This article was written by Suzanne Gibson (Special Counsel, Singapore)
The Asian retail investment funds market is in the throes of a significant shake-up, with two new cross-border Asian passporting regimes and a momentous mutual recognition arrangement between Hong Kong and China.
The ASEAN CIS Framework for cross-border offerings of collective investment schemes (CIS Framework) is already in existence, with managers in Singapore, Malaysia and Thailand now able to passport their compliant domestic funds to retail investors in these three countries.
The proposed Asia Region Funds Passport (ARFP) is a broader passporting framework, and is a step closer to realisation following the signing on 11 September 2015 of a Statement of Understanding by Finance Ministers from Australia, New Zealand, The Philippines, South Korea, Thailand and Japan. Significantly, this was the first time that Japan had committed to progressing the ARFP, and the inclusion of the strong Japanese market is a huge boost to the strength of the framework in the region. Although Singapore did not sign the Statement of Understanding last week, it has been represented at negotiations since ARFP’s inception, signed the Statement of Intent in relation to the ARFP in September 2013 (together with Australia, South Korea and New Zealand) and continues as an active participant. There may also be other signatories before ARFP’s proposed 2016 launch.
The Mutual Recognition of Funds between Hong Kong and the Mainland of China (MRF) permits Hong Kong and Chinese fund managers to passport their compliant local funds to retail investors in Hong Kong and China. For Hong Kong managers, the MRF provides incredible opportunities by allowing access to the massive Mainland Chinese retail market.
All three regimes are designed to enable the cross-border regional distribution of compliant domestic funds to retail investors in other passporting countries. In a perfect passporting world, regional fund managers would be able to freely offer their local products to retail investors in other passporting countries on a level playing field. But if the European UCITS experience has taught us one thing, it is that managers will flock to the country which offers them the best combination of tax efficiency, accessibility and marketability - a place that:
- offers the best tax treatment for the fund, the manager and the investors;
- is accessible and easy to do business in; and
- has robust regulation, familiar funds structures and investor protections which will satisfy foreign retail investors.
Whichever country achieves this could become Asia's retail investment funds hub - the Luxembourg of our region.
Who is in the running for this crowning glory?
Once the proposed ARFP is launched and assuming Singapore continues its involvement with the ARFP, the key ARFP contenders are likely to be Singapore and Australia. But with the recent launch of the MRF, Hong Kong is also a major competitor.
Singapore is already a leading Asian asset management hub in a prime geographic location for Asian distribution. It offers tax incentives for qualifying funds and an attractive tax regime for funds, managers and investors. It has experience of regional funds passporting through the existing CIS Framework and has been a key advocate for the ARFP.
At A$2.6 trillion, Australia has the largest amount of investment fund assets under management in Asia and the third largest in the world, behind the U.S. and Luxembourg. It has a highly advanced, well-regulated financial services industry, and key government support for the ARFP. Australia has made some significant tax reforms in recent years, including the Managed Investment Trust reforms providing concessionary withholding tax, the introduction of a new tax regime to apply to managed investment trusts which will, amongst other things, accommodate currency overlays on particular classes of units and the recent revision of the investment management regime. The investment management regime is specifically focused on facilitating the access of Australian financial intermediaries. There are also recommendations to introduce new (non-trust) collective investment vehicles which would be more akin to fund structures used in other jurisdictions (e.g. potential limited partnership structures and corporate flow-through vehicles).
Hong Kong has not committed to the ARFP. But the 1 July 2015 launch of the MRF is a game changer for global funds managers, giving Hong Kong-compliant public funds access to the retail investor market in Mainland China. If Hong Kong were to join the ARFP, it would be able to offer any Hong Kong funds that were both MRF and ARFP compliant to retail investors in ARFP countries as well as to retail Mainland Chinese investors. Even without ARFP participation, many global fund managers are considering establishing a Hong Kong presence (to the extent they do not already have one) so that they can benefit from the MRF and access the Mainland Chinese retail investor funds market.
Now that China has implemented the MRF with Hong Kong, it will be interesting to see whether we will see similar mutual recognition frameworks negotiated with our countries.
Significant changes in the distribution landscape for Asian funds could have a real impact on UCITS distribution in Asia, particularly in countries where UCITS has been particularly successful, such as Hong Kong, Singapore and South Korea. Unlike the EU, Asia does not have a supra-national legislator or regulator, a common currency or 30 years' experience of a regional funds passporting regime up its sleeve. But Asian governments do have the will to innovate and to create a market which encourages the regional distribution of fund products established in Asia, meets product demand by the increasing pool of investible funds in the region, slows the tide of Asian money being managed ex-Asia and boosts economic growth. For Asian retail investors, retail regional passporting should lead to increased product choice and diversity of available product potentially coupled with a corresponding downwards pressure on fees. For fund managers, it is an exciting time to assess product structures and operating models, to identify the products and structures which best meet regional demand from these new distribution channels.
For further information in relation to the MRF, see our recent alert: KWM Connect: China Stock Connect and Mutual Recognition of Funds – Latest developments in cross-border investment
Investment Company Institute, Worldwide Mutual Fund Assets and Flows, Second Quarter 2014 (released 2 October 2014), as cited in the Why Australia Benchmark Report 2015, issued by the Australian Trade Commission, January 2015.