Home Knowledge Charging of Fees and Expenses to Capital

Charging of Fees and Expenses to Capital

The Financial Regulator will, from 1 September 2010, permit all funds to charge fees and expenses to capital.  Prior to this, it was generally only qualifying investor funds, professional investor funds and retail equity funds which were permitted to charge fees and expenses to capital – open ended retail distributing investment funds investing predominantly in debt markets were not permitted to do so. This is a very welcome development, particularly in the context of UCITS fixed income funds.

The conditions under which funds will be allowed to charge fees and expenses to capital are as follows:

  • The constitutional document of the fund must provide for charging fees and expenses to capital;
  • The prospectus must include appropriate disclosure including the rationale behind policy;
  • A prominent risk warning to describe the effects of charging fees and expenses to capital i.e. that capital may be eroded and that income will be achieved by foregoing the potential for future capital growth;
  • A similar risk warning in the subscription application form referring to the effect of the charging policy including possible capital dilution as follows “unit holders/shareholders should note that all/part of the fees and expenses will be charged to the capital of the fund.  This will have the effect of lowering the capital of your investment”. 

The following additional requirements will now also apply in the case of retail fixed income funds:

  • The greater risk of capital erosion given the lack of potential for capital growth must be highlighted, together with the likelihood that due to capital erosion the value of future returns would also be diminished;
  • Where the priority of the fund is the generation of income rather than capital growth this should be highlighted.  In addition the prospectus should include a statement that distributions made during the life of the fund must be understood as a type of capital reimbursement. 
  • Any income statement issued to investors where expenses are being charged for capital should include a statement to explain the effect of this accounting policy including wording to the effect that the investors capital has been reduced.  A similar statement/risk warning should also be included in all marketing documentation.