The Passport will enable a fund registered in its home jurisdiction to be "passported" to other participating countries.
The Australian Government is one step closer to implementing the long-awaited Asia Region Funds Passport regime, as part of a package of reforms to strengthen the international competitiveness of Australia's funds management sector.
The exposure draft of the Corporations Amendment (Asia Region Funds Passport) Bill 2017 (Passport Bill) was released for public comment, alongside the Treasury Laws Amendment (Corporate Collective Investment Vehicle) Bill 2017 (CCIV Bill).
What is the Passport?
The Passport is an international initiative that, once implemented, will provide a multilateral framework to facilitate the cross-border marketing of managed funds across participating economies in the Asia region.
The Passport will enable a fund registered in its home jurisdiction to be "passported" to other participating countries. This will occur through mutual recognition, whereby participating jurisdictions agree to recognise aspects of each other's regulatory systems.
This will provide a framework that will potentially make it easier for Australian managed fund providers to offer their products in other Passport economies, and for managed fund providers from other Passport economies to offer their products in Australia. The Passport is intended to support the development of an Asia-wide managed funds industry through improved market access and regulatory harmonisation. The introduction of the new corporate collective investment vehicles pursuant to the CCIV Bill will complement the Passport regime, aiming to internationalise Australia's funds management sector by providing a form of investment vehicle that many Asian investors are already familiar with.
Memorandum of Cooperation
The Passport's Memorandum of Cooperation (MOC) came into effect on 30 June 2016, and was signed by Australia, Japan, Korea, Thailand and New Zealand (the Pilot Group). The signing of the MOC was the outcome of six years' international negotiation, and sets out the internationally agreed rules and cooperation mechanisms underpinning the Passport. Over time, the aim is to ensure all other eligible APEC economies are able to participate in the Passport regime.
The Pilot Group economies have committed to incorporate the Passport arrangements as set out in the MOC (the Passport Rules) into their respective domestic laws to establish regulatory frameworks for the Passport. Activation of the Passport will occur as soon as any two participating economies have implemented the Passport Rules into their legal systems, with an expected launch date of 1 January 2018. In Australia, it is proposed that the Passport Bill will implement the Passport arrangements into domestic law by allowing the Passport Rules to be established by legislative instrument and inserting a new Chapter 8A into the Corporations Act 2001 (Cth).
Australia and New Zealand's current mutual recognition scheme
The intent of the Passport regime is similar to the Trans-Tasman mutual recognition scheme currently on foot between Australia and New Zealand , but there are notable differences. Since 2008, Australia and New Zealand have maintained a mutual recognition arrangement for financial product offerings between the two jurisdictions which permits a wide variety of products to be offered in both countries, using a single disclosure document prepared under the laws of the relevant home country, with only minimal entry and ongoing requirements. The success of this arrangement has been largely facilitated by the similar regulatory environments and close economic ties between Australia and New Zealand.
Currently, differences and duplication in regulatory requirements across economies have created significant difficulties for fund operators to offer their investment scheme products across international borders. It is intended that the Passport, once implemented, will establish a framework to help facilitate mutual recognition arrangements between the participating economies, and to ease the tension of regulatory incompatibilities that may currently exist. However, unlike the Trans-Tasman Mutual Recognition Scheme Passport funds will still need to comply with the disclosure requirements as governed by the laws of the host economy.
Regulation of Passport regime
Broadly, the Passport regime will comprise a combination of home economy laws, host economy laws, and the new Passport Rules.
Generally, home economy laws will apply to the operation of local funds, including the authorisation and licensing of those fund operators. Host economy laws govern the disclosure requirements of foreign funds to investors in the host economy, and other matters concerning foreign funds' interactions with investors such as complaints handling, marketing and anti-money laundering and counter-terrorism requirements.
The new Passport Rules will set out various common rules that will operate across the participating economies, including Passport fund entry processes, the required qualifications and experience of Passport fund operators, investment and portfolio allocation restrictions, and other restrictions and requirements aimed to promote investor protection.
What is a Passport fund?
Under the proposed laws, an entity is an eligible Passport fund if it is both:
- a "regulated CIS" (defined as a collective investment scheme that is regulated by the corporations legislation of a participating economy); and
- registered as a Passport fund in a participating economy.
To become a Passport fund, eligible Passport funds and operators must apply to the home economy regulator for registration as a Passport fund, and then apply to the host economy for approval to enter and offer fund interests in the host jurisdiction.
In Australia, only managed investment schemes registered in accordance with the Corporations Act qualify as eligible Passport funds. Those funds may apply to become Passport funds by lodging an application with ASIC. ASIC must register the fund as a Passport fund if:
- the fund's operator satisfies the eligibility criteria as set out in the Passport Rules, which includes requirements relating to minimum value of assets under management (at least USD500 million), capital and organisational competence; and
- ASIC is satisfied that the fund will comply with the corporations legislation in Australia (including the Passport Rules incorporated into Australian legislation).
Outside Australia, only funds registered in another participating economy qualify as eligible Passport funds. In order for those funds to offer interests in Australia, they must lodge an application with ASIC. ASIC may refuse entry for various reasons, including that the fund is unlikely to comply with the home or host economy's laws and regulations, or entry is not in the public interest.
The Government is currently reviewing public submissions relating to both the draft Passport and CCIV Bills. Further revisions to the proposed legislation are expected before it is incorporated into Australian law.
One of the biggest challenges facing the implementation of the Passport regime is achieving tax neutrality (so that domestic and foreign funds offered to investors in a single jurisdiction are treated similarly for tax purposes). Given the diversity of local tax regulations in participating economies, achieving alignment on an agreed tax framework is a fundamental issue that will need to be addressed in order for the Passport regime to be successful. The tax framework was absent in the MOC, but draft legislation is expected to follow. As such, we expect that further potentially substantial updates in respect of the Passport may be released in the coming months.
1 The Trans-Tasman Mutual Recognition Scheme is contained in the following laws: for New Zealand issuers wishing to extend an offer into the Australian market - Chapter 8 of the Corporations Act 2001 (Cth) and the Corporations Regulations 2001 (Cth); and for Australian issuers wishing to extend an offer into the New Zealand market - Subpart 6 of Part 9 of the Financial Markets Conduct Act 2013 (NZ) and Part 9 and Schedule 25 of the Financial Markets Conduct Regulations 2014 (NZ).
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