On 16 July 2019, the European Securities and Markets Authority (ESMA) issued a public consultation on draft guidelines on performance fees under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive.

The draft guidelines aim to improve harmonisation in the way in which performance fees can be charged to UCITS. This follows a mapping exercise ESMA carried out in 2018 which analysed the current national practices for key aspects of performance fees. The results of which indicated a lack of harmonisation among EU jurisdictions. Steven Maijoor (Chair of ESMA) notes that the varying practices exhibited between EU Member States creates “undue risks of regulatory arbitrage and inconsistent levels of investor protection”.

ESMA’s draft guidelines propose common criteria to promote supervisory convergence in the following areas:

  • general principles on performance fee calculation methods;
  • consistency between the performance fee model and the fund’s investment objectives, strategy and policy;
  • frequency for the performance fee crystallisation and payment;
  • the circumstances where a performance fee should be payable; and
  • disclosure of the performance fee model.

Annex II of the consultation provides an overview of the applicable 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.

Responses to the consultation should be submitted by 31 October 2019. ESMA will consider the feedback received in Q4 2019 and expects to finalise the guidelines afterwards.