The Australian Government has released a draft of the internationally negotiated rules and operational arrangements (Draft Rules) for the Asia Region Funds Passport for public consultation.
Once implemented, the Asia Region Funds Passport will provide a multilateral framework to facilitate the cross border marketing of managed funds across participating economies in the Asia region.
It will in effect create a regional market for managed investment funds by facilitating cross-border issuing and provide Australian fund managers with an opportunity to increase their presence in Asia and develop further business.
The development of the Asia Region Funds Passport
The concept of the Passport was recommended by the Australian Financial Centre Forum in its 2010 report (known as the 'Johnson report'). The concept was explored through the members of APEC. On 20 September 2013, finance ministers from Australia, South Korea, New Zealand and Singapore signed a Statement of Intent in Bali, Indonesia, which outlines an undertaking by signatories to publicly consult on detailed Passport arrangements and sets out a process to see the Passport implemented by 2016.
On 16 April 2014, the governments of the Working Group economies release the consultation paper, which contains the detailed passport arrangements, with consultation closing on 11 July 2014. The consultation paper detailed the proposed arrangements for the Passport developed by the Working Group.
Following the consultation period, the Working Group refined the arrangements, taking submissions into account. The proposed arrangements are reflected in a draft memorandum of understanding (MOU). The MOU, when signed, will signal an economy’s commitment to participate in the Passport and implement the Passport arrangements.
Background to the Draft Rules
The Draft Rules, released last week, were prepared by the Working Group comprising representatives of certain APEC countries (Australia, Korea, New Zealand, the Philippines, Singapore and Thailand). The Draft Rules can be found here.
The Working Group has prepared a consultation paper to seek views from the public on the detailed rules and operational arrangements. The consultation paper comprises the Draft Rules as well as a 'Feedback Statement'.
The Assistant Treasurer's media release states that the Passport seeks to reduce red tape for fund managers by creating a standardised set of rules that will apply across Passport participants while providing Australian investors with a greater choice of investment products.
Aspects of the Draft Rules
The Draft Rules comprise proposed annexures to the draft MOU. Some annexures are confidential and are not reproduced, and the Working Group seeks feedback on the following annexures:
- Annex 1 of the draft MOU, which sets out the only areas in which a 'Participant' will impose obligations on 'Passport Funds' from other economies that are offered in its economy (known as the 'Host Economy laws and regulations'). A 'Participant' is defined as 'an economy that is a party to the MOU'.
- Annex 2 of the draft MOU, which sets out the regulatory arrangements for Passport Funds – how Passport Funds are to be registered and supervised by regulators and how the Passport arrangements are to be enforced (the 'common regulatory arrangements'). This annex is designed to be given effect in, but not directly incorporated into, the law of a participating economy.
- Annex 3 of the draft MOU, which sets out the Passport rules. This is a common set of requirements with which the 'Operators' of Passport Funds (ie, responsible entities in Australian context) and certain other persons involved with Passport Funds will be required to comply on an ongoing basis. The Passport rules contain provisions that govern the behaviour of a Passport Fund in both the home and host economies. The Passport rules are designed to be directly incorporated into the law of a participating economy.
A 'Passport Fund' takes on different meanings depending on the laws of the participating countries, and in an Australian context is means a registered managed investment scheme established in Australia, or a 'sub fund' of that scheme. A 'sub fund' is, relevantly, a registered scheme or a 'CIS' 'forming part of [a registered scheme] that also includes another CIS under which assets of the first-mentioned CIS cannot be lawfully applied under any laws of [Australia] except in meeting liabilities or otherwise for that CIS or the entitlements of members in that CIS'.
A 'CIS' or 'Collective Investment Scheme' is a defined in a manner that looks similar to the definition of 'managed investment scheme' under the Corporations Act. A CIS is 'a scheme with the following features:
- at least two persons (members) contribute money or money’s worth for the right to the benefits produced by the scheme;
- the contributions are pooled to produce financial benefits or an interest in property for the contributors or persons directly or indirectly acquiring their rights from the contributors (members);
- not all the members (in their capacities as members) take part in day to day management of the scheme; and
- the pool is managed as a whole for the benefit of the members collectively.'
Indicative implementation timetable
The consultation closes on 10 April 2015. The Working Group will consider submissions received from the consultation process in May this year.
The Feedback Statement sets out an indicative implementation timetable. The MOU is intended to be finalised in August 2015. Passport member economies will endeavour to implement changes to legislation and regulation where necessary to give effect to the Passport arrangements within 12 months after becoming party to the MOU. When at least two economies give effect to the Passport arrangements, it is intended that eligible Collective Investment Schemes in these economies can access the Passport arrangements.
The Assistant Treasurer expects that the Passport arrangements will commence in 2016.