PwC | AWM Asia Pacific Market Research CentreIssue 4 | 2019
Asset and WealthManagement Research Digest
When talking about cross-border fund passporting, the European-originating Undertakings for Collective Investments in Transferable Securities (“UCITS”) framework is widely-regarded as the global gold standard. The UCITS fund passporting regime, which encompasses 28 countries in Europe, has 33,359 funds and EUR 9.28tr of AUM falling under the regime as of December 2018.1 It has facilitated the rise of European fund centres like Luxembourg and Dublin, and has provided a framework for emerging passporting schemes the world over. An additional benefit is to investors who, through the ability to purchase such a massive range of funds, are able to leverage the investment expertise of a myriad of asset managers who distribute qualifying UCITS funds.
By comparison, and perhaps in reflection of the general level of maturity among APAC economies, APAC lacks a developed and comprehensive fund passporting or cross-border scheme as found in Europe with the UCITS framework.
There are green-shoots of progress though, with three unique approaches to fund passporting arrangements emerging across the region, sometimes in overlapping capacities.
Asian Fund Passports – Is it 1988 in APAC?
While the future of fund passporting across APAC may take longer than anticipated and the final scheme may not be directly related to any of the existing programmes, we believe the development of such arrangements is to be encouraged and nurtured by industry players across the region.
1 European Fund and Asset Management Association (EFAMA)
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The merging of a multitude of regulatory frameworks and legal systems across a wide and diverse region can prove problematic and challenging as parties search for common ground. Our observations of common regulations relating to a fund passporting scheme generally include:
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Eligible investment asset classes
Limits on leverage (if any)
Offer document conditionsClient acquisions and AML/KYC requirements
Custody arrangements Liquidity requirements
Registration arrangementsTaxation (investor level, fund level and investment level)
Asset management business licensing
Investor protection and dispute resolution procedures
01 06
03 08
02 07
04 09
05 10
Common regulatory similarities and benefits of a passporting scheme
01
Asset and Wealth Management Research Digest 3
Where such regulatory challenges, which typically were prescribed to protect the local industry products and market place can be overcome, substantial benefits can be derived for asset managers and investors alike. Specifically, these benefits can include:
Improved efficiency and reduced fees/costs
With fund passporting opening up the possibility of new economies and products for investors to invest into, the potential size of funds swells and, if they can attract new investors, this can result in larger funds. This in turn leads to greater use of economies of scale and efficiency across the fund industry. With a larger pool of investors to target, and more funds and fund managers targeting the same investors, competition within the industry increases which results in greater results for investors and better outcomes for the industry at large. An example of this would be the direct access to offshore funds that passporting brings which in turn eliminates the need for additional distribution layers and thus reduces fees and commissions paid.
Increased investor choice
Fund passporting allows for foreign fund managers to sell their products directly to investors outside their home economies. In addition to the cost savings this model brings, mentioned above, this provides investors with a vastly expanded array of products that were earlier either inaccessible to them or priced higher due to the afore mentioned additional distribution layers. Being able to access an increased range of funds for lower cost will provide investors access to otherwise inaccessible markets and enable greater diversification.
Improved services
As more fund managers are now in the market offering their products to investors, there is greater competition among the fund managers and greater incentives to reap the rewards on offer that innovation, performance, and client servicing brings. This aspect is not limited to fund managers servicing investors, custodian and other fund service providers will have an increased pool of asset managers to target as clients and their levels of performance should rise as well through the increased competition.
Improved consumer protection
Economies across geographic regions are rarely homogenous, some will be more mature, others less so. By entering into a fund passporting scheme, economies can share best-practice among their fund managers and investors have the option of investing with fund managers that provide them with the greatest protection. Thus, fund managers not engaging in industry best practice or not looking out for the interests of investors can adopt practices from other mangers which do practice these matters in order to compete better in the expanded market.
Benefits to the wider economy
The range of economies on offer within a fund passporting scheme means that investors have an impressive selection of economic development levels and growth opportunities to invest in which aids in diversification as covered earlier. It also means that local capital markets can receive inflows from other economies which deepens liquidity across the region the fund passporting scheme relates to. With a unified framework, there is increased visibility and interest in regional funds, and this can translate to increased support for the regional fund management industry.
Despite these benefits, significant challenges to implementing a regional fund passporting regime exist, especially in regards to reconciling differing taxation requirements across the jurisdictions within the passporting scheme.
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In spite of the strong integration of APAC countries into the world economy, the asset management industry remains largely fragmented, with each market providing a different level of access, mode of entry for foreign players, and distribution dynamics.
As these markets develop, there is a clear trend towards regionalisation. Efforts to promote cross-border fund distribution aim to provide significant benefits to participating economies, allowing them to strengthen the capacity and expertise of their funds industry while improving international competitiveness of their financial markets.
While APAC currently lacks a regional fund passporting framework at the level of the UCITS regime, there are several green shoots emerging across the region as fund centres and fund passporting schemes which show promise in developing into a comprehensive framework:
Asia Region Fund Passport ASEAN CIS Mutual Recognition of Funds
Status:
MOC signed in April 2016, - commenced 1 February 2019
Status:
Live 25 August 2014
Status:
Live 1 July 2015
Jurisdictions in scope:
Australia, South Korea, New Zealand, Japan, Thailand
Jurisdictions in scope:
Malaysia, Singapore and Thailand
Jurisdictions in scope:
China, Hong Kong
Other MRFs:
Switzerland & Hong KongFrance & Hong KongUK & Hong Kong Luxembourg & Hong Kong
Current APAC fund passporting and cross-border scheme landscape
02
Source: PwC AWM Research Centre analysis
Asset and Wealth Management Research Digest 5
The ARFP is a common framework of coordinated regulatory oversight to facilitate cross border marketing of managed funds across participating economies the APAC. The Memorandum of Cooperation (“MOC”), signed in 2016, sets out the internationally agreed rules and cooperation mechanisms for the ARFP, and is the basis for its implementation into domestic law. Signatories to the MOC, namely: Australia, Japan, Republic of Korea, New Zealand, and Thailand are deemed ‘participating economies’ which entitles them to have representatives on the Joint Committee (“JC”), the body which oversees implementation of the ARFP.
The stated goals of the ARFP are:
• Deepening APACs capital markets to attract finance for economic growth in the region.
• Strengthening the efficiency, expertise, and international competitiveness of the funds management industry in the region.
• Recycling savings and growing the pool of funds available for investment in the region.
• Providing investors in participating economies with a more diverse and competitive range of investment opportunities.
• Maintaining the legal and regulatory frameworks which promote investor protection, and fair, efficient, and transparent markets for financial services.
Engagement with non-ARFP jurisdictions is maintained through their participation as observers on the JC, as Singapore, Philippines, and Hong Kong are. In addition, JC members continue to engage in regional and wider international events to ensure ARFP is represented by its members in international setting and can track industry best-practice and market itself to potential members for future enlargement of the scheme.
Non-members have, in some instances, undertaken targeted capacity building activities in the region, such as technical and policy workshops, to improve the understanding of regulators’ and industry of the ARFP and pave the way for potential future membership.
The potential membership of APAC asset managers is substantial and dispersed across the whole of the APAC region as the chart below shows (numbers denote potential fund managers):
India34
Japan60
Korea56Hong Kong
94
Philippines 4
New Zealand18
Australia109
Taipei34
Thailand18
Indonesia14
Singapore73
The Asia Region Fund Passport (“ARFP”) scheme
03
Country
Australia
Korea
Singapore
Taipei
Indonesia
Hong Kong
India
New Zealand
Japan
Thailand
Philippines
109
56
73
34
14
94
34
18
60
18
4
Sources: Morningstar direct, IMAS Directory, and PwC Analysis
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As the ARFP matures and develops across the region, there is hope within the asset and wealth management industry that it will emerge as an APAC-UCITS passporting regime.
Degree of similarity
Identical Similar Low
Based on these high-hopes, we have created a comparison between the two regimes examining their degree of similarity across a range of aspects:
Set up in Home prior to Host
Reporting obligations
Synthethic short-selling through derivatives
Fair value principles
UCITS III-Host registration
Sec lending 50% v/s 100%
Physical short-selling banned
Custody of assets by Trustee/operator and
not depository
Limited additional requirements for hosting
NAV calculation by Operator
Depository responsible for delegation
Independent depository/operator
Management Company = Operator
Deligation limitations
Single entity risk 15% v/s 10%
Source: PwC AWM Research Centre analysis
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The regulatory arrangements of the scheme are outlined in the following table:
* Can apply other host laws if they don’t discriminate between foreign/domestic funds
Element
Operation of the passport fund
Custody arrangements
Independent oversight
Risk management
Investment restrictions
Delegation
Valuation basis for pricing
Redemption
Financial reporting and auditing
Related party transactions
Disclosure (including annual and periodic reports)
Duties of operators
Distribution and licensing of distributors
Record keeping
Member Complaints
Dealing with investors
Anti-money laundering and counter-terrorism financing
Home
Home + passport
rules
Only passport
rulesHost*
The benefits of ARFP extend across the various types of funds on offer, for example, local fund of fund managers could, provided they meet the hygiene aspects of ARFP, export their products across the region. Similarly, financial institutions like pension and insurance companies could pool talent across APAC via a collective investment product in their home country and outsource specialist expertise to host country managers.
Source: PwC AWM Research Centre analysis
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Appoint local distributors and local representatives
Minimum AuM
Maximum percentage an external manager can manage
Annual compliance audit
Appoint local distributors and local representatives
• Use of locally licensed intermediaries in host country• May need to appoint a local representative• Subject to host country requirements on offer of CIS
USD 500 million
Maximum of 20%
USD 350 million
100%
• Annual audit of the CIS Operator covering, at a minimum, compliance with theCommon Standards
• Use of locally licensed intermediaries in host country• May need to appoint a local representative• Subject to host country requirements on offer of CIS
• Track record (5 years, US$350mioglobal AUM)
• At least US$1mio capital• Completency & experience• Delegation restrictions
• No performance fees• Transferable securities• Investments into other funds
permitted• Limits on derivatives
• Legal structures approved for CIS offered to retail investors (i.e. Authorisedscheme approved by MAS)
Qualifying CIS Operator (locally regulated)
Before
Qualifying CI (locally domiciled)
After
Enhancements (effective 23rd February 2018)
Approved for retail offer in home country
Common standards imposed on Qualifying Manager, Trustee and CIS
Since its implementation in August 2014, the ASEAN Collective Investment Schemes (“CIS”) framework has provided retail investors in Singapore, Malaysia, and Thailand with greater access to asset managers across the region.
To further promote the scheme, enhancements to the ASEAN CIS framework were introduced in February 2018 to allow for greater participation from fund managers across the region. The key principles and changes are highlighted below:
Source: PwC AWM Research Centre analysis
Association of South East Asian Nations Collective Investment Schemes (“ASEAN CIS”)
04
Asset and Wealth Management Research Digest 9
Eligibility requirements
Switzerland- Hong Kong MRF
France- Hong Kong MRF
UK- Hong Kong MRF
Luxembourg- Hong Kong MRF
Fund is established, domiciled and managed in accordance with Swiss laws and regulations and its constitutive documents.
Swiss funds:
• Equity;
• Bond;
• Mixed assets;
• Feeder;
• FoFs;
• Money market;
• Index;
• Structured;
• Funds investing in derivatives;
• ETFs.
Swiss funds:
• HK funds looking to distribute in Switzerland cannot exceed the maximum borrowing limit of 10% of its total NAV;
• In the case of a HK fund of fund, the target fund in which the fund of fund invests restricts investments in other funds for their part to a total of 10 percent.
Domicile and fund management rules
Types of funds
Specific requirements
Fund is established, domiciled and managed in accordance with French laws and regulations and its constitutive documents.
French funds:
Fund is established, domiciled and managed in accordance with UK laws and regulations and its constitutive documents.
UK funds:
Fund is established, domiciled, and managed in accordance with Luxembourg laws and regulations and its constitutive documents.
Luxembourg funds:
Fund is established, domiciled and managed in accordance with Hong Kong laws and regulations and its constitutive documents.
HK funds:
• No investments in real estate;
• No investments in precious metals or precious metals certificates, commodities or commodity certificates;
• No short-selling.
HK funds:
Fund is established, domiciled and managed in accordance with Hong Kong laws and regulations and its constitutive documents.
HK funds:
Fund is established, domiciled and managed in accordance with Hong Kong laws and regulations and its constitutive documents.
HK funds:
Fund is established, domiciled, and managed in accordance with Hong Kong laws and regulations and its constitutive documents.
HK funds:
Both French and HK funds
• At least 20% of the NAV of the covered fund is attributable to investors in the home jurisdiction at the end of each reporting period;
• No investments in commodity based instruments and real estate, or certificates representing them;
• No using leverage exceeding 100% of the fund’s NAV;
• Only share classes with currency hedging allowed.
• Equity;
• Bond;
• Mixed assets.
Both UK and HK funds
• No using of leverage exceeding 100% of the fund’s NAV;
• Only share classes with currency hedging allowed.
• For HK funds: No investments in commodity based instruments and real estate, or certificates representing them.
• For UK funds: No investments in real estate.
• Equity;
• Bond;
• Mixed assets;
• FoFs;
• Index;
• ETFs;
• Feeder (with certain eligibility requirements).
Both Luxembourg and HK funds
• No using of leverage.
• Must not invest in physical commodities, crypto-assets, crypto-currencies, or certificates referring to the above.
• No share classes with hedging arrangements beyond currency arrangements.
• Must have at least one dealing day for redemption every two weeks.
• Equity
• Bond
• Mixed
• Feeder (of the three funds listed above)
Source: PwC AWM Research Centre analysis
Hong Kong’s numerous bilateral Mutual Recognition of Funds (“MRF”) programmes
05
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The fragmented nature of APAC’s AWM industry is being challenged as global trends force the industry to evolve and new investment structures will compete with established offshore vehicles. Additionally, fund passports will become ever more popular with investors as they ease regulatory burdens and foster asset growth.
As well as the three passporting programmes outlined, there is a general trend of increasing openness among APAC nations relating to their asset and wealth management space. This openness, while a long-way from implementing a fully-open funds passporting scheme, is a start which shows promise and further successes can be built upon.
We anticipate that the increasing adoption of passports will eventually lead to further sophistication of the asset management industry across the region due to the potential to exercise benefits over scale and wider demographics. While a lot of work has already been done, now begins the efforts to bring in players and tap into the potential benefits of the scheme. While the foundation of the APAC passporting schemes is different from the European UCITS regime, their purpose is neither to compete with it nor to replicate it. The truly monumental and Herculean efforts of the past few years are finally paying off and its success will depend on the industry and investors demanding its increased adaptation across the region.
South Korea
FSCMA Amendments (2016) set out new regulations for offshore investing, for sure of master-feeder structures and for who offshore funds can be sold to.
Taipei
Additional preferential measures in incentive plan - “Plan to Encourage Stronger Business Ties in Taiwan for Offshore Funds”.
Vietnam
Vietnam lifted restrictions on foreign ownership in public companies, which enabled foreign investors to take up to 100% stakes in certain sectors.
Philippines
Proposed rules to allow fund houses to offer feeder funds in the Philippines.
Thailand
Relaxation under the Foreign Exchange Regulation Reform. Started to allow offshore funds to be sold to local investors, and specified the definition of accredited investors.
Australia
Luxembourg UCITSs successfully applied for exemption to Australian AFS license.
Indonesia
In Indonesia, 15% overseas investment cap on Sharia funds lifted, to allow for full investment in overseas markets.
Source: PwC AWM Research Centre analysis
The future for APAC fund passporting and cross-border programmes
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Asset and Wealth Management Research Digest 11
Our structured, research-based analysis sheds light on the multiple factors affecting your asset management business.
Each market intelligence country digest provides you with:
• The state of the asset & wealth management industry
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• Various types of investors and their asset allocations
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Poor operational infrastructure can be a drag on performance and service level. Since interdependencies exist between operational risk and other risk categories, operational failures tend to result in large losses. This is especially important since we are in an environment with increased regulatory requirements for operational risk. Our Investment Fund Centre has experience in performing ODD assessments for investors and has helped prepare asset managers for ODD requests in the APAC region.
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Benchmarking studies in the fund industry act as an important tool for establishing, evaluating, and justifying inter-company transactions. In achieving these objectives, the Market Research team provides support in developing such benchmarking studies – as part of the tax documentation and fund structuring process, or to help build revenue models – while also performing sensitivity analysis to help assess the impact of your funds’ fee structure on your profitability. In ensuring the reliability and accuracy of our studies, we work with data from specialized databases provided by credited and established vendors within the industry.
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Armin ChokseyPartner, Asian Investment Fund Centre & Market Research Centre LeaderPwC Singapore+65 6236 4648 [email protected]
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