Background to the Regional Passporting Proposals
The “ASEAN1 Framework for Cross-Border Offering of CIS (Collective Investment Scheme)” (ASEAN CIS Framework, or Framework) finally went “live” on 25 August 2014, amid much anticipation, with three initial member jurisdictions – Singapore, Thailand and Malaysia – and with the rest of Asia watching closely.
The ASEAN CIS Framework is part of a larger effort to establish the ASEAN Economic Community by 20152, with the goal of capital markets integration within ASEAN. Under the Framework, a locally domiciled CIS that satisfies certain eligibility requirements may apply to be “passported” to another member jurisdiction for promotion to retail investors in that other jurisdiction, under a streamlined approval process. The Standards of Qualifying CIS – a set of common standards to govern the cross-border offering of ASEAN CIS – include the following requirements:
- the CIS has been assessed by the relevant local regulator as being suitable as a “Qualifying CIS”;
- investments may only be made in transferable securities, money market instruments, deposits, units of other CIS and financial derivatives;
- the CIS may not engage in certain specified activities, such as securities lending or repurchase agreements; and
- the CIS is operated by a locally licensed CIS operator (that has a minimum five-year track record and at least USD500 million under management globally).
In other words, CIS should be fairly plain vanilla UCITS3-like funds. The Handbook for CIS Operators of ASEAN CIS has also been issued by the securities regulators of Singapore, Thailand and Malaysia, in order to provide guidance on the operational aspects of the Framework.
Market watchers will be aware that Singapore also signed a Statement of Intent in 2013 with the Republic of Korea, Australia, and New Zealand, to establish the APEC Asia Region Funds Passport (ARFP), and the regulators in the signatory countries released a consultation paper on the ARFP earlier this year. Since then, Thailand and the Philippines have also indicated an intention to be part of the ARPF. The original Statement of Intent indicated a target day of January 2016 for the ARFP to go “live”.
Apart from the ASEAN CIS Framework and the ARFP, the Hong Kong-PRC Mutual Fund Recognition Scheme is also in the cards – having first been announced by the Securities and Futures Commission of Hong Kong in January 2013, with market participants in Hong Kong and the PRC expecting more detailed rules on this Scheme to be announced before the end of this year. In terms of market size, the ASEAN Passport offers access to the smallest market among the three possible Asian passport/mutual recognition regions – Singapore, Thailand and Malaysia based asset managers collectively managed approximately USD204 billion as at December 20124, with the assets under management in ASEAN as a whole weighing in at USD286 billion as at December 2013.5 Mainland China constitutes, by far, the largest market of retail fund investors – hence, the anticipation over the Hong Kong-PRC Mutual Fund Recognition Scheme.
Still, with the sense that some Asian funds passport scheme is better than none, what can eligible CIS operators expect from the ASEAN CIS Framework?
The Perceived Benefits
The commonly mentioned benefits of the Framework are that there will be more diverse investment opportunities for retail investors in the member jurisdictions, as well as deeper capital markets that should increase competitiveness in the international arena. With an increased focus on protecting national/regional markets, the Framework will encourage the region’s surplus savings to recycle locally and be applied towards regional economic development, instead of flowing out to finance foreign investments. While, in theory, Singapore’s recent status as an RQFII6 centre may also allow Singapore CIS operators to export RQFII funds to Thailand and Malaysia – and, conversely, for Malaysia-based Shariah funds and fund expertise to be exported to other member jurisdictions – it remains to be seen whether there will be a retail demand for such movement of products and expertise within the ASEAN CIS Framework.
Currently, Singapore and Thailand are the only countries participating in both the ASEAN CIS Framework and the ARFP. A CIS operator that satisfies the requirements to offer CIS in Singapore or Thailand, respectively, should therefore also be able to passport its locally-domiciled CIS to member jurisdictions under both schemes – this would strengthen Singapore’s position as a funds and financial centre should both schemes become successful, and may also significantly increase Thailand’s profile as an up-and-coming funds hub in the making. Certainly, market watchers had been surprised by Thailand’s initial enthusiastic support for the ASEAN CIS Framework earlier in 2012.
Thailand and, in particular, Singapore (as one of the most developed economies in ASEAN and with one of the more sophisticated securities regulators) may well become the logical choices of domicile for foreign fund managers wishing to establish a presence and a CIS in Asia in order to take advantage of the regional funds passporting schemes.
The current Framework is largely in line with the Singaporean domestic CIS regulatory regime, with similar standards anticipated to be adopted by the ARFP. This should make it easier for Singapore-based CIS operators to expand into other Asian markets.
For the less mature economies within the ASEAN CIS Framework or the ARFP, the passporting regime will allow them access to the regulatory and commercial expertise of more developed funds hubs such as Singapore and Australia. It is a reasonable expectation that this access may lead to an improvement in local regulatory standards and frameworks. Larger domestic managers in these economies may also be able to target a more international client base by passporting their CIS to Singapore, assuming that all relevant eligibility requirements are met.
The question is whether there will be sufficient demand by retail investors and equivalence in the different securities regulatory regimes within ASEAN to generate a cross-border movement of products that is not too lopsided in favour of the more developed jurisdictions such as Singapore.
Challenges to Successful Implementation of a Passport Scheme in Asia/ASEAN
Both the Framework and the ARFP face similar challenges to implementing a successful regional funds passporting scheme, including, but not limited to, the following.
Different Regulatory Standards
As mentioned above, not all securities regulatory regimes are created equal, and this situation is, possibly, magnified in Asia. With a wide range of regulatory standards and expectations within ASEAN and the broader Asia region, certain regulators may resist the introduction of passporting schemes, due to the inclusion of jurisdictions that may not appear to have a comparable level of regulatory supervision. Inadequate legal frameworks, low accounting and auditing standards, poor transparency and weak corporate governance in less-developed member economies may all be factors contributing to a lowering of the general performance standard of a (new) regional passport scheme and cast doubt about the quality of certain cross-border CIS.
Different Political Agendas, and Nationalistic/Protectionist Measures
The different regulatory regimes within ASEAN are often a reflection of the different levels of socio-economic and political development of the different ASEAN members, with Singapore at the acknowledged top end of the spectrum and, for example, Myanmar at the other extreme. With different political agendas, local regulators and/or governments in ASEAN/Asia may feel some degree of political pressure from their constituents to protect their respective domestic fund industries through the maintenance of barriers to entry.
Absence of a Common Currency
Without a common currency within the passport region, products will need to be denominated in different currencies and, hence, require multi-denominated share classes. Additionally, currency restrictions exist with regard to the Malaysian Ringgit and Thai Baht, which means that exchange controls and repatriation issues need to be considered. This may be viewed in contrast to the UCITS passporting regime in Europe, which does have the Euro as its common currency.
Competition from UCITS
Currently, UCITS form the core regional distribution strategy for many global fund firms, and are dominant in the three major Asian funds distribution centres of Hong Kong, Taiwan and Singapore. The advent of a new Asia/ASEAN-focused regional passporting scheme is not expected to provide real competition to UCITS, at the outset. This is, particularly, because the markets to which the passporting schemes currently provide access, such as Thailand and Malaysia, may be less attractive to global investors. Mainland China, the largest market in the region, is not participating in the ARFP, and cannot participate in the ASEAN CIS Framework (not being part of ASEAN). Things may change after the launch of the Hong Kong-Mainland China mutual fund recognition scheme.
There are tax disadvantages for Australian investors who invest in offshore funds – this resulted in the mutual fund recognition agreement previously signed by Hong Kong and Australia7 not being as successful as the signatories had hoped. Similarly, a regional passporting scheme will not be very attractive to Australian investors unless there are appropriate changes to that country’s domestic tax laws. Similar restrictive taxes on offshore funds also apply in South Korea – these restrictions make it prohibitive for offshore funds to enter this market.
It would be incumbent upon Australia, South Korea and other jurisdictions with similarly restrictive domestic tax regimes to introduce changes to facilitate the passporting of CIS both into, and out of, their markets. Without such changes, the movement of authorised CIS may not be as free-flowing as might be expected under a regional passporting scheme.
In this case, with the push for the ARFP to come online by 2016, one might speculate whether the politics that a pan-Asia passporting regime goes “live” in some shape or form may have overtaken the logistics of ensuring that the relevant domestic legislation and regulation are also ready for the new development.
It will be essential for the success and practical implementation of any passporting regime for firms to have already established a successful local distribution network with a strong local partner in the other member jurisdictions within a passport regime.
Despite the challenges, funds passporting has now been introduced in Asia in the form of the ASEAN CIS Framework. It remains to be seen whether the Framework (and other Asia-based schemes to come) will be able to rise above the Hong Kong-Australia Mutual Fund Recognition Scheme, which is now likely to be quietly put aside. If so, it would not be inconceivable to contemplate Mainland China being invited to join the Framework as well, in much the same way as the CA Expo (China-ASEAN Expo) takes place each year to promote closer trade ties between ASEAN and its largest trading partner, Mainland China.