Australia has the investment expertise, the track record and the framework to make it a financial services hub, writes DTCC’s Matthew Chan – all that is lacking now is the conviction.
Is Australia finally going to become the next financial services hub? Luxembourg built theirs through savvy collaboration with Europe’s regulatory and political authorities.
Ireland’s version developed out of economic necessity post their 1980s recession. Both nations achieved their visions of becoming global hubs for the international funds management sector, a goal that for years has evaded Australia despite resounding credentials.
It has been almost a decade since Kevin Rudd’s Labor government, in a bid to capitalise on Australia’s envied financial system resilience throughout the GFC, enthusiastically tasked Mark Johnson to charter Australia’s future as a leading financial services centre.
The impact of the ensuing November 2009 report, Australia as a Financial Centre Building on our Strengths, was that it effectively divided the industry into two camps: aspirational believers and the cynical realists (with more in the latter camp).
Since then we’ve seen technology, regulation, market structure, network infrastructures and investor demographics dramatically accelerate the globalisation of investment management.
The hubs of the world took advantage of this by successfully levelling many of the international borders that previously defined their markets.
So, what is holding back ours – the world’s third largest pension pool behind the US and Luxembourg, and, indeed, Asia’s largest – with its record of investment capability, consultative regulation and a national commitment to growing innovation and fintech?
Perhaps it’s the one-sidedness with which we’ve been viewing the opportunity.
For years, the national rhetoric has talked up Australia’s potential as a world-class investment destination, but here lies the issue.
A hub can’t simply be a one-way destination for capital. A true global hub is a collection point that facilitates a smooth flow of funds both in and out.
To become the hub it aspires to be, Australia needs to break its home-bias comfort that has been allowed to develop as the nation’s pension savings pot, now just under $3 trillion, continues its projected growth toward $9.5 trillion by 2035. An international outlook isn’t discretionary.
For Australia to achieve its hub vision, it must adopt a truly international mindset, engage fully with Asia, keep pace with China’s transition to a global financial market and embrace all available technologies to efficiently and safely facilitate the flow of funds to global markets, on behalf of local and international investors.
In support of this, market participants should conduct an analysis of their cross-border trading operations and capabilities, especially in post-trade functions where processes have traditionally been less automated.
This is more than efforts to make Australia an attractive destination for foreign capital. To be a hub, Australia must consider where to best deploy capital internationally, with the necessary frameworks, vehicles and links to support it.
Mark Johnson and his team can be largely credited for setting this investor-centric, international view in motion, at least regionally with the recommendation to develop an Asia Region Funds Passport (ARFP) program, moulded on similar models that underpinned the success of Luxembourg and Ireland in affirming their positions as global hubs.
The ARFP will enable a fund registered in its home jurisdiction to be marketed or ‘passported’ to investors in other participating countries, which currently includes Australia, Japan, Korea, Thailand and New Zealand.
Just weeks from its 1 January 2018 target start date, and with final legislative touches being made to the new corporate collective investment vehicle (CCIV) designed for the program, the ARFP will have moved a long way in addressing the standardisation, legal and taxation-related hurdles that have hindered regional funds flows previously.
But while passporting schemes are a major step towards facilitating the increasing demand for cross-border exposure, investment funds will only flow to where there is the best capability and strategies to put capital to work.
Well-designed passports and tax reforms are not going to help Australia grow into a global funds hub if participants are still not embracing the technology to support it.
For instance, an Australian manager with exceptional China insights may attract funds from Japanese and New Zealand investors and invest in Chinese stocks, but that manager’s success will depend on its operational ability to invest into that market, including deploying technology to manage risk and ensure efficient implementation and exit.
Process standardisation aided by automation and scalable networks are key to enabling the international distribution of funds, via passporting programs, as well as international investment execution.
Managers with international investment capabilities, including the adoption of automation and use of network infrastructures, are best able to unlock cross-border distribution and investment.
This enables them to be agile without taking unnecessary risk in capturing alpha opportunities created by markets, many of which were simply not investable in 2009.
It also helps them invest further afield while minimising operational impediments that come with operating Australia’s upside-down timezone.
Australia has proven it has the investment expertise and sound frameworks to be a true global financial services leader.
It now needs the conviction to apply its record and experiences to become a safe but vibrant home for international investors and funds seeking a wide range of strategies and exposures, bringing greater capacity and competitive energy to the international investment management market.
Indeed, with this in mind, there may never be a better time to be an Australian investment manager.
Matthew Chan is the head of institutional trade processing, APAC, at the Depository Trust & Clearing Corporation (DTCC).
Uncertainty and market volatility tend to increase during the run-up to US presidential elections, but the 2020 campaign seems more divisive...