With the introduction of regional fund passporting schemes, will Asia Pacific rival what has happened in Europe with UCITs and recent European harmonisation initiatives?
Asia Pacific is trying to boost cross-border investments, with several passporting arrangements happening simultaneously.
One is the Association of Southeast Asian Nations (ASEAN) funds passport, which covers jurisdictions such as Singapore, Malaysia and Thailand.
There is also a larger and more regional agreement, the Asia Region Funds Passport (ARFP), which is currently in the consultation stages, and would involve Australia, New Zealand, South Korea, Singapore, the Philippines, Thailand and Japan (the most recent signatory).
A major drive for the ARFP is that these markets combined will create assets under management rivalling pan-Europe and cross-border investments into China.
The time is ripe for Asia-Pacific countries to dictate future growth and necessary steps to drive investment growth into the region rather than pursue European domiciled funds.
By harmonising funds distribution within Asia-Pacific countries the ease and reduction in operating costs will benefit investors.
Currently, however, these passporting measures are still in the memorandum of understanding period, and there is one key point that, if not addressed, will make it very difficult for the passport to be successful. That is the issue of tax.
In some countries, such as South Korea and Australia, local investors can purchase funds launched by local fund managers and pay a relatively low capital gains tax rate.
If that fund is sold by a foreign fund manager, however, the capital gains tax rate is much higher.
This issue hasn’t been addressed in the most recent version of the understanding, and because of this, Singapore, which was an early signatory of the ARFP when it was initially discussed, has refused to sign until the issue is addressed.
Singapore is generally a very open economy, but if Singapore agrees to this passporting regime, it would allow foreign funds to be sold to its investors, while Singaporean fund managers trying to sell funds in Australia, for example, will be hit with a punitive tax rate. It’s not a fair arrangement.
In addition, this year we have seen global appetite to China’s capital market, causing the buzz around the region.
RMB initiatives launched recently such as the Hong Kong-Shanghai Stock Connect and the renminbi qualified foreign institutional investor (RQFII) program expanding into Europe, allowing equities, balanced funds as well as fixed income-only funds to access the Chinese market has led to China’s ambition to be considered as a global reserve currency.
In the long run, China will stabilise and become more mature.
Progress, at the moment with the passporting and RMB internationalisation schemes are still being developed.
The ARFP is not operating the same way as the UCITS framework, where if a fund is approved in the home domicile it can be sold to other countries without further approval. In the cases of the ASEAN passport and the ARFP, the home country and the host country distributing the fund have to give their approval.
They are both still some way off from real single passports.
Obviously, Europe is very different because it is driven by the European Union, which serves to harmonise the banking infrastructure.
There is no Asian union, so participating countries are, understandably, not willing to completely open up to each other.
It is a big job, but if it is successful, it will be a big step for these Asian markets.
We watch with interest where this progresses in 2016.
It’s the right time now for our Asia-Pacific countries to collaborate and create a passporting scheme which will benefit of investors throughout the region and the growth of our industry as a whole.
Daryl Crich is the chief administrative officer of BNP Paribas Securities Services Australia.
