UCITS Performance Fees – Action Required!

On 4 September 2018 the Central Bank of Ireland (“Central Bank”) published a “Dear CEO” letter highlighting key supervisory issues identified during its recent thematic review of the payment of performance fees by UCITS.

The Central Bank expects Fund Management Companies (“FMCs”) which manage UCITS that charge performance fees to:

  • carry out a review of their existing methodologies to examine if they are in line with the Central Bank’s UCITS Performance Fees Guidance (the “Guidance”); and    
  • confirm to the Central Bank in writing, by 30 November 2018, that such a review has taken place.


Earlier this year, the Central Bank carried out a thematic review of practices relating to the calculation and verification of performance fees charged by some Central Bank authorised UCITS funds. This review was carried out in parallel to Consultation Paper 119, which proposes that the Guidance will be transitioned into the Central Bank UCITS Regulations by year-end 2018. See our related briefing here.

The review identified approximately 350 UCITS that accrued performance fees in 2017. Authorised officers reviewed a sample of circa 30% of these UCITS for the purpose of determining whether the methodologies and parameters selected and applied in the calculation of UCITS performance fees were in line with the Guidance.

The “Dear CEO” Letter

According to the “Dear CEO” letter, the Central Bank identified a number of good practices across the majority of UCITS sub-funds reviewed, including:

  • UCITS that had clear and unambiguous prospectus disclosures 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.

However, the Central Bank also identified instances of non-compliance with the Guidance in approximately 10% of the sample of UCITS sub-funds. Overall the Central Bank is concerned that the Guidance is not being applied in a comprehensive manner and that this could be detrimental to the interests of the UCITS and their investors.

As a result, the Central Bank now requires FMCs which manage UCITS that charge performance fees to carry out a review of their existing methodologies (the “Review”) in order to be satisfied that performance fees charged comply with the Guidance, including the findings detailed in the Central Bank’s review.  The Review must include the calculation procedures adopted by Fund Administrators and Depositary verification procedures.

The “Dear CEO” letter must be brought to the attention of all members of the Board of the FMC and to the relevant responsible persons within the Fund Service Providers. The Central Bank will have regard to the contents of this letter as part of future supervisory engagement.

What action is now required?

The Review

The “Dear CEO” letter sets out a number of issues that an FMC must be cognisant of, and take appropriate action to address, when carrying out the Review. These issues already form part of the Guidance and therefore, it is expected that most UCITS funds are already complying with these requirements in full.  The key issues include the following:

  • UCITS performance fees must be calculated based on Net Asset Value (NAV) and must not be calculated on the basis of Gross Asset Value (GAV);
  • A UCITS calculating performance fees based on outperforming an index must demonstrate that the index is relevant in the context of the UCITS policy and, as part of the Review, an FMC must satisfy itself that this is the case and record in writing the basis for being so satisfied;
  • UCITS must make adequate investor disclosures when paying performance fees on the basis of achieving a new high net asset value per share (the “High Water Mark Approach”) and must take the initial offer price as the starting price for calculations;
  • The Guidance provides that any underperformance of the index in preceding periods be clawed back before a performance fee becomes due in subsequent periods. Some UCITS only claw back under performance of the index for a specified period. The FMC must be satisfied that investors are not disadvantaged where clawback is limited to a certain period and amend the UCITS performance fee methodology to comply with the Guidance;
  • The prospectus must clearly disclosure the version of the index being used for the purpose of performance fees based on the outperformance of an index;
  • An FMC must review the calculation procedures adopted by Fund Administrators to ensure that the calculation of performance fees is applied in a consistent and independent manner; and
  • An FMC must review the verification procedures adopted by their Depositaries to ensure that the verification process is:
    • carried out by the Depositary on all UCITS performance fee calculations;
    • performed by the Depositary prior to payment; and
    • performed on crystallisation by the Depositary, regardless of whether or not a performance fee is due for payment.

Email Confirmation

The Chairman of the Board of the FMC must confirm to the Central Bank by email to themedinspections@centralbank.ie, by 30 November 2018, that the review has taken place.  In addition, the email must set out whether, in the course of the review, the FMC identified:

  • any required changes to existing methodologies;
  • any required changes to prospectus disclosure; and
  • any instances of improper payment of performance fee.

The email must also set out the actions being taken to remedy the above.

Other issues

The Central Bank intends to commence supervisory engagement with the individual UCITS that were the subject of the review, where specific supervisory issues were identified, as well as with the Depositaries and Fund Administrators of those UCITS.

This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.