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September 10, 2018

Monday Morning Memo: Investigations of performance fees—a new threat for the European funds industry?

by Detlef Glow.

The Central Bank of Ireland issued an industry letter on its thematic review of UCITS Performance fees right after my last Monday Morning Memo: Is it only about fees and expenses in the funds industry?. While I was claiming that investors need to double-check whether their funds are worth the price they are charging, the Central Bank of Ireland found that some funds charging performance fees use inappropriate reference benchmarks to determine the success of the portfolio—the reason for charging a performance fee. In addition, the Irish regulator found that some funds charge their performance fees based on gross assets rather than net assets. These findings mean those fund management companies have been overcharging their clients.

In light of the current discussion about the fees and expenses charged by active fund managers, these findings might become another reason for new regulatory efforts in the financial industry. Associates of the European fund industry may be crossing their fingers that no more local regulators start to review their practices of charging clients or that the European Commission does not finally launch an initiative to ban performance fees from all mutual funds in the E.U.

These findings may also become a hindrance for fund distribution in general. Most investors are already doubtful about performance fees and may now become even more wary of a fund charging such fees. Fund selectors especially don’t want be involved in any discussion about a possible scandal in a fund they have selected for their clients.

From my point of view, the findings of the study will put even more pressure on actively managed funds to justify the fees they are charging. Even though only a few funds that were overcharging their clients were found, the impact from these findings could harm the reputation of all funds charging performance fees. In this regard, I would hope all stakeholders in the European fund industry set some rules for themselves in order to avoid a new scandal.

The views expressed are the views of the author, not necessarily those of Refinitiv.

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