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French firms have issues with Esma performance fee guidelines

Fees_calculatingFund associations and asset managers are digesting guidelines for performance fees that were issued by Europe’s financial regulator this week.

The European Securities and Markets Authority (Esma) issued its Guidelines on performance fees for Ucits funds and certain types of alternative investment funds on Tuesday after a consultation exercise.

Esma wants to harmonise performance-fee models across Europe, where various approaches are taken.

The Esma guidelines allow for performance fees to be taken even when a fund loses money but still outperforms its reference benchmark.

However, where underperformance against benchmark is concerned, the period over which fund managers must claw back performance before charging performance fees looks set to be a sticking point for Esma in getting acceptance for the guidelines.

Esma’s guidelines say the reference period should be five years so that a fund manager can clawback any underperformance relative to a benchmark index before a performance fee is paid.

AFG, the French trade body for fund managers, commented favourably on the Esma guidelines but said the guidelines “go too far” by imposing one model based on a five-year reference period from which fees would be calculated to allow for recovering losses.

The AFG says imposing a five-year time horizon across funds jeopardises performance fee models already tried-and-tested, including in France, because there is no distinction between asset classes, strategy or recommended holding periods.

AFG said the five-year guideline could incite some funds to discard performance fees and adopt higher fixed fees. These funds would lose the benefit to investors of having profits shared out when funds perform well - or being charged a lower fixed fee when they underperform.

“Therefore, in the AFG’s opinion, depriving investors who subscribe in a fund of a choice between, for example, a share class that is subject to performance fees and another that carries only fixed fees which are higher and charged systematically regardless of market conditions, runs counter to their interests. We must bear in mind that variable fees work to investors’ advantage in a market downturn,” the AFG said, and called for only a partial application of the fees with the five-year requirement to be optional.

The guidelines will be translated into the official EU languages and published on the Esma website, which will trigger a two-month period during which regulators must notify Esma of whether they comply or intend to comply with the guidelines.

Esma said a vast majority of respondents agreed that greater standardisation was desirable.

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