The agreement was signed at the Asia-Pacific Economic Cooperation finance ministers meeting in Indonesia on 20 September between Australia, South Korea, New Zealand and Singapore, and should facilitate greater cross-border distribution of funds management products.
Corrs partner Michael Chaaya and senior associate Jennifer Cho wrote in a recent update that the agreement “has Australia’s financial services industry in a state of optimistic flurry [but] there are still plenty of obstacles ahead for the Passport’s development”.
There are question marks over how the scheme will operate successfully across the differing political, legislative, and taxation requirements in the region, and whether participating countries will be able to agree on the scope and form of the Passport, they said.
However, Australia must continue to play a lead role in pushing ahead with the scheme, given the “massive opportunity” the Passport offers Australia in growing exports of financial services across Asia, they wrote.
These opportunities are highlighted by a recent Capgemini and RBC Wealth Management report, which found the wealth among high net wealth individuals (HNWIs) in the Asia Pacific region has soared to record levels, significantly outpacing the growth in personal wealth among HNWIs in other parts of the world.
One of the key benefits of the scheme is to allow Australian fund managers to sell investment management products in participating Asian countries and manage Asian money in Australia under existing Australian regulations and laws without the need to “top up” on licences to comply with the laws of other participating jurisdictions, according to Corrs.
The Passport is modelled on the European Union (EU)’s Undertakings for Collective Investment in Transferable Securities (UCITS) system, which has been successful but also plagued by shortcomings, Mr Chaaya and Ms Cho wrote.
Many EU member nations have imposed additional regulatory requirements to protect local asset managers, which combined with a lack of similarity across local laws and differences in tax laws, has resulted in a retreat from free operation, they said.
The Asian Passport will have to deal with these and additional roadblocks, including differing local legislation, varying degrees of development in market size, and differing levels of investor sophistication. Tax reforms that will be required in various jurisdictions are likely to create a significant challenge to the Passport’s success, they added.
“Without tax reform, there is somewhat of a consensus that while the Passport would enable offshore fund managers to access investors in Australia, offshore investor appetite for Australian funds would be dampened due to a comparatively more punitive tax regime.”
The Passport will also have to overcome the absence of a single supranational body, different currencies across each participating country, and the expediency with which the different jurisdictions can agree on common product licensing, monitoring, disclosure and enforcement regulations, according to Mr Chaaya and Ms Cho.
