On 28 April 2016, representatives from Australia, Japan, Korea and New Zealand signed the Asia Region Funds Passport’s Memorandum of Cooperation (MoC).
Signing of the MoC is an outcome of more than six years international negotiation on the passport arrangements. Australia, Japan, Korea, New Zealand, the Philippines, Singapore and Thailand have contributed expertise to developing the framework in the working group.
The MoC comes into effect on 30 June 2016 and any other eligible economy that signs the MoC before then will be an original participant in the passport.
The MoC comes into effect on 30 June 2016 and any other eligible economy that signs the MoC before then will be an original participant in the Passport. The MoC also ensures any other eligible APEC economies are able to participate in the Passport even after it comes into effect.
Participating economies have up to 18 months from 30 June 2016 to implement domestic arrangements. Activation of the Passport will occur as soon as any two participating economies implement the arrangements under the MoC.
More information is available on the dedicated Funds Passport APEC website
Click here to read the FSC media release.
About the Passport
The Asia Region Funds Passport aims to facilitate cross border distribution of managed fund products across the Asia region. It allows collective investment products offered in one Passport economy to be sold to investors in another economy. Currently, funds are manufactured, distributed and administered within each jurisdiction, with no transferability across borders.
A Passport Pilot program group has been established. Participating economies are developing an agreed set of regulations to facilitate the transferability of funds management products across jurisdictions.
The FSC sees the Passport as a key element of Australia’s ability to compete as a regional financial services centre and has been heavily involved since promoting the concept to the Johnson Review in 2009. Since this time the FSC has worked closely with Treasury to provide assistance with development of workable regulatory and product specifications.
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Four countries have agreed to commence a pilot program for the Asia Region Funds Passport. The initial agreement was signed by Australia, South Korea, New Zealand and Singapore at the APEC Finance Ministers’ meeting in Nusa Dua, Bali Indonesia on 20 September 2013. A copy of the Statement of Intent is available here.
More information on the Pilot will be available on the APEC.
Benefits for consumers
There are many benefits to consumers of being able to access investment products developed outside their own jurisdiction.
In the short term consumers will benefit from:
- Enhanced competition between product providers, which will lead to competitive pressures on cost;
- Improved access to a broader range of managed funds, making it easier to find a product that suits their particular circumstance and risk appetite;
- Improved management of financial risk through easier diversification into assets located in other jurisdictions; and
- Improved capacity to save for retirement through availability of a wider range of competitive products.
In the longer term:
- A wider and inclusive network of Passport economies; and
- Targeted regulatory capacity building.
What is the benefit to the region?
The region will benefit from having a greater number of funds domiciled within it. Fund domicile (the fund’s location for legal purposes) influences the location of services such as unit registry, fund administration, custody, legal and accounting with these activities generally being located in the same jurisdiction as the fund.
Whilst UCITS funds are accepted in some parts of the Asia region, these funds are required to be domiciled in the EU. This means that the fund services are also located in the EU and the Asia region misses out on the economic activity and additional government revenue that flows from them.
For example, a Korean fund manager wanting to offer a product into the Singapore market could set up a UCITS fund domiciled in Luxembourg but Luxembourg would gain the benefit of the additional economic activity from fund services and additional income tax. Under the Passport, the Korean fund manager would locate the fund in either Korea or Singapore, keeping the economic benefits within the Asia region.
Opportunity for fund managers
The Asia region is expected to be a significant driver for growth of the global funds management industry in the future. This is due economic and demographic changes that are occurring in the region, including:
- Asia’s middle class is growing quickly – this will drive demand for funds management as investors look for pportunities to invest and grow wealth;
- Asia’s population is ageing quickly – hence a need for pension and retirement savings products; and
- Many countries in the region do not yet have compulsory superannuation contribution systems for workers – which will drive the need for individual savings plans.
The Asia region is currently punching below its weight in its share of global funds management activity; there is significant potential for Asia to increase this share.
Funds under management (FUM) in the Asia region are currently USD 3.410 trillion. This represents only 12% of world wide FUM, despite Asia’s population sitting at 4.2 billion or 60% of the world population.
By comparison, the US manages 57% of worldwide FUM but only accounts for 14% of the world’s population. In Europe 30% of the world’s FUM is managed, yet it contributes only 11% of world population.
Population and Funds Under Management – Asia, Europe and the Americas
- Population: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2012 Revision, http://esa.un.org/unpd/wpp/Excel-Data/population.htm
- FUM: ICI worldwide Mutual Fund Market Data Q1 2013 http://www.iciglobal.org/iciglobal/stats/worldwide
Further detail on the regulations
The Passport regulations will be a common set of regulations agreed between all participating jurisdictions that will govern product issuers and products. These regulations won’t necessarily be identical to the domestic regulations in any of the participating jurisdictions, but will be designed to provide a level of protection for investors acceptable to financial regulators in each participating jurisdiction.
The regulations are expected to cover issues including:
- eligible investment asset classes;
- custody arrangements;
- offer document conditions;
- registration arrangements;
- licensing arrangements;
- any limits on leverage;
- liquidity requirements; and
- investor protection and dispute resolution procedures.