidelines on performance fees under the Undertakings for Collective Investments in Transferable Securities (“UCITS”) Directive. The draft guidelines are set out in Annex V to the consultation.

To read the consultation paper, click here.

The guidelines

The draft guidelines follow on from a mapping exercise undertaken by ESMA in 2018 which highlighted considerable variance in the treatment of performance-based fee models and payments by National Competent Authorities (“NCAs”). The guidelines seek therefore to mitigate the risk of regulatory arbitrage and inconsistent levels of investor protection among NCAs with a view to ensuring a level playing field throughout the EU, regardless of the domicile of the fund.

EU legislation to date in this area concerns only performance fee disclosure and while certain NCAs (including the UK) have gold-plated the EU requirements, it appears that this consultation may lead to first pan-European requirements in respect of the determination of performance fees.

The draft guidelines focus on supervisory convergence in the following areas:

i) general principles on performance fee calculation methods;

ii) consistency between the performance fee model and the relevant fund’s investment objective, strategy and policy;

iii) frequency for the crystallisation of the performance fee;

iv) circumstances in which a performance fee should be payable; and

v) disclosure of the performance fee model.

Annex II of the consultation provides a summary of the relevant provisions of the UCITS legislation related to performance fees and Annex III includes excerpts from the IOSCO Good Practice for Fees and Expenses of Collective Investment Schemes which ESMA considered while developing the consultation.

Further, while the draft guidelines refer only to UCITS funds, Question 13 of the consultation paper asks whether the principles set out in the draft guidelines ought also to apply to AIFs which are marketed to retail investors. The rationale for this is to ensure equivalent standards in retail investor protection.

FCA position for UK funds

From a UK perspective, there are existing additional disclosure requirements at COLL 4.2.5R around such performance fees, as well as guidance at COLL 6.7.6G and IMA (now IA) guidance (albeit now several years old). This suggests that the UK is already ahead of many other EU jurisdictions when it comes to the areas of focus set out in the draft guidelines, particularly for more recent fund launches. For example, the IMA guidance already discuss the principles of the performance fee calculation, the benchmark chosen, hurdle rates, crystallisation of the fee and high water marks. The FCA rules also require that where a performance fee is taken, examples of its operation in plain English and the maximum it can amount to are included in the prospectus. However, there may still be some differences between the new guidelines and existing models particularly around use of high-water marks, how these are reset and how the reference period is defined.

What if there is a no deal Brexit on 31 October?

If the UK is a member of the EU at the time that the ESMA guidance is published, then that guidance will continue to apply to the UK. While under the EU (Withdrawal) Act 2018 guidance and other non-legislative material produced by ESMA and the other ESAs does not become part of UK law, the EU laws that give the ESAs power to give guidance are, however, ”onshored” and will become part of UK law.

In Policy Statement PS19/5 the FCA confirmed that, “we consider that the EU non-legislative material will remain relevant post-exit day to the FCA and market participants in their compliance with regulatory requirements, including provisions in our Handbook.” (Appendix 3, para 8)

However, as the ESMA guidance will not be made prior to 31 October, that guidance will not be relevant unless the FCA sets out that it should be treated as such.

In PS19/5 the FCA says, “The FCA may consider materials produced by the ESAs post-exit, including where pre-exit material is updated. Where we consider it appropriate to do so, we will set out our expectations as to how it should be treated.” (Appendix 3, Para 16)

Whether or not the FCA do so, will depend upon its view of that guidance. As noted above, the UK already has a robust policy on performance fees. If ESMA’s guidance contradicts, conflicts or confuses that guidance, then the FCA may well not adopt it, however, if the guidance is useful then the FCA may well do so. For examples of existing ESMA guidance that the FCA will not retain after exit, see Appendix 3, paras 12-15.

It will be open to professional bodies and market participants to lobby the FCA in respect of how it treats ESMA guidance in respect of performance fees, whether issued before or after Brexit.

To read PS19/5, click here.

Next steps

The deadline for responses to the consultation is 31 October 2019, following which ESMA will consider feedback with a view to then publishing the final guidelines.

How can Eversheds Sutherland help?

Our in depth understanding of the sector means that we are well placed to advise you the possible implications of the consultation paper and any gap analysis required against your existing performance fee models and the proposed guidelines.