Cross-border fund passport fever has swept over Asia. In 2014 the ASEAN CIS fund passport, which includes Thailand, Malaysia, and Singapore, went live and last year the long-awaited MRF fund passport between Mainland China and Hong Kong came online. This year will see the launch of another regional fund passport: the Asia Region Funds Passport (ARFP).
The ARFP is a project being driven by the Asia-Pacific Economic Cooperation (APEC) forum designed to facilitate cross-border distribution of managed fund products across Asia. In April representatives from Australia, New Zealand, Japan, and Korea signed a Memorandum of Cooperation (MoC) to implement the ARFP framework. Once implemented, the ARFP will allow funds domiciled in one of the participating countries to be sold into the other participating countries. The MoC will take effect on 30 June 2016 and the participants will have eighteen months to implement the necessary domestic legislation to facilitate the ARFP. While the ARFP can be activated once two countries have the necessary arrangements in place, for all intents and purposes, the live date is 1 January 2018.
While the Philippines and Thailand have not yet signed the MoC, it is expected that they will eventually sign since they signed the Statement of Understanding in September 2015. Arguably, with six countries expected to participate, the ARFP is the most ambitious of the new Asian fund passports and faces the steepest climb; which is best illustrated by Singapore’s decision not to join the passport.
Singapore, a signatory of the ARFP Statement of Intent in 2013, is now uncommitted to the project due to tax discrimination concerns. Historically, favorable tax treatment of local funds over foreign funds is how countries have sought to protect and grow their fund industries. However, for fund passports to be successful, these barriers must be torn down to level the playing field. Singapore’s decision not to sign the ARFP agreement was initially viewed as a setback for the project but if it pushes the group to address tax issues that bedevil all cross-border fund passports, it may end up being positive in the long run.
Beyond tax issues, the other challenge for the ARFP is political. A key element to the success of UCITS, first as a regional fund passport and then as a global one, was the European Union. The EU is a political framework that was specifically designed to integrate the European marketplace. This meant UCITS had political and technocratic tools to push through the necessary changes to ensure market barriers were removed. Even with that, UCITS took twenty years to really blossom as a true regional fund passport. The challenge for the ARFP is that there is no true political framework underpinning APEC. This means that the participating countries will need to have the resolve and sustained ambition to tackle the issues that will invariably surface.
The effect of the ARFP on the participating countries’ domestic fund markets will surely test the group’s resolve. Countries have joined the ARFP hoping that it will boost their local fund industry. However, we know from the development of UCITS, that over time a fund passport leads to concentration in certain domiciles. In Europe, Ireland and Luxembourg have emerged as key fund domiciles; while other countries, such as the UK, have seen their domestic fund markets shrink. If this pattern emerges in the ARFP, participating countries may question if they will continue to support the effort given its potential to shrink their domestic industry.
Despite the tough road ahead, the potential of the ARFP is undeniable. Taking just Australian and Japanese markets, the ARFP would combine the seventh and eighth largest fund markets in the world, with $2.9 trillion in assets.¹ A recent report by PWC estimates that by 2020 the assets under management in mutual funds amongst the ARFP zone could reach $4.3 trillion. Given these numbers, it’s easy to see why the ARFP has generated such buzz. In fact, last year in our UCITS 2025 survey of global asset managers, we found that an impressive 34% of respondents believe that there is a medium or high chance that an Asian fund passport scheme will replace UCITS as the dominant cross-border structure by 2025.
¹ICI, Worldwide Regulated Open-End Fund Assets and Flows, Fourth Quarter 2015