Asia Region Funds Passport - Asia’s answer to UCITS or white elephant?

The Asia Region Funds Passport (ARFP) is an APEC initiative to create a regulatory arrangement for the cross-border offer of collective investment schemes (CIS) in participating jurisdictions.

The objectives underlying the ARFP proposal include:

  • providing investors with greater diversity of investment opportunities
  • promoting regional financial integration to assist Asia-Pacific capital markets to grow and deepen
  • growing the pool of funds invested in the region, and keeping those funds in the region
  • maintaining frameworks (legal and regulatory) which promote investor protection and fair, efficient and transparent markets.

The finance ministers of Australia, Korea, New Zealand and Singapore have issued a consultation document which outlines the detailed rules proposed for the ARFP. Following domestic consultation, each of the eligible and participating economies is expected to revise and finalise the ARFP rules and mutually commit to adopt the final regime.

Treasury and ASIC are to be commended for their role in progressing the ARFP proposal and for their active engagement with Australian fund managers and other participants in the funds management sector domestically. The ARFP, as envisaged under the consultation document, has many positive features. However, in our view, many of the rules currently proposed risk impeding the development of a successful CIS passporting regime for the Asia-Pacific which can truly compete with the EU’s Undertakings for the Collective Investment in Transferable Securities (UCITS).

In particular, the initial Australian CIS proposed under the ARFP raises concerns as it is limited to a managed investment scheme (MIS). Australian fund managers have long faced challenges when trying to market and explain a MIS and the unit trust structure to prospective foreign investors. Restrictions on delegation of the portfolio management function are also problematic as they effectively prevent an ARFP fund operator from delegating any portfolio management functions to a delegate who is not regulated by the ARFP regime in their home economy. This will be fundamentally problematic for many ARFP fund operators who manage global portfolios, for example global equities, as it will prevent them from appointing investment managers who are located and regulated outside participating Asia-Pacific countries.

In the interests of providing a broader perspective on the ARFP we spoke with 3 key industry participants who are close to the proposals:

John Brogden
CEO of the Financial Services Council

Harvey Kalman
Executive General Manager of Corporate Fiduciary & Financial Services at EQT

Andrew Cannane
General Manager, Corporate Client Services Corporate Trust at Perpetual

Q. What are the strengths of the Proposal?

A. John Brogden
Once operational, the [ARFP] will deliver free trade in investment funds for the Asian Region. It will facilitate the cross border distribution of managed fund products across Asia using an agreed set of regulations which are designed to deliver a level of protection for investors which is acceptable to financial regulators in each participating jurisdiction.

The [ARFP] will allow investment funds domiciled in one country to be sold directly to retail investors in participating jurisdictions, and vice versa

A. Harvey Kalman
Investment professionals and jobs will come to the region if it’s built appropriately - ‘build it and they will come’. But [we] need to build the right framework.

The ARFP will:

  • provide host economy regulators with transparency and control over what’s provided to and said to investors in their jurisdiction, as well as what they’re earning on investments
  • help keep money in the region (rather than being invested in UCITS).

A. Andrew Cannane
The Passport will provide a compelling platform for the sector to capture the immense opportunities coming out of Asia’s economies. It would also serve to increase competition amongst the regions prominent fund managers, which will lead to innovation, efficiency and better outcomes for investors.

Q. What are the weaknesses of the Proposal?

A. John Brogden
[It may take time for the ARFP] to gain traction as it will be competing with the well-established European UCITS regime. Asian fund managers have gone through the expensive process of establishing offices in Europe for the sole purpose of gaining a UCITS licence for their products so they can sell them into Asia. UCITS have been very successful in accessing Asian funds under management and currently account for 40 per cent of all new sales.

A. Harvey Kalman
Under the Australian model, we work with the archaic unit trust, a collective investment vehicle that no-one outside of Australia understands. Even the UK has moved to unitised companies. [We] need a universal CIS which is ‘passportable’ within the region.

If the change or the structure isn’t as good as or better than UCITS then it’s useless. Our biggest competitors are UCITS. We need to match/exceed them.

[The proposal also] has to allow for the fact that some services are in and others are out of the region. [The proposal] has the potential to be a white elephant if it’s too restrictive, for example look at the delegation restrictions.

A. Andrew Cannane
Australia’s single responsible entity regime is contrary to both the UCITS funds model and most of our counter-parts in the Asia-Pacific region. For Australia to integrate its collective investment market into the global system, we must consider how to improve independent governance within our legislative framework. Unfortunately, according to the Australian Government corporate law adviser CAMAC, UCITS funds cannot be registered as a managed investment scheme under the Corporations Act, as the UCITS structure does not recognise Australia’s single responsible entity regime.

Q. What would you like to see in an Asia Region Funds Passport regime?

A. Andrew Cannane
At Perpetual Corporate Trust, we believe that the passport platform should seek to mirror the key investor protection, independence and product requirements of UCITS. Central to this is independent oversight of the collective investment scheme operators by gatekeepers and regulators.

The concept of independent oversight by an independent entity such as a trustee or depository is universally accepted as an appropriate way to enhance the interests of investors and minimise risks. Such an entity is there to protect investors from non-compliant, illegal and fraudulent conduct of the scheme’s operator (investment manager). It is desired by, and understood by global investors.

In developing a lasting structure to advance the chances of success of the passport, we should adopt this global standard. Our view is that an operator of a CIS participating on the passport platform should only be supervised by an independent entity that is licensed to do so.

A. John Brogden
[Currently] 40% of all new funds managed in Asia are done through UCITs because a regional mutual recognition agreement does not exist. [This means that increased] trade in financial services and cross-border investment flows must be a goal for all countries in the region.

This will be facilitated by mutual recognition of financial services regulation across all countries that agree to join the [Proposal]. This will be supported by a multilateral framework which will outline a set of structural requirements such as arrangements for registration of the fund and licensing of the manager; investment restrictions and conditions such as prospectus requirements.

A. Harvey Kalman
A transparent regulatory approach that allows the offering of funds across borders - as if those borders weren’t there. There should be barriers to prevent “charlatans” from participating, and to only allow those with the appropriate skills, resources, insurance and good standing (or “ethics”) to participate.

Q. What do you see as the challenges to implementation?

A. Harvey Kalman
Time, politics and local biases…people are nervous and fearful because they’re not sure how [the passport proposal] will affect them. [In particular] any changes/reform to the industry will be slow and take time. If institutional investors in particular like it, then it will be taken up much faster - that’s key.

A. Andrew Cannane
Developing the passport will require significant effort amongst member states, particularly in respect of tax regimes and permissible product structure[s]. However getting some important key structural issues settled ahead of 2016 will be important to the long term success of the passport system.

The upcoming FSI provides a critical opportunity to ensure we have the right policy settings in place. Lifting financial services exports needs to be a key focus of the inquiry. It is [also] critical that the Australian Government press ahead with the remaining recommendations of the Johnson Report if Australia is to capitalise on the significant export opportunity that financial services offer.

A. John Brogden
The pilot program for the [ARFP] starts in 2016. Australia has a window of opportunity to fix its non-competitive regulatory and policy regimes before the [ARFP] pilot begins. It is critical that the Government commits to a world class Investment Manager Regime, has a Collective Investment Vehicle Regime that allows Australian-based fund managers to effectively compete internationally and tax rates on Managed Investment Trusts that are competitive with other jurisdictions.

Each of the countries participating in the ARFP have very different regulatory environments. The challenge will be to ensure the agreed regulations for the pilot meet the needs of each participating nation while retaining the appropriate level of consumer protection.

Q. Do you think the current proposal will benefit Australian fund managers?

A. Andrew Cannane
We believe that the current proposal will benefit Australian fund managers. We know that the growth potential is already there - the 2013 Australian Investment Managers Cross-Border Flows Report commissioned by the Financial Services Counsel and The Trust Company (Part of Perpetual Limited) identified that foreign fund flows into Australia have increased by 78% since January 2010 [66% of foreign inflows have originated from the Asia-Pacific region, representing a total of $18.71b]. With the right policy settings in place, Australia can take advantage of the potential for domestic fund managers to form a significant and growing proportion of future export activity.

A. John Brogden
The [ARFP] will improve market access for Australian fund managers in Asia. This will lead to flow-on consequences to the wider Australian economy, including lower fees, increased employment of Australian fund managers, fund administrators and support staff, and increased tax revenue.

Australian fund managers could also build up greater expertise in the Asia region which they may then be able to export to other continents.

A. Harvey Kalman
Anything that allows Australian fund managers to manage money outside of Australia, and Australian funds to attract investment from other jurisdictions, will benefit all of us. Australian fund managers need to expand and export their offerings beyond managing Australian superannuation money.

Conclusions for the industry

It’s clear that the current ARFP proposal is intended to achieve very laudable objectives, and that it has the potential to grow the funds management industry in the Asia-Pacific significantly. However it seems to us to be equally clear that more work needs to be done to ensure that the final regime will provide fund managers in the region with an effective and competitive platform.