Date: 8th April 2019

When the European Securities and Markets Authority (ESMA) updated its Questions and Answers (Q&As) regarding the application of the Undertakings in Collective Investments in Transferable Securities (UCITS) Directive on 29 April 2019, BETTER FINANCE was happy to find that ESMA heeded our calls to better address various disclosure issues and closet indexing in general. The updated ESMA Q&A’s comprehensively address most of the issues flagged by BETTER FINANCE in its 2018 research on “Benchmark Disclosure Compliance".

Statistics on investment products and their returns are meaningless numbers if they cannot be compared with an objective indicator that would allow the investor to measure performance. BETTER FINANCE has been long advocating for making benchmark comparisons mandatory for investment products, in particular UCITS. We have several reasons for that, of which we remind:

  • Investors need to be aware of how the alternative (the market) is performing;
  • Investors need to understand what value they get for their money;
  • The majority of UCITS have a determined investment universe (e.g. German blue chips) making it easy to establish the reference market – the benchmark;
  • Objective comparisons stimulate competition, reduce costs, and could improve returns.

The KIID Regulation[1] was the first step in this direction. Although not always 100% clear in its wording, the provisions of Article 7(1)d and of Article 18 required UCITS managers to publish the reference benchmark, if any, and its past performance in the 2-page document.

Research by BETTER FINANCE showed that not many actively managed funds disclosed their reference market, probably reasoning that their investment policy does not include or imply a reference to a benchmark. This legislative loophole allowed some fund managers to circumvent this requirement by:

  • Pretending there was no benchmark, sometimes even engage in closet indexing;
  • Comparing the fund with itself (absolute performance), with 0% performance, or with other poorly performing funds (peer groups).

Following BETTER FINANCE investigations into these serious shortcomings, ESMA took a closer look at the issue made use of other tools at its disposal, issuing clarifications in its Q&As update of the 29th of March (2019) on the Application of the UCITS Directive.[2] In particular, these updates shed very welcome light on the disclosure of benchmarks in the UCITS’ KIIDs.

In summary:

  1. The onus is on the UCITS manager to indicate the type of fund objective from three options:
    1. Actively managed funds, referenced to a benchmark;
    2. Actively managed funds, not referenced to a benchmark,
    3. Passively managed funds, with or without an index-tracking objective.
  1. The Q&As distinguish between a “benchmark” and a “benchmark index”:
    1. The comparator (target is “x% +” an indicator) – for total/absolute return funds;
    2. The market index, which can be a simple index or a composite index;
    3. If the comparator is X% p.a. over a defined period of time, then the “annualised performance of the benchmark index should be shown”.[3]
  1. A UCITS management approach that “includes or implies a reference to a benchmark[4] means that the benchmark plays a role in the management of the UCITS”,[5] such as:
    1. Explicit or implicit definition of the portfolio composition:
      • (i) The benchmark index is the universe from where securities are selected;
      • (ii) The UCITS holds units in other UCITS/AIFs in order to achieve similar performance to a benchmark;
    2. UCITS performance indicators:
      • (i) The benchmark is used for determining performance fees;
      • (ii) Overperformance of the benchmark is an internal or external target;
      • (iii) Contracts between the UCITS management company and third-parties stipulate benchmark overperformance as an objective;
      • (iv) The portfolio manager has a remuneration element dependent on relative performance to the benchmark;
      • (v) Marketing materials compare fund performance with a benchmark;
      • (vi) Risk indicators are benchmark-dependent (Tracking Error, VaR).
  1. All documents (marketing/mandatory – printed/electronic) must be consistent with the KIID:
    1. The “KIID should be consistent with other fund documents”,[6] including the Prospectus;
    2. The KIID must be consistent with own or third-party distribution channels, such as online platforms or financial data providers;
    3. The KIID must be consistent, regardless of whether the investor is professional or retail.

All these clarifications are in line with/in response to our interpretations and findings from our Closet Indexing and Benchmark Disclosure Compliance research reports. What is sure, is that UCITS managers should no longer escape from disclosing their fund’s benchmark.

Public and Private Enforcement

ESMA’s Guidelines are part of Level 4 acts in EU Capital Markets regulation, meaning that they are not legally binding for their addressees or the Member States, nor do these clarifications serve as an irrebuttable interpretation of the law, which only the Court of Justice can do.

However, two legal effects can derive:

  • Public enforcement: ESMA and national competent authorities may use these Q&As to scrutinise and, if deemed necessary, sanction inconsistencies;[7]
  • Private enforcement: these Q&As from ESMA may facilitate the proof of liability of the fund manager in a collective redress action, for instance.

[1] Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of a website, OJ L 176, 10.7.2010, p. 1–15, ELI:

[2] ESMA Q&A on the Application of the UCITS Directive, 29 March 2019, ESMA34-43-392.

[3] ESMA Q&A, p. 14

[4] Article 7(1)d KIID Regulation.

[5] Emphasis added, ESMA Q&A, p. 19.

[6] ESMA Q&A, p. 15.

[7] According to ESMA’s website, “Q&As are not legally binding, yet their application will be rigorously scrutinised by ESMA and national competent authorities given their practical significance to achieve a level-playing field”; see ESMA, ‘Questions and Answers’, accessed 5 April 2019,