Australian agriculture is the headline winner from new free trade agreements with Japan and Korea, but the agreements will also boost financial services and infrastructure investment in Australia.
Japan and Korea are, respectively, our second and fourth largest trading partners so the sweeping reduction in tariffs and import barriers are key wins for Australia’s beef and agricultural exporters.
However many more financial services industry opportunities will also arise with the newly signed Korea-Australia Free Trade Agreement (KAFTA) and the negotiated Japanese agreement (JAEPA) that will be formally signed during Japanese Prime Minister Abe’s Australian visit in July.
Financial services have traditionally been a relatively small part of Australian trade with Korea and Japan however the potential of the trade agreements to open up cross-border flows of financial data and services should not be underestimated – particularly as they come on the heels of a dramatic increase in the scale and diversity of South Korean offshore investments.
The KAFTA agreement will allow Australia greater freedom in the provision of financial services to Koreans, who have been moving from traditional mining into broader forms of investment like finance and insurance, manufacturing, infrastructure and commercial property.
The amount of Korean money pouring into foreign commercial property grew ten-fold to $5 billion in the year up until the first half of 2013.
The number of South Korean proposals approved by the Australian Foreign Investment Review Board (FIRB) almost tripled to 114 in the three years to 2013.
Under KAFTA, Australian financial services providers will have the newfound ability:
- To supply cross-border financial services without the need to open a full commercial presence. The agreement clearly defines those financial services that include asset management, investment advice for Korean investment funds and pension funds, custodial and trust services, direct, reinsurance and brokerage insurance, and insurance-related services.
- To provide and transfer financial information, data processing and supply financial services software.
- To access more streamlined licensing procedures and more transparent regulatory decision making.
- For Australian accountants to establish Korean offices that provide consultancy services on international and Australian accounting law. Within five years, Australians will be able to work in and invest in Korean accounting firms.
- For Australian law firms to establish representative offices in Korea and advise on Australian and public international law. Within five years, Australian law firms will be able to establish joint ventures and hire local lawyers.
Direct investment opportunities will also become more attractive with a quadrupling of the Foreign Investment Review Board’s screening threshold for Korean investments in non-sensitive sectors. The threshold for private investors will rise from A$248 million to A$1,078 million.
Key opportunities lie in greater collaboration between Asian and Australia financial services, particularly with pension and infrastructure funds.
Japan and Korea both face the economic challenges presented by increased competition from emerging markets and the maintenance of high average incomes.
There are dwindling domestic investment opportunities for the rising middle class, and the pension funds for Japan’s 127 million people and Korea’s 50 million are growing with their rapidly ageing populations.
Korean and Japanese investors -- who will continue to demand alternative attractive investment prospects, asset consultation and portfolio management -- are looking to invest directly overseas.
Korea’s biggest investor in pension funds, the National Pension Service of Seoul, has more than 20 million people enrolled and, in 2013, a reported $420 billion in assets. Buying overseas assets is expected to be a key part of the National Pension Fund’s stated intention to enhance returns by raising the weighting of alternative investments -- like property, infrastructure and private equity-- to more than 10% of its portfolio by 2016.
In turn, Australian fund managers are expected to export increased insurance and pension services to Asian countries to help meet significant demand for money management and investment advice.
Australian banks will benefit from increased demand for services like trade finance and foreign exchange. However fund managers banking on surplus demand for investment advisory services and portfolio management should remember that the Free Trade Agreements precede other significant initiatives that will further liberate the investment environment and increase competition.
These initatives include the Asia Region Funds Passport, to which all three economies are signatories. The Passport will reduce barriers to investment, funds and data transfer across the Asia Pacific.
Although its future is not assured, the release of a wide-ranging consultation paper in April 2014 saw the Passport progress to its next stage of implementation. It is hoped the Passport will encourage further regional financial integration by allowing investors to access an internationally diversified range of investment products.
There will be an influx of potential investor funds from South Korea and Japan, but the increased competition from the Passport funds will also drive down financial services fees.
So the liberalisation of financial services trade will bring both major challenges and opportunities for fund managers and advisers.