ESMA Seeks Peak Performance
With industry competition constantly at fever pitch, the regulatory scrutiny on fees charged to investors remains equally intense in Europe. We recently flagged that European Securities Markets Authority (ESMA) wish to look beyond fee disclosures to concepts such as “value for money”, fairness, and competitiveness to execute its investor protection mandate. A key sub-set of this debate is performance fees.
Last year, we covered ESMA’s performance fee consultation primarily focused on harmonization of how UCITS funds calculate, disclose, and pay performance fees where there was evidence identified that rules and market practices remained inconsistent across the EU.
More recently, last month, ESMA published its final report on guidelines on performance fees in UCITS and Retail Alternative Investment Funds. This publication kicked off a two-month window for EU national regulators to confirm to ESMA whether they already comply or intend to comply with the final guidelines.
In response to the ESMA Guidelines, last week in Ireland, the Central Bank of Ireland (CBI) issued a consultation paper (CP134) to garner industry feedback on incorporation of the ESMA guidelines into the existing CBI performance fee framework. CP134 identifies a couple of specific areas of the ESMA guidelines not covered in the CBI’s existing ruleset. At its core, CP134 looks to bridge these gaps. For the intervening period where the ESMA and CBI rulesets diverge, in the case of any inconsistencies, the existing CBI guidance will prevail. The CP134 consultation period closes on January 15, 2021.
In Luxembourg, the other dominant UCITS fund domicile, the Commission de Surveillance du Sector Financier (CSSF) has not yet commented, however a similar industry dialogue would not be unusual. Indeed, to a great extent, many funds already operate to the principles contained in the ESMA guidelines as a matter of course, or through regulator supervisory engagement made revisions as the direction of travel on the issue became clear.
As such, reading through the guidelines, some asset managers have wondered aloud why such matters of common sense required this additional formal guidance. However, within the consultation ESMA had noted enough irregularities through their supervisory engagement to feel that the guidelines were not only warranted but required for transparency and investor protection. As with many regulatory recalibrations, often regulators are changing the rules to temper the few, and not the many.
Scope of Guidelines
The performance fee guidelines apply to managers of UCITS and certain types of AIFs (those marketed to retail investors except for (a) closed-ended AIFs; and (b) open-ended AIFs that are EuVECAs [or other types of venture capital AIFs], EuSEFs, private equity AIFs, or real estate AIFs).