UCITS - ESMA adds two new questions on performance fees to its Q&As

On 28 May 2021, ESMA updated its Q&As on the application of the UCITS Directive, adding two new Q&As relating to:

• the performance reference period for the benchmark model; and
• the performance reference period in case of funds' mergers.

The new Q&As (which appear as Q3 and Q4 in Section XI of ESMA’s Q&As) both relate to ESMA’s Guidelines on performance fees in UCITS and certain types of AIFs (the Guidelines).

The performance reference period and the benchmark model

Q3 asks how the performance reference period for the benchmark model (under which performance fees may only be charged on the basis of outperforming the reference market index) should be set, based on paragraph 40 of the Guidelines.

ESMA confirms that paragraph 40 of the Guidelines recommends that:

• any underperformance of the fund against the benchmark index should be clawed back before any performance fee becomes payable; and
• the length of the performance reference period, if shorter than the whole life of the fund, should be at least five years.

To comply with these recommendations, any underperformance should be brought forward for a minimum period of 5 years before a performance fee becomes payable - ie fund managers should look back at the past five years for the purpose of compensating underperformances.

Where the fund has overperformed the benchmark index, the fund manager should be able to crystallise performance fees.

The performance reference period where funds have merged

Q4 asks how a manager should set the performance reference period where there is a merger, the receiving UCITS is a newly established fund which has no performance history and it is, in effect, a continuation of the merging UCITS.

ESMA states that, to ensure that the aim of the merger is not to reset the performance reference period, where the receiving UCITS is a newly established fund with no performance history and the receiving UCITS’s NCA has assessed that the merger does not substantially change the UCITS’ investment policy, the performance reference period of the merging UCITS should continue applying in the receiving UCITS.

Other ESMA updates

At the same time as the changes to the UCITS Q&As, ESMA published updates to its Q&As on:

• AIFMD - see our article here
• Sustainability-related disclosures for benchmarks - see our article here
• EMIR implementation;
• MiFID II and MiFIR Investor Protection topics;
• MiFIR data reporting topics;
• SFTR reporting;
• CSDR; and
• Securitisation.