By a letter dated 04 September 2018, the Central Bank of Ireland (CBI) announced that it will require all Irish UCITS management companies, including self-managed UCITS (ManCos), managing UCITS charging performance fees to review their existing performance fee methodologies to ensure they are in compliance with the relevant CBI Guidance and for the Chair of the Board of each ManCo to confirm in writing to the CBI by 30 November 2018 that such a review has been conducted and its outcome. This follows the CBI’s recent thematic review into whether the transparency and procedures around calculation and payment of performance fees in UCITS ensure that investors’ best interests are protected at all times and continue to be in compliance with the relevant guidance.
On 04 September 2018, the Central Bank of Ireland (CBI) published a letter, in which it set out the findings of its recent thematic review of UCITS performance fees. The letter flags up instances of both good and bad practices which the CBI had found.
The review surveyed just under one third of the 350 Irish UCITS which accrued performance fees during 2017, in order to establish whether the methods which the funds use to calculate and pay performance fees are both:
What relevance does this have for a UCITS ManCo managing a UCITS which charges a performance fee?
The findings will be of importance to UCITS ManCos which manage funds charging performance fees.
These will have to review their existing calculation methodologies and the Chair of the Board must confirm to the Central Bank in writing by email (addressed to email@example.com) that they have done so by 30 November 2018.
The written confirmation must also include information on:
- any required changes to existing methodologies which the review identified
- any required changes to prospectus disclosures which the review identified
- any instances of improper payment of performance fee which the review identified, and
- actions being taken to remedy the above.
The CBI also requires that the letter be brought to the attention of “all members of the board of the (UCITS ManCo)” and to “the relevant responsible persons within the Fund Service Providers”.
The CBI further notes that it will “have regard to the contents of [the] letter as part of future supervisory engagement.”
The CBI published its Guidance in October 2015. In its Consultation Paper 119 on amendments to the Central Bank UCITS Regulations (CP119) which ran from March to June 2018, the CBI proposes the Guidance becomes binding rules and invited stakeholders to consider what requirements were needed to better regulate the charging of performance fees by UCITS. (For example, CP119 includes a proposal to require funds to charge performance fees no more frequently than once a year.)
In parallel with CP119, the CBI conducted this thematic review, covering circa 105 of the 350 Irish UCITS which charged performance fees in 2017. These were assessed against the Guidance - however in a minority (around 10%) of these funds, the CBI found instances of non-compliance with the Guidance or poor practices.
Examples of bad practice by ManCos (and others)
The examples highlighted in the CBI’s letter include:
- cases where performance fees were calculated on the basis of Gross Asset Value rather than Net Asset value, contrary to the Guidance
- instances of UCITS calculating performance fees based on the outperformance of a benchmark or index, which did not appear to be relevant in the context of the UCITS policy
- inadequate disclosure practices in instances where performance fees are paid on the basis of a High Water Mark (HWM), as such fees may be the result of market movements rather than due to the performance of the Investment Manager - the CBI considered that investors may not be fully aware of the circumstances which led to the payment of the performance fee
- UCITS using a HWM approach to calculate performance fees but not using the initial offer price as the starting price for calculations, as is set out in the Guidance, and
- where performance fees are based on the outperformance of an index, the CBI found cases where it was unclear as to which version of the index was being used - the letter reminds firms that the UCITS prospectus must clearly disclose the version of the index being used.
The letter also criticises the performance of some administrators and depositaries (Fund Service Providers) in certain areas of the calculation and independent verification of the performance fee.
Examples of good practice
The CBI’s review, however, also threw up instances of good practice, which the regulator highlights in its letter. These include:
- UCITS that had clear and unambiguous prospectus disclosure in respect of the performance fee methodology
- UCITS that clearly disclosed the version of the index to which the performance fee methodology related
- Transparent, comprehensive and frequent review of performance fee calculations by Fund Service Providers, and
- Fund Service Providers with dedicated performance fee teams.
What happens next?
Where the review identified specific issues with an individual UCITS, the CBI will commence supervisory engagement with that fund, as well as its Fund Service Providers.
In addition, the CBI is requiring all UCITS ManCos whose UCITS charge performance fees to:
- carry out a review of their existing methodologies to be satisfied that performance fees charged comply with the Guidance and the CBI’s findings as set out in its letter
- ensure that the Chair of the UCITS ManCo Board provides written confirmation to the CBI that this review has taken place
- that the confirmation includes information as to whether, in the course of the review
- any required changes to existing methodologies have been identified
- any required changes to prospectus disclosure have been identified
- any instances of improper payment of performance fee have been identified, and
- actions are being taken to remedy the above.
The written confirmation referred to above must be sent by email to firstname.lastname@example.org by no later than by 30 November 2018.
If you require any assistance in connection with any issue arising from the CBI’s letter, please contact your usual contact at Simmons & Simmons.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.