The finance ministers of the Asia Pacific Economic Cooperation countries issued a joint announcement on 10 November 2011 supporting the establishment of a pilot Asia region funds passport scheme ("ARFP").
At the time, it was anticipated that this pilot scheme could be launched as early as in the second half of this year. It was expected that Hong Kong, Singapore and Australia would form the core common regulatory framework and determine the initial list of eligible investment products.
After years of talk and lobbying by certain countries and sectors, notably the Australia and New Zealand asset managers, this seems like it may be a significant step towards the establishment of an ARFP framework. But how realistic is it?
Like a UCITS?
The proposal is modelled after its famous European cousin, UCITS, which the Asian funds industry has been keen to emulate. Such a scheme would allow fund managers in participating Asian countries to promote their products to investors in other participating Asian countries, although the existing impediments of different local regulatory, legal and tax requirements would still need to be overcome.
These different local regulatory, legal and tax requirements currently already impact on the reach of UCITS in different parts of Asia:
- China and India, the two largest retail markets in Asia, as well as Indonesia and Australia, do not recognise UCITS at all.
- In Taiwan, UCITS can be registered for retail investment only if they do not utilise derivatives at all, and the registration process is a lengthy one.
- In Japan, UCITS registration is also a notoriously slow and expensive process.
- In Malaysia and Thailand, a locally registered feeder fund is required to invest into a UCITS. The situation is similar in South Korea, although it has also introduced tax disincentives for foreign funds.
As things currently stand, UCITS are not truly pan- Asian passport-able.
In the absence of an ARFP, individual countries in Asia have already taken steps to advance different levels of market access with bilateral or multi-lateral reciprocity:
- Australia has entered into bilateral mutual recognition agreements with each of New Zealand and Hong Kong, whereby funds, which have been authorised in one country, can be distributed to retail investors in the other country. They do not have to comply with the full range of the other country's authorisation requirements.
- Hong Kong and Taiwan have put in place reciprocal cross-listing of exchange-traded funds ("ETFs"). An approved ETF that is licensed by the Securities and Futures Commission in Hong Kong or the Financial Supervisory Commission in Taiwan will be mutually recognised by the other jurisdiction.
- Members of the Association of Southeast Asian Nations ("ASEAN") have also undertaken tangible efforts to create a single integrated marketplace for listed securities by adopting the ASEAN and
Plus Standards Scheme in 2008, which facilitates multi-jurisdictional share or debt offerings.
The advantages of an ARFP are obvious: potentially enhanced portfolio management by promoting access to larger pools of funds. This would encourage better diversified portfolios at lower transaction costs, improved internal management, greater investor choice, economies of scale resulting from registering funds across different jurisdictions and a common offering mechanism. Smaller managers would have the opportunity to tap into new markets for their products.
Asia is made up of 48 countries with differing local regulatory and taxation requirements as well as stages of economic development and evolution. While the benefits of an ARFP may be evident, the task of reconciling such differences across the region is surely much easier said than done.
Liberal markets, such as Hong Kong and Singapore, generally encourage (or at least facilitate) local market access by offshore investors, whereas India and China only offer restricted access to foreigners. Australia, which has inherently prohibitive local tax treatments of foreign investors, last month also increased withholding taxes from 7.5% to 15%, becoming even less attractive to offshore investors than before.
Although differences in tax treatment and national political and regulatory agendas continue to exist in Europe, the UCITS regime has the advantage of being enacted and implemented by a single supranational body. Asia, on the other hand, does not have such a body and it is not anticipated that it will establish one soon.
The fact that Asia does not have a common currency is not an insurmountable hurdle, although it is entirely possible that the de facto common currency for the ARFP may be the Renminbi. The de facto common currency for most funds at the moment (including UCITS) is the U.S. Dollar.
Participating Asian countries would also need to agree on common product licensing, monitoring, disclosure, sales practices and enforcement. Consequently, an ARFP would be dependent on the initiative of individual countries in Asia to pass identical (or at least substantially similar) laws and regulations to facilitate the establishment of the ARFP. Such an initiative is likely to be hampered by differing political agendas among the different jurisdictions, potentially with some degree of protectionism as well.
Impetus for an ARFP
The Alternative Investment Fund Managers Directive presented a real possibility of Asian managers being left out of the European fund-raising market. And the looming prospects of the Foreign Account Tax Compliance Act ("FATCA") now lend added impetus to the establishment of an ARFP. For further information on FATCA, please refer to Applying FATCA in Asia: Still Oceans Apart, in this Report.
An ARFP is also likely to be supported by Asian regulators, who generally prefer an Asia-centric (rather than EU-centric, in the case of UCITS) approach to the regulation of funds available in Asian jurisdictions.
With the mindset of Europe's UCITS experience, it is theoretically feasible for an ARFP to begin with a core group of countries that are already on par in their development and prepared to agree on a common set of regulations. The likely candidates for this core group are Hong Kong, Singapore and Australia, all of which have developed mature markets with comparable regulatory systems. This is notwithstanding the recent announcement by the Australian tax authorities, which will still likely adversely impact foreign direct investment into Australia, although it may not have as significant an impact on the prospects for a pilot ARFP scheme which includes Australia's participation. It also remains to be seen if the Australian tax and regulatory authorities will consider any specific tax breaks or waivers to incentivise foreign participants in the Australian financial services sector.
A Retail or Alternative Funds Passport?
It may be more palatable to local regulators if the first step in the establishment of an ARFP is the establishment of a passporting system extended at the outset to only non-retail funds.
Once the regulation of asset managers is finessed in this manner and that project is successfully off the ground, with the goal of seeking a harmonisation of private placement regimes Asia-wide, it may be easier to transpose or extend the ARFP to apply to retail products as well.
In the post-global financial crisis investment and regulatory landscape the time is now ripe for a real, sustained effort at establishing an ARFP — whether for retail or private funds, or both.
* This article is based on an article originally published by Global Funds Asia.
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