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ESMA Releases Final Guidance on UCITS and AIF Performance Fees


The European Securities and Markets Authority (ESMA) last week published its final guidance on performance fees of UCITS and open-ended AIFs in a bid to ensure a ‘level playing field and a consistent level of protection to retail investors,’ the pan European regulator said.


According to ESMA, the new guidelines will harmonise the way fund managers charge performance fees as well as the circumstances in which they can be applied, as regulators continue to heavily scrutinise the fees managers are charging retail investors.Before the latest guidelines, for instance, an ESMA survey showed that there was no consistency when it came to selecting a benchmark or index across 14 jurisdictions, which can lead to inconsistencies, easier out-performance, and regulatory arbitrage by investment firms.The new regulations apply a cost-benefit analysis and provide five specific guidelines, most of which were welcomed by investment firms during a consultation last year. These include:

  1. Specific performance and calculation method;
  2. Consistency between the performance fee model and the fund’s investment objectives, strategy and policy;
  3. Frequency for the crystallisation of the performance fee;
  4. Negative performance (loss) recovery;
  5. Full and complete disclosure of the performance model.


‘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,’ the regulator said.It added that: ‘The guidelines provide comprehensive guidance to fund managers when designing performance fee models for the funds they manage, including the assessment of the consistency between the performance fee model and the fund’s investment objective, policy and strategy, particularly when the fund is managed in reference to a benchmark.’The guidelines will now be translated into EU languages and published on ESMA’s website. They will come into force two months after publication.