The Asia region’s enthusiasm for better market access and regulatory harmonisation for a funds management network within the region has not been in vain with the new Asia Region Funds Passport (ARF Passport) framework finally having commenced. The ARF Passport provides another multilateral framework which enables finance products in or of eligible funds or other collective investment vehicles in one nation to be offered to retail investors in another nation where the nations are signatories to the ARF Passport regime.
Historically, cross border retail funds management within the Asia region has been fragmented through economic and demographic differences, and duplication in regulation requirements. It was expensive and inefficient, and sometimes, impossible, for fund managers to operate across the Asia region. Australia has the largest funds management industry in the Asia region, but differences in tax systems, maturity and size of constituent markets has meant that it had limited access to Asian investors, especially retail investors, and hampered investor choices. The ARF Passport offers both a pathway to enable Australian funds to offer their finance products to the growing middle class and high net worth population across Asia and increases competition for Australian investors by having access to Asian funds.
The move towards a uniform ARF Passport regime has been a long time coming. Industry players across the Asia region have been aware of the need for a better targeted framework which has resulted in two previous Asia region funds passports emerging from the Asia Pacific in recent years (ASEAN and MRF), each with their own characteristics, difficulties, stages of development and traction. A comparison of the main characteristics of the three regimes is set out in the table below.
The ARF Passport is similar to its Asian counterparts in terms of fund eligibility, manager experience and ongoing regulatory oversight requirements. For an Australian fund to be “passported” to another signatory nation of the ARF Passport, it must be an eligible regulated Collective Investment Scheme (CIS) under the ARF Passport. In Australia, this would be a managed investment scheme (MIS), or a sub-fund of a regulated MIS. The application process is not cumbersome with a form needing to be submitted to ASIC who will then register the MIS as a “passport fund” if they are satisfied that the fund will comply with the corporations legislation in Australia.
For a foreign fund to be passported to Australia, the process is slightly more time-consuming. The foreign fund operator must meet their home country’s regulation requirements to become a regulated CIS. They will then need to lodge a notice of intention to offer interests in Australia with ASIC with all of the required information and documentation. ASIC will then have a period of 15 business days from receipt of the notice to consent or reject the notice.
The overall success of the ARFP regime will depend on its ability to be agile and benefit investors, distributors, innovators and managers in both Australia and Asia. While the ARF Passport regime is designed to be a leap towards new market opportunities, its current form doesn’t yet address some key difficulties that existing passport regimes also failed to address such as the tax treatment of passported funds. Each signatory to the ARF Passport regime (and the existing two regimes) has its own unique tax systems with some favouring domestic funds over offshore funds, making it potentially difficult and unattractive for foreign managers to enter domestic markets.
It is not inconceivable that the ARF Passport regime will create and enforce a uniform tax treatment in relation to passported funds, but this is unlikely to happen overnight. The European Undertakings for Collective Investment in Transferable Securities (UCITS) regime, created in 1985, has been augmented and added to over the last 30 years in its aim to remove barriers to the cross-border marketing of CISs and create a single funds market across the EU, with Member States progressively legislating in the last decade for tax transparency to remain competitive in the single market. UCITS now has a uniform tax charge which applies to all funds within the regime.
The ARF Passport is a welcome step in the right direction. Asia is a fragmented market (by nature), and while there is some much needed fine-tuning of the ARFP Passport regime yet to happen, this is the industry’s best attempt at overcoming a long-running challenge of isolated funds management markets. No doubt the cross-border funds management network will be in a state of flux for the foreseeable future, but investors and fund managers alike are hopeful of a positive result.