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New BaFin and CBI guidelines creating restrictions for cross-border UCITS funds

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Guidelines introduced by the Central Bank of Ireland (CBI) and German regulator, BaFin, will create new barriers to entry, according to FITZ Partners’ latest edition of the Performance Fee Benchmarking Report.

Last week, the Central Bank of Ireland (CBI) issued its revised regulations regarding performance fee structures, requesting the introduction of either permanent High Water Marks or permanent Clawbacks and compulsory annual Crystallisation.

At the same time, the German regulator, BaFin, has introduced further performance fee restrictions for UCITS funds distributed in Germany from December 2019; a minimum of 12 months Crystallisation period, a High Water Mark (HWM) or Clawback mechanism running over at least five years and set caps on the size of performance fees being charged to the fund.

“Introducing different local restrictions will create new barriers to entry to local markets which can only reduce efficiency in the market,” says Hugues Gillibert, CEO, FITZ Partners.

Out of all the 1,062 UCITS performance fee structures analysed in the report, only 50 per cent of all funds in review satisfy the CBI guidance, but a staggering 98 per cent of Irish domiciled funds would be compliant with the CBI’s requirements.

The research also found that BaFin’s more restrictive requirements do not seem to be followed by many cross-border funds with Ireland domiciled UCITS coming on top with 30 per cent performance fee structures passing the BaFin tests. In the case of Luxembourg funds, only 10 per cent with a performance fee structure would technically be allowed for distribution in Germany from next January.

Gillibert (pictured) explains that the CBI and BaFin guidelines were in fact following similar logic and in the case of Irish domiciled funds, the majority of which passed the CBI guidelines, “there would be less of a burden for them to pass the BaFin guidelines if they introduce fee caps.”

The report finds that a number of cross-border funds have made changes to their performance fee structures in order to align their models to regulators’ proposals, but not all. Gillibert is also seeing an increasing number of asset managers creating duplicate share classes; one with performance fees and one without performance fees which could be distributed to the German market.

Nevertheless, he is concerned that the creation of different technical local regulations may introduce new barriers to entry to local markets, and more importantly lead to questionable uneven treatment of investors across Europe.

“Local regulators across Europe are certainly entitled to have different views when it comes to performance fee structures, but in our view the industry would be expecting greater standardisation of regulations across Europe,” he adds.

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