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ESMA launches public consultation on performance fees

22 July 2019

Pan-European regulator ESMA has launched a public consultation on performance fees, in which it aims to harmonise the way in which fees can be charged to UCITS and its investors. 

The proposed guidelines set out common criteria for EU national regulators on areas such as performance fee calculation methods; consistency between the fee model and the fund’s investment objectives and strategy; frequency of fee crystallisation and payment; when a performance fee should be payable and disclosure of the performance fee model.

Steven Maijoor, chair, ESMA, 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 is seeking stakeholders’ feedback on the proposals, with a view to reviewing the feedback in the final quarter of this year.

According to Laura Suter, personal finance analyst, AJ Bell, the complexity of performance fees and the way they are communicated means many investors have little hope of understanding what fees they are paying.

She said: “A lot of what the regulator says is common sense, but not currently implemented by some in the industry. ESMA says that fund managers should ensure investors understand how the performance fee works. A number of fund managers are still using industry jargon to communicate performance fees to investors. The suggestion by the regulator to include graphics and calculations to help investors understand how the fees work will go some way to battling through this confusion.

“ESMA has also reinforced the fact that the benchmark for a performance fee should be ‘appropriate’ for the investment objectives and aims of each fund. We’d hope that this ends the practice of some performance fees being based on beating the Bank of England base rate, which has been sitting at historic lows for a decade now, and providing a very low hurdle for funds to beat.”

Suter added that a performance fee pegged to the LIBOR rate or base rate could mean that investors are being charged a fee when their investments fail to keep pace with even cash returns. Instead, she has called for an “appropriate market index or a measure of inflation” to be used, which would mean investors’ money keeps pace with rising prices before they are charged a performance fee.

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