EU markets watchdog steps up scrutiny of fees at retail funds

LONDON (Reuters) - The European Union's markets watchdog has published draft guidelines to harmonise how performance fees are calculated for EU-regulated retail investment funds.

The funds, known as Undertakings for Collective Investment in Transferable Securities, or UCITS, hold around 10 trillion euros in assets.

"Performance fees are a key feature both for investors and funds alike. However, different practices exist, creating undue risks of regulatory arbitrage and inconsistent levels of investor protection," Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), said in a statement on Tuesday.

Fees are often linked to how a fund's performance compares with a benchmark like a stock index, but many EU states impose no constraints on which benchmarks funds use, ESMA said.

The draft guidelines, which ESMA has put out to public consultation before issuing final guidance, look to harmonise general principles on models used for calculating and disclosing performance fees.

ESMA said certain arrangements regarding the way performance fees are calculated "might not be in the interest of the UCITS" because they might lead to undue costs being charged on the fund or its unit holders.

The watchdog said in January that charges swallow a quarter of gross returns from the trillions of euros invested in the retail funds.

ESMA and other regulators want greater transparency on fees to encourage investors to shop around for the best-value asset managers.

(Reporting by Huw Jones, editing by Larry King)