As plans for an Asian investment passport gain momentum, Rachel Alembakis looks at how this would be initiated and the possible pitfalls associated with it
Plans to create a pan-Asian investment vehicle similar to Europe’s ‘Undertakings for Collective Investments in Transferable Securities’ (UCITS) has gained influential support with an endorsement following the Asia Pacific Economic Co-Operation (APEC) November 2010 finance minister’s meeting. While there are no concrete proposals on the table to date, industry professionals, peak bodies and country regulators are informally talking with each other to discuss the shape and timetable for a common investment fund structure.
Proponents of so-called Asian passport funds say having an investment vehicle with a common structure, taxation treatment and approval from regulatory bodies in a number of Asian countries would be widely embraced by investors seeking to take advantage of Asia’s growth and diversification. Currently, no single agreement exists to allow for an investor in one Asian country to invest in multiple markets through one vehicle – individual taxation regimes and legal controls differ.
Similarly, no fund manager can market a single vehicle in each of Asia’s countries; regulatory approval must be sought and granted on a country-by-country basis. This adds up to tremendous costs for a fund manager, limiting the efficiency of the end product. A commonly negotiated investment regime would allow providers to sell a vehicle cross-border, which would also add to economies of scale.
In November, APEC finance ministers released a statement off the back of their meeting in Japan, which in part said: “[we] are committed to take action at the domestic and international levels to raise standards, so that our domestic authorities implement global standards consistently, in a way that ensures a level playing field and avoids fragmentation of markets, protectionism and regulatory arbitrage. We also recognise the importance of creating more open and integrated financial markets in the region, and welcome efforts to facilitate crossborder [sic] marketing of fund management services within Asia.”
The Australian perspective
At the November APEC meeting, Australian Prime Minister Julia Gillard also released a report authored by PwC for Australia’s Financial Services Council (FSC). The report was favourable towards the establishment of an Asian passport fund, and outlined the key hurdles to be negotiated – mainly in taxation treatment and regulatory standards.
There are significant grounds to believe a pan-Asian investment vehicle would be taken up – State Street estimated that in 2009, the pan-Asian region held US$3.9trn in collective fund assets.
“When you talk to individual economies and some of the key players, you do get a sense of how this issue is important,” said State Street Global Advisors Singapore-based regional director for the Institutions Group in Asia, Hon Cheung.
“One of the common themes that you see across Asian governments, generally, building a strong financial service industry is important. They also understand that right now, much of what’s done is carried out offshore. Given this strong trend of regional co-operation, it does logically follow the question why can’t we do this for ourselves?”
In addition to the massive pool of available funds for investment, such as Australia’s superannuation system, with more than US$1trn in assets, proponents of a common investment vehicle point to the UCITS regime as a model and an argument in favour of developing a similar open-ended investment vehicle for the Asia Pacific region.
“There will be a close correlation in terms of the regime. The actual regulation may look different, but the regime will be similar [to UCITS],” said FSC CEO John Brogden. “It’ll develop a massive benefit on a number of fronts. It’ll provide investors with an opportunity to access Asian markets, diversify their portfolio and it’s particularly important because Asia is such a growth market, and will be a growth market for the next 20 to 50 years. Second thing is that it allows a free flow of funds in the region, and thirdly it ends the ridiculous situation where Australian fund managers have to domicile themselves in Europe in order to use UCITS to access the Asian markets.”
As momentum builds behind starting actual negotiations, all parties recognise that the two biggest hurdles to creating an Asian UCITS structure are tax and regulatory harmonisation. Regulators such as the Australian Securities and Investment Commission (ASIC) will require standards on transparency and legitimacy before signing on.
“What ASIC will do – and rightly so – is guarantee that an Australian mum and dad investing in an Asian product won’t lose their money,” noted the FSC’s Brogden. “That’s what it comes down to. We will work with the government and we will work with our counterparts, but fundamentally it’s a regulator to regulator agreement.”
But there is reason to believe that creating a common regulatory standard is not as difficult as might be envisaged, as potential participant countries already have certain regulatory standards in common when it comes to the sale and marketing of investment funds. PwC’s report noted that “[each] jurisdiction requires the licensing of the promoter or issuer of the fund, the registration or approval of the fund itself and the registration or vetting of the offer documents”.
“I think one of the hurdles is finding a way around what’s acceptable from a regulatory perspective,” said head of PwC’s Australia’s asset management practice, Andrew Wilson. “There are many differences within Asia’s markets regarding the specific details of regulatory regimes.
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