Cross-border investment - passports to prosperity

The advent of an Asian Funds Passport has ushered in a new era for Australian companies. Peter Baker explains the implications and what can be expected. 

The concept of cross-border fund distribution across the Asian region has taken a significant step forward with Australia, Singapore, South Korea and New Zealand signing an agreement at the September APEC Finance Ministers meeting in Bali.

The letter of intent signed at the forum will lead to greater regulatory standardisation between the main countries in the region and paves the way for a pilot Asia Region Funds Passport (ARFP) to commence in 2016.  

The ARFP agreement seeks to establish a multilateral, cross-border distribution framework (similar to the European UCITS model) and will allow Asian investors direct access to Australian investment products and similarly, Australian investors access to Asian-based investment products. 

VIEW ALL

View all

Significantly, the passport stands to create compelling opportunities for Australian fund managers managing growing savings in Asia, opening the $2 trillion Australian Superannuation market to Asian-based fund managers. 

This has prompted a number of Australian asset managers to think about their distribution channels into Asia, and there have been a number of recent examples of joint ventures with Asian counterparts with, in part, a view to enabling distribution into the region. 

John Brogden, chief executive of the Financial Services Council of Australia (FSC), said in a statement: “With 60 per cent of the world’s population and 12 per cent of the world’s total funds under management, the funds market in Asia has the potential to grow exponentially and to become the global centre of GDP growth.”  

The investment world continues to embrace cross-border distribution strategies, while globally investors are increasingly looking to capture some of the Asia growth story.

However, there have been numerous barriers to access. The ARFP initiative will help smooth out the previous roadblocks to cross-border investment and will enable investors in the participating countries to access the best investment talent across the full range of asset classes. 

Additionally, investors will benefit from increased competition between product issuers. This will result in potential downward pressures on cost and increased product offerings, facilitating simpler access to a broader portfolio of diversified global investments. 

What distinguishes the Asia Funds Passport? 

The ARFP is modeled on the European UCITS framework.

However, during the evolution of the UCITS brand, governments within the Asia Pacific region have had a limited role in shaping the regulations which govern European UCITS funds.

So as the Asian financial sector matures, a compelling case has evolved to develop a truly Asian distribution framework which harnesses regional expertise and ensures that the benefits of such a framework remain in the region. 

The ARFP offers the region the potential to provide both easy access and prudent regulatory oversight to investment funds which are locally domiciled.

It also offers significant opportunities for local third party service providers in areas such as unit registry, fund administration, custody, legal work and accounting. 

The establishment of an ARFP ensures the Asia region does not miss out on this significant additional economic activity as the region further undergoes massive wealth transformation. 

Competition and other obstacles 

Negotiating unique cultural, legal, political and taxation systems to establish a level regulatory playing field for the ARFP will require considerable determination and exceptional regional leadership. 

Assuming a relatively smooth implementation of the pilot program, participating countries such as Australia will endeavour to widen the reach of the ARFP to other countries. Hong Kong and Japan, the largest markets in the region outside of Australia, will be crucial targets for future passport membership.  

The ARFP will have to compete with not only UCITS, but potentially with at least two other regional platforms, including the ASEAN funds passport with participants including Singapore, Malaysia, Indonesia, Thailand, Brunei, the Philippines and Vietnam. 

There is also increasing market speculation that Taiwan will join Hong Kong and China to create a greater China regional funds passport. Interestingly, this potential regional funds passport may also look to align with a non-Asian jurisdiction such as Dublin or Luxembourg. 

There will no doubt be a lot of competition amongst these schemes for traction, and future relaxation of cross border capital restrictions in mainland China and the internationalisation of the RMB show that the ARFP pilot agreement is but the first chapter in the journey for the Asian funds passport. Significant challenges remain. 

Indeed, whilst last week’s ARFP signing is the culmination of over two years of hard work, this is just the first step in what is expected to be a long process. Implementation and promotion of the Asian funds passport will present a greater hurdle. Obstacles include at least four issues that will need to be resolved. 

Firstly, tax rules on investment funds in Australia are highly complicated. Australia and Hong Kong have a bilateral arrangement in place to facilitate investment products to each other, but the tax complexities have become such a barrier that nothing significant has progressed. 

This issue requires resolution for other countries to sell products to Australia under the ARFP platform, otherwise the scheme will be seen as all to the advantage of Australia. 

Secondly agreement needs to be reached on the type of products to be sold under the ARFP. This will influence the level of support from all countries. UCITS has built its success on strong governance of simple and mainstream products over many years. 

Recently, more complicated and leveraged products have been covered under the scheme which has alarmed some non-EU regulators, particularly post-global financial crisis.

However, if the ARFP offers nothing different to UCITS, it will be hard to generate fund managers’ enthusiasm to sell products for this platform. Striking the right balance will be crucial. 

Scale is also a key issue that fund managers in the region are struggling with. If managers have to create new products for this platform and cannot leverage the scale of their existing products, the ARFP will be a hard sell. 

The final obvious hurdle is the issue around distribution; the life-blood of any fund platform.

Industry participants should not assume that a successful product in Australia will sell in another country, and vice versa.

Cultural differences, demographics, consumer behaviours and many other factors will all have an impact. 

Distributors in each country will be flooded with product choices and wooed by participants of the various platforms. The commitment of resources to distribution management, however, should not be underestimated. 

Opportunities 

The four countries in the ARFP pilot program have a total of approximately US$3 trillion under management in their funds management industries, according to FSC figures. Australia, with US$1.7 trillion, is the third largest globally after the US, with US$13 trillion, and Luxembourg, with US$2.6 trillion. 

The fact that Luxembourg, a tiny European country, is the domicile for such a level of funds under management and that Asia is the world’s second-largest investor into Luxembourg-based UCITS funds, gives a clue as to why the ARFP is so important.  

Despite the obvious challenges, the signing is a powerful step forward to offer all investors in the region a full suite of competitive investment products – and for Australian fund managers and the broader Australian financial services industry to export their expertise in a more sophisticated, competitive environment. 

There is also real opportunity for Australian superannuation funds to access regional, low cost investment options as well as a broader range of investment management expertise and diversified investment opportunities. 

Given the 2016 passport implementation date, this coincides well with the legislated increase in employer compulsory contribution. This is important as developing economies in the region are undergoing significant transformation and subsequently require substantial investment capital to support the extraordinary levels of growth.  

With favourable geographical proximity and expected continuity in the Asian growth story, the Australian superannuation system will inevitably look to expand the deployment of investment capital in the region and will seek to find new and efficient distribution channels into Asia. 

BNP Paribas Securities Services is proud to have been an active supporter of the ARFP from the commencement of discussions approximately four years ago, serving on advisory panels and working alongside other financial institutions, industry bodies and government officials to help iron out the many wrinkles which have been presented. 

And whilst there may still be some way to go for the AFRP, funds in the region can already take advantage of the existing UCITS directives.

Peter Baker is head of Client Strategy & Communication for BNP Paribas Securities Services Australia & New Zealand.