Written by Associate Rebecca Sheehy
The introduction of the Asia Region Funds Passport (ARFP) has been in the works for some time. The ARFP was one of the recommendations coming out of the 2009 Johnson Report and aims to provide a basis for cross-border marketing of managed funds in the Asia region. While there has been a tendency to focus on the benefits of the ARFP to consumers and fund managers in isolation, it's a good idea to look at the ARFP in the context of some of the other Johnson Report recommendations that are being discussed, such as reforms to tax law and generally making different investment structures more attractive to investors. When you look at the full picture of the Australian funds management industry at the moment, a key question is being asked: even if the ARFP is introduced, will this be a game changer for Australia? We might be able to get Australian funds into Asia more easily but will they actually succeed there? These were some of the issues that were discussed at the Asia-Pacific Financial Forum (APFF) 'Progress on the Asia Region Funds Passport and Regional Financial Market Integration – Industry/Regulator Dialogue' on 23 March.
The concept of a passport allowing funds formed in one jurisdiction to be marketed into another in the Asia region has been discussed and progressed by a number of APEC members since 2010. In 2013, a statement of intent was signed between Australia, Korea, New Zealand and Singapore, with a working group subsequently established.
The working group established to implement the ARFP has had multiple meetings and are close to finalising the arrangements following rounds of public consultation. A statement of understanding was signed on 11 September 2015. The next step is signing the memorandum of cooperation which has been broadly agreed by Australia, Japan, Korea, New Zealand, the Philippines, Singapore and Thailand, and may occur as early as this month, but this is dependent on the cabinet process in some jurisdictions. Following this, Australia will need to go through its own legislative process, for which it has 18 months from signing the memorandum.
When considering the benefits of the ARFP, the consensus seems to be that Australian consumers have the capital and Australian fund managers need the opportunity. As the APEC website tells us, the ARFP will benefit consumers because it will enable them to invest more easily outside their jurisdiction (meaning more competition between product providers), it will improve their access to managed funds (meaning that they can more easily find one that suits their needs) and it will improve management of financial risk through easier diversification. The benefits to fund managers are that Asia's middle class is growing quickly, the population is ageing quickly and there is significant potential for Asia to increase its share of the market.
These benefits may all be self-evident, but the consensus during the APFF dialogue was that the ARFP is not necessarily a golden ticket to success, and there was a particular focus on the prospects of success of Australian domiciled funds in Asia. It was acknowledged that a discussion around the benefits of the ARFP cannot be divorced from the question of whether the tax and structuring treatment of Australian funds will make them appealing to an Asian market, and whether the ARFP would actually influence whether Australian funds are successful on the global stage.
Tax and structuring issues
As we discussed in our three-part Unravelled series 'The beginning of the end of the unit trust's monopoly?', the unit trust is the favoured vehicle for Australian domiciled funds, but it is arguably deficient in many ways. We suggested that the Johnson Report recognised that offshore investors are dissuaded from investing in Australian funds because they do not understand unit trusts and if there were a broader range of vehicles available, Australian fund managers would be more competitive with offshore fund managers.
In the Unravelled series, we looked at the Board of Taxation's report on tax arrangements applying to collective investment vehicles, released by the Federal Government on 4 June 2015, and its proposal to extend more favourable tax treatment to other types of collective investment vehicles, namely limited partnerships, corporate collective investment vehicles and common contractual funds. What we think became obvious through this series is the fact that there are some issues with Australian fund structuring that need to be dealt with if Australian fund managers are going to be truly globally competitive: primarily that the tax neutrality of unit trusts needs to be extended to additional collective investment vehicles and that the vehicles we use need to be more familiar to overseas investors.
Without implementing these reforms, Australia's participation in the ARFP is unlikely to reap all of the rewards it promises – a sentiment that seemed to be shared by some participants at the APFF dialogue. There was a discussion around the fact that the withholding tax regime needs to be simplified and a recommendation that the rate of withholding tax for ARFP funds be dropped to 5 per cent. Further, that the structures should more closely resemble what's on offer overseas, such as a SICAV, and there needs to be a commitment to implementing these changes if the ARFP will be as beneficial as it is hoped.
Asia is not the EU
The fact remains that the Asia region does not have a superimposing regulatory body like ESMA, which is able to issue directives that EU member states are obligated to adopt in their legislation. The Alternative Investment Fund Managers Directive (AIFMD) EU marketing passport is a product of this. The ARFP, on the other hand, requires representatives from each jurisdiction to enter into negotiations, each with their own agendas and interests. For the ARFP, the rules around distribution and disclosure are governed by the host country which requires each country to agree on common standards.
The AIFMD passport imposes a common standard for each country and it is based on the premise that all participating EU regulators are of equal stature and can be relied upon to diligence fund managers in their jurisdiction according to common standards. It would be beneficial to establish common standards among regulators in the Asia region so that cooperation among nations can be enhanced. While the practicalities of this are less clear cut, it remains an important issue when looking at the prospects of success of the ARFP.
Identifying the competition
It was also noted at the APFF dialogue that Australian fund managers need to find their edge. Ultimately, Australia operates a highly regulated space with high labour costs and high tax rates. If Australia cannot identify an advantage it holds over offshore managers then again the ARFP may not serve them as well as it was hoped.
With the ARFP on track for introduction in 2017, the next milestone is signing the memorandum of cooperation. It remains to be seen if the same level of commitment will be made to implementing any of the other key recommendations from the Johnson Report that logically complement the work done on the ARFP. The consensus certainly seems to be that the time is right for these discussions to become policies.