Trade, Asia, and the Passport

The Asia Region Funds Passport (ARFP) is on the verge of implementation as jurisdictions put the final touches on legislation to enable a scheme aimed at easing barriers to cross-border marketing of funds. Although proponents see the ARFP as a key to unlocking new markets for its participants, its success may rest upon the responsiveness of regulators and the backing of the industry over the long term.

An Asian response to UCITS

Championed by Australia and driven by the Asia Pacific Economic Cooperation (APEC), the ARFP is a response to the success of the European Union's UCITS fund regime, which has seen European-based UCITS fund managers win significant fees for managing Asian savings and investments. The passport is expected to take effect in late 2018, providing a framework between Australia, New Zealand, South Korea, Japan and Thailand to facilitate business across borders.

An additional tool in the fund manager's 'toolkit'

Advocates see the ARFP as a potential game-changer for asset management in the region, easing access to the vast investment management markets of Australia and Japan. Yet industry participants remain cautious about its immediate prospects in a region already well served by UCITS fund products. “The passport is not going to guarantee an immediate success for exporting funds to Asia," Amna Khan, Asia-Pacific and Americas Head of Product at Colonial First State Global Asset Management, told the Financial Services Council 2018 Summit conference in Melbourne. “We do actually have a number of useful vehicles in the region already. We see this is as an additional tool in the toolkit. It's not as if UCITS will suddenly become redundant or the Asian passport will become redundant. The ARFP will take a long time to reach its potential."

Advocates see the ARFP as a potential game-changer for asset management

Regulators have been careful to solidify the approval processes during a pilot program which generated positive feedback, but also revealed concerns from asset managers about the potential need to modify fund structures and product disclosure statements, which have subsequently been addressed by the Australian Securities and Investment Commission (ASIC). Underlining the challenge of gaining buy-in across Asia, the pilot program attracted participants from Australian fund managers and professional services firms but only observers from other jurisdictions, including the key markets of Japan and South Korea.

ASIC has played a significant role in advocating the passport. Japan and Thailand have already passed legislation required to implement the passport, while South Korea and New Zealand are expected to do so by the end of 2018. “Funds, advisers and services providers in the other economies outside Australia did take part in pilot meetings," Ged Fitzpatrick, ASIC's Senior Executive Leader, International, said. “We are aware of some other fund operators that are interested, and have done work in the preparation of making early use of the passport, but which did not wish to participate at the pilot stage."

Opening doors in Japan

Hong Kong, the Philippines and Singapore were all observers at the last joint committee meeting in Sydney in April 2018, and Fitzpatrick said he expected at least one or two other jurisdictions to participate at the next one in New Zealand in September 2018. “In the long, long term, there's no reason why you couldn't look beyond Asia to other jurisdictions on the other side of the Pacific," Fitzpatrick added.

For Mark Burgess, Chairman of independent fund manager Yarra Capital Management, conversations about the passport have helped open doors in Japan, where investors are interested in products that can serve the country's large and ageing population. “I also think it builds relationships, remembering that Japanese fund managers are thinking of passporting to us, and are already in our conversations. They want to bring product here, and we want to take product there," he said. “With government support of passporting viewed as a good way or a reasonable way in which to have client relationships, then we see no reason why it won't take off in these markets. And that's exactly how UCITS worked."

Australia keen for CCIVs to bolster ARFP

An area that requires further effort is the need to ensure tax neutrality between domestic and foreign funds in each jurisdiction

An area that requires further effort is the need to ensure tax neutrality between domestic and foreign funds in each jurisdiction. Australian fund managers are also eager for the long-awaited deployment of Corporate Collective Investment Vehicles (CCIVs), which offer a more recognizable fund structure for Asian investors compared with the unit trusts that dominate the domestic market. “Obviously the CCIV is critical in helping to gain attraction and having a structure that Asian investors are more comfortable with," said Khan. “And tax is something we haven't got to that needs to be addressed. It will be, but it's a long-term play."

Regulators that have embraced the ARFP will also need to be able to demonstrate their flexibility in the face of sudden changes in market conditions, said Nikki Bentley, a Sydney-based partner at global law firm Norton Rose Fulbright. Bentley cited Luxembourg's quick response in fast-tracking approvals for UCITS funds that sought to participate in the Hong Kong-Shanghai Stock Connect scheme after its 2014 launch. “We see a lot of investors in Asia where they are keen to see which one of the regulators in the passporting regimes responds quickly to changing regulations in the Asian region," she said.

Building confidence in the passport will take time and may be dependent on the commitment of jurisdictions to market the scheme effectively. “The question that comes back all the time is 'what's the difference, why should we buy into it?'" said Khan. “The softer side of marketing needs to be properly positioned as well for it to be truly successful."