The Asia Region Funds Passport: Myth or (Almost) Reality?

Introduction*

The finance ministers of the Asia Pacific Economic Cooperation countries issued a joint announcement on 10 November 2011 supporting the establishment of a pilot Asia region funds passport scheme ("ARFP").

At the time, it was anticipated that this pilot scheme could be launched as early as in the second half of this year. It was expected that Hong Kong, Singapore and Australia would form the core common regulatory framework and determine the initial list of eligible investment products.

After years of talk and lobbying by certain countries and sectors, notably the Australia and New Zealand asset managers, this seems like it may be a significant step towards the establishment of an ARFP framework. But how realistic is it?

Like a UCITS?

The proposal is modelled after its famous European cousin, UCITS, which the Asian funds industry has been keen to emulate. Such a scheme would allow fund managers in participating Asian countries to promote their products to investors in other participating Asian countries, although the existing impediments of different local regulatory, legal and tax requirements would still need to be overcome.

These different local regulatory, legal and tax requirements currently already impact on the reach of UCITS in different parts of Asia:

China and India, the two largest retail markets in Asia, as well as Indonesia and Australia, do not recognise UCITS at all. In Taiwan, UCITS can be registered for retail investment only if they do not utilise derivatives at all, and the registration process is a lengthy one. In Japan, UCITS registration is also a notoriously slow and expensive process. In Malaysia and Thailand, a locally registered feeder fund is required to invest into a UCITS. The situation is similar in South Korea, although it has also introduced tax disincentives for foreign funds. As things currently stand, UCITS are not truly pan- Asian passport-able.

Existing Initiatives

In the absence of an ARFP, individual countries in Asia have already taken steps to advance different levels of market access with bilateral or multi-lateral reciprocity:

Australia has entered into bilateral mutual recognition agreements with each of New Zealand and Hong Kong, whereby funds, which have been authorised in one country, can be distributed to retail investors in the other country. They do not have to comply with the full range of the other country's authorisation requirements. Hong Kong and Taiwan have put in place...