Funds passport still on managers’ wish list

Funds passporting in Asia – which would allow the marketing and sale of funds across multiple markets – would be in a form similar to Europe’s Undertakings for the Collective Investment of Transferable Securities (Ucits). Open-ended Ucits funds, registered in a EU country such as Luxembourg or Ireland and freely available in several other countries, subject to regulatory approval, have become a standard, respected investment product across Europe. But their increasing penetration of Asian markets is being subjected to competition from some regional initiatives.

Australia, which is promoting itself as a financial centre in the Asia-Pacific region, is among the strongest proponents of creating an Asian funds passport.

Fund passporting was one of the main topics of the Asia-Pacific Economic Cooperation Finance Ministers’ Meeting in Japan in November 2010, and was included in the joint ministerial statement: “We also recognise the importance of creating more open and integrated financial markets in the region, and welcome efforts to facilitate cross-border marketing of fund management services within Asia.”

In December 2010, this was among the issues raised at the first Pan-Asian regulatory summit held in Hong Kong.

The industry is however aware that a reality check is needed before fund houses get carried away with regulatory initiatives, which would ideally facilitate cross-border funds distribution. The awareness of potential difficulties in implementing a passporting system in Asia is the main reason it has not received full support from all jurisdictions across the region. And underpinning any debate is a cut-throat level of competition between cities such as Hong Kong, Singapore and Shanghai in their rivalry to become the region’s pre-eminent financial services hub.

“We cannot underestimate the time and effort that will be involved,” says Jimmy Chan, Hong Kong-based CEO of asset management company Value Partners.

Asia is made up of individual capital markets, each with its own set of regulations and level of development. Unlike in Europe, where the Ucits platform originates, Asia has no region-wide structure such as the European Union (EU) that can help create and implement a passporting system. Even with the EU, it took around 25 years to create and fully implement Ucits.

Martin Wheatley, chief executive officer of Hong Kong’s Securities and Futures Commission, the territory’s funds regulator, has said that while there is a good level of cooperation in policy and enforcement in Asia, the same cannot be said when it comes to the gatekeeping level, under which passporting would fall. Mr Wheatley notes that while there are efforts to cooperate on establishing some form of Asian “brand” of funds, Ucits remains the “global ex-US brand.”

Other regulators such as Thirachai Phuvanatnaranubala, secretary general of Thailand’s Securities and Exchange Commission and chairman of the Association of Southeast Asian Nations (Asean), acknowledge that establishing a pan-Asian passporting system will be “difficult” to say the least.

“It’s not easy to reach a consensus,” confirms Mr Phuvanatnaranubala, “even within a small group such as the Asean.”

Implementing an Asian funds passport “will not be easy,” says Catherine Simmons, Hong Kong-based head of regulatory, industry and government affairs for Asia Pacific at State Street. “The varying levels of development and the intense competition among Asia-Pacific nations to be financial centres are among the several complicating factors. In addition, the lack of an overarching regional organisation like the European Union and the lack of a common currency such as the euro are frequently cited as obstacles.”

She has noted, however, that the fact that Ucits have not penetrated all markets in Asia suggests another way is possible. China and India, for example, are among the largest retail markets in Asia and neither recognises Ucits products. “Asian regulators might be more comfortable if they have something to do with the rules governing funds that are offered across the region,” says Ms Simmons.

An Asian funds passport, according to Ms Simmons, would promote the development of capital markets and domestic financial services sectors. It would also give access to a broader range of products, potentially improve returns and reduce concentration risk.

Product manufacturing and investment costs would also be reduced, while regulators would be allowed to shape rules surrounding funds sold and marketed across the region. The final result would ideally be the creation of a regional brand that is potentially more marketable than individual country brands.

Certainly, if China supports and accepts a fund passporting system, other markets in Asia may be more likely to accept such a system. “China, probably key to the success of this Asia passport, may be the missing piece of this jigsaw, until it has become more open to foreign funds,” believes Value Partners’ Mr Chan.

A fund passporting system would benefit companies such as Value Partners, which is aiming to be a major player in the region, because it will allow the company to gain more access to greater numbers of investors across regional markets. For now, Value Partners is operating mainly out of its Hong Kong office and has opened a research office in Shanghai last year, while contemplating its next move on the mainland.

Barriers

• Even with EU backing, Ucits took 25 years to implement.

• China and India do not recognise Ucits products.

• If China accepted an Asian funds passporting system, other markets would be more likely to follow

James Walker, Hong Kong-based partner and head of the Asia funds practice at Clifford Chance, was among those involved in a group put together by the Hong Kong Monetary Authority ten years ago to look into fund passporting. “We looked at it and we concluded then that it was going to be difficult,” he says, noting that it was decided that bilateral reciprocity would be more feasible.

Recent efforts by Australia to move forward with a fund passporting system may restart the whole discussion in Hong Kong and elsewhere in the region, believes Mr Walker.

Tax issues are among the biggest challenges to implementing a fund passporting system, given that some jurisdictions, such as Hong Kong, do not charge a capital gains tax whereas Australia, for example, is known for its steep tax regime. Other challenges include national interest, regulatory barriers, currency issues and competition from Ucits.

An Asian funds passport, according to Jag Alexeyev, New York-based head of global research for Strategic Insight, could help promote a more cohesive approach to asset management, accelerate the transition from distribution and fund sales to advisory solutions, support wider implementation of retirement foundations and enable greater scale and sustainability.

However, Anshuman Jaswal, Bangalore-based senior analyst at Celent, notes that Ucits have already become very popular in some markets such as Singapore and Taiwan and would thus offer strong competition to an Asian funds passport. “Once the Asian fund passport becomes a reality, the region’s asset managers would have to compete with the Ucits funds as well. The latter, with their economies of scale and low fees, might be tough to deal with,” says Mr Jaswal.

“Therefore, the success of Asian asset managers, even if there is a regional passport, is not a foregone conclusion.”

Rita Raagas De Ramos is Managing Editor of Ignites Asia, a Financial Times service

We cannot underestimate the time and effort that will be involved

Jimmy Chan, Value Partners