Get your passport… cross-border marketing of retail funds in Asia Pacific

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

As the funds market in Singapore and the wider Asian region has grown, so have the calls for a regulatory framework that will allow retail funds to be marketed more easily across the region's national borders.

This briefing introduces three regulatory schemes, which together, if implemented widely and consistently, are likely to underpin the regulatory landscape for cross-border retail fund marketing in the Asia-Pacific region for years to come.

Background

For better or for worse, the Asia Pacific region has no equivalent of the European Union to hand down harmonised fund marketing regulations across jurisdictions, although most regional managers will be keen to avoid a "harmonised approach" if it follows the AIFMD model.

This has resulted in not one, but three schemes being implemented (or at least proposed) to enable the cross-border distribution of compliant funds to retail investors across participating jurisdictions. There is great pressure on the early adopters to demonstrate the benefits of the schemes, and both the ASEAN and Hong Kong/Mainland China schemes have launched slowly to date.

Three regional passporting schemes

The three schemes are:

1. the ASEAN Collective Investment Scheme (CIS) framework for cross-border offerings of collective investment schemes (CIS Framework);
2. the Asian Regional Funds Passport (ARFP); and
3. the Mutual Recognition of Funds between Hong Kong and the Mainland of China (MRF).

Each scheme has a different geographic focus, but all three should, or at least could, contribute positively to the development of the regional funds market.

1. CIS Framework – a pan-ASEAN passport (in theory)

The CIS Framework is already in place and forms part of the ASEAN Economic Community Blueprint, whose goal is to establish ASEAN as a single market and production base. ASEAN is the Association of Southeast Asian Nations and comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam with a total aggregate population of 625m and a combined nominal GDP of more than US$2.6trn.

The CIS Framework allows the units of an ASEAN CIS authorised in its home jurisdiction to be offered in other participating countries under a streamlined process, provided that the CIS satisfies certain common standards. To date, however, only Singapore, Malaysia and Thailand participate in the CIS Framework and only a handful of funds have been approved for cross-border distribution.

2. ARFP – Singapore digs in its heels over tax equality

Like the CIS Framework, the ARFP, which is due to launch later in 2016, will establish a framework to facilitate the marketing and distribution of CIS. It will apply to ARFP member countries rather than participating ASEAN nations.

In September 2015, finance ministers from Australia, Japan, Korea, New Zealand, the Philippines and Thailand signed a joint statement of understanding (the Statement), signalling these economies' commitment to join the ARFP ahead of its launch in 2016.

The Statement was a significant step forward for the ARFP, although Singapore notably declined to sign it, despite having been involved in the ARFP consultation and drafting process since 2013.

Singapore's decision not to sign the Statement represented a blow to the ARFP and stemmed from Singaporean concerns that taxation arrangements were not adequately dealt with. In short, Singapore demanded a level playing field as to taxation, with foreign funds offered to investors in a participating jurisdiction being subject to a similar tax treatment as funds managed locally. The Statement failed to address this issue and so Singapore has withdrawn from the ARFP for now.

3. MRF – Hong Kong and Mainland China off to a slow start

The MRF represents a major development in the distribution of retail funds between Hong Kong and Mainland China. The MRF came into effect on 1 July 2015 and allows eligible Mainland Chinese and Hong Kong funds to be offered to retail investors in each other's market, subject to a streamlined vetting and registration process.

Amongst other positives, the MRF will allow global asset managers easier access to the huge pool of Chinese retail investors, significantly opening up China's capital markets. The first batch of funds under the MRF were approved in December 2015, with three Hong Kong funds being approved to be offered to Chinese investors, and four Chinese funds being approved for distribution through Hong Kong.

Conclusion

All of these schemes stem from the need to improve the ease of fund distribution across the diverse economies of the Asia Pacific region. This has to be a good thing, broadening the product range for retail investors and allowing access to the burgeoning capital pools of the new Asian middle class. However, the absence of a central unifying body (such as the EU in Europe) means that these schemes will inevitably be developed without widespread co-ordination and without all key players' buy-in.

The CIS Framework and the MRF, the two schemes that have been launched to date, require more managers to buy in to the concept if the schemes are to reach the requisite scale. For the ARFP there must be question marks over its ability to meet the needs of managers and investors across ARFP members if the key financial centre of Singapore sits it out on the sidelines.

There can be no doubt that the Asia Pacific region can benefit from being more connected. It is encouraging that the last few years have seen a number of roadmaps laid out, but of the roads on offer none can claim so far to be well-travelled, and there remain many obstacles ahead.