After a long gestation period, the first real steps towards an Asia Region Funds Passport are about to be taken.
This month Australia will join New Zealand, South Korea and Singapore in signing a statement of intent to formalise the Passport, and this move has Australia’s financial services industry in a state of optimistic flurry.
Despite the enthusiasm from many commentators, there are still plenty of obstacles ahead for the Passport’s development. For instance, how will the scheme successfully operate across the differing political, legislative, and taxation requirements in the region? Will the participating countries be able to agree on the scope and form of the Passport?
Given the massive opportunity the Passport represents to Australia - to grow our exports of financial services across Asia - Australia must continue to play a lead role in pushing ahead with the scheme.
The Asia difference
Asia’s growing contribution to global wealth is well known. The region is home to 60% of the world’s people. While the average age in many Asian countries is younger than western economies, populations in these nations are now ageing.
The OECD reported that “many of Asia’s retirement-income systems are ill prepared for the rapid population ageing that will occur over the next two decades” . This shows the vast opportunity that’s emerging for Australia’s world class funds management system - to become universally available to people throughout Asia.
There is also a growing wealth management opportunity with the numbers of high net worth individuals in Asia expected to surge by 88% between 2012 and 2022. This will trigger greater demand for access to global investment choices and more efficient cross-border capital flows – both of which the Passport intends to deliver.
The Passport as a gateway to the Asian hub
In short, the Asia Region Funds Passport will establish a multilateral framework allowing the cross border marketing of funds across participating countries.
Full implementation of the scheme will allow Australian fund managers to sell investment management products in participating Asian countries and manage Asian money in Australia under existing Australian regulations and laws. No longer will there be a need to ‘top up’ on licenses to comply with the laws of other participating jurisdictions.
Asian fund managers will be able to enter the Australian market, injecting new competition into the world’s fourth largest savings pool with over $2 trillion in funds under management.
On the flip side, Australian financial product manufacturers are bound to be interested in markets like South Korea (with $270 billion under management) and Singapore which has $1 trillion in funds under management.
Perhaps most importantly, investors right across our region will have access to a diversified range of investment products with a consistent level of protection.
Can we simply carry across the UCITS experience to Asia?
The Passport is modelled on the UCITS framework which provides a unified regulatory framework for collective investment schemes to operate freely across the European Union.
The UCITS system has proven its worth with investment fund assets across the EU doubling in size since its inception. Investors have also benefited with access to truly portable and well regulated products.
However, the system has also been plagued by shortcomings. Many EU member nations imposed additional regulatory requirements to protect local asset managers. This, plus a lack of similarity across local laws and differences in tax laws (in respect of access to double tax treaties and withholding taxes) has resulted in a retreat from free operation.
The Asian Passport will also need to deal with these and other roadblocks - differing local legislation, varying degrees of development in market size, and differing levels of investor sophistication.
As experienced by the EU, tax reforms that will be required in various jurisdictions are likely to create a significant challenge to the Passport’s success. Without tax reform, there is somewhat of a consensus that while the Passport would enable offshore fund managers to access investors in Australia, offshore investor appetite for Australian funds would be dampened due to a comparatively more punitive tax regime.
Additional challenges for the Passport are:
- the absence of a single supranational body, unlike in the EU;
- different currencies across each participating country; and
- of course the expediency with which the different jurisdictions can agree on common product licensing, monitoring, disclosure and enforcement regulations.
The formal statement of intent which will formalise the Passport and commit signatories to taking action is expected to be signed by Australia, New Zealand, South Korea and Singapore in late September 2013. However, some other countries may join these founding signatories after discussions at the Asia-Pacific Economic Co-Operation group Annual Finance Ministers’ meeting in Bali.
The signing of the statement of intent itself will not launch the Asian Region Funds Passport scheme. It is proposed that consultation papers will be published in each participating country in 2013, regulations will be considered in 2015 and a pilot scheme for the Passport may commence in 2016 if legislation is settled by the end of 2015.