Asia
28 May 2014
Two new fund passports could be up and running in Asia within the next few years, giving managers access to the likes of Singapore
Image: Shutterstock
The prospect of a UCITS-style fund passport in Asia must be enticing for managers in the region, considering the success the European project has enjoyed. Soon, those working in and around Singapore will benefit from two.
Singapore has a hand in the Association of Southeast Asian Nations (ASEAN) Collective Investment Scheme (CIS) Framework for Cross Border Offering of Funds and Asia-Pacific Economic Cooperation (APEC) Asia Region Funds Passport. These initiatives, covering Singapore, Malaysia, Thailand, South Korea, the Philippines, New Zealand and Australia between them, will fill cross-border void for fund distribution in the region.
“There are currently no established schemes to facilitate the cross-border dissemination of funds in Asia, unlike the UCITS initiative in Europe,” says Stephanie Magnus, who is an associate principal in the corporate and securities practice group and head of the financial services and regulatory practice in Singapore at law firm Baker & McKenzie.
“It is hoped that these passport arrangements will open up Asian markets (with their very disparate laws and regulatory frameworks) to fund mangers and funds (and streamlining the cost of compliance), while giving increasing choice for investors,” she explains.
“With Asia’s rising importance, particularly in the financial services sector, and with the increasing affluence of Asia, it is hoped that these scheme will improve investment choice, and strengthen Asia’s status as a key global investment hub.”
A consultation paper on the Asia Region Funds Passport was released in April. Speaking at the time, John Brogden, CEO of Australia’s Financial Services Council, echoed Magnus’s comments.
He said: “Asia is currently punching below its weight in terms of the share of global funds management activity. It has 60 percent of the world’s population but only 12 percent of the worldwide funds under management. There is significant potential for Asia to increase its share.”
Asia’s funds under management do not reflect its share of the world’s population because the avenues currently available to set up new vehicles limit managers, according to Roger Harrold, who is a managing director of securities and financial services consultancy AlfaSec Advisors in Singapore.
Funds can be set up locally in the domestic market or through a UCITS, explains Harrold. This works in domiciles such as Singapore, Hong Kong, South Korea or Australia, where funds are established and sold within their borders.
UCITS structures allow funds managed out of Dublin or Luxembourg to be marketed in Singapore, Hong Kong or Taiwan, but some Asian domiciles, including the Philippines and Malaysia, have not embraced them, while others, namely China and India, do not recognise them at all.
Harrold explains: “Why is it changing? Fund passports allow one fund established in one country to be distributed in another country that embraces similar rules and regulations. Obviously, with the growth of the markets in Asia, the local regulators are keen to have a greater say in these savings channels—mutual funds, trusts and banks are harbouring a lot of savings—and how their market develops. At the moment, unless it’s a home-grown structure, your only alternative is UCITS, and while the local regulators have some oversight, it is ultimately controlled out of Dublin or Luxembourg.”
The main hurdle that fund managers looking to disseminate their funds across Asia are facing “is the disparate regulatory requirements across the different Asian countries”, says Magnus.
“The implementation of the initiatives will help to uniformalise the regulatory requirements, which will in turn give fund managers a consistent standard to adhere to, thus increasing the efficiency of cross-border fund dissemination, and prospectively lowering the regulatory costs for fund managers.”
The benefits of the initiatives will be many, says Magnus, with fund managers in Singapore set to enjoy the best of both.
“At the moment, Singapore is the only country that has participated in both the ASEAN Framework and the Asia Region Funds Passport. With Singapore as a financial centre, the local regulator, the Monetary Authority of Singapore (MAS), has been taking active steps to keep the country’s regulatory regime robust.”
“Currently, the ASEAN Framework’s regulatory standards are broadly in line with MAS’s requirements, and it is projected that the finalised Asia Region Funds Passport standards will likely also be similar to Singapore’s domestic regulatory standards. Singapore fund managers will therefore have a head start in terms of familiarity with the cross-border investment schemes’ regulatory requirements.”
Harrold says that the ASEAN Framework and the Asia Region Funds Passport will “probably benefit fund managers that are already have physical presences in the region”.
“If you’re a fund manager in the UK, trying to set up an office in Singapore in order to distribute your funds and invest in the ASEAN Framework, that is probably going to be a hard sell because the rules specify that you need to have some form of presence in each of these markets,” explains Harrold.
Managers will also benefit from being able to run a larger, more efficient fund that does not need more than one custodian or administrator, says Harrold. There is also the prospect of dealing with a lighter regulatory environment.
“Some would say that a fund manager would benefit from a lighter regulatory environment if your only alternative to setting up a local fund is using a UCITS structure.”
“European managers have done a great job over the past five years dealing with very onerous regulation in UCITS IV and V. Anyone that is setting up a UCITS structure needs to comply with that, so I think there is a certain amount of benefit for a management company in using a different structure that which is outside of that regulatory environment.”
He explains: “If you think about Singapore and Hong Kong, they may take a different view on what type of reporting and regulating that is required from managers. It doesn’t always go hand in hand, that whatever is good for Europe is good for Asia. The lighter regulatory touch may be appealing to some fund managers, if they have an alternative.”
The new initiatives are still in the making. Magnus says: “There has been little news about the ASEAN Framework since the release of the Standards of Qualifying CIS framework document last year. However, since the ASEAN Framework was originally targeted for release in the first half of 2014, we should expect to receive further updates about the framework’s implementation soon.”
“The Asia Region Funds Passport is currently undergoing consultation, following the release of the consultation paper on 16 April 2014. It is projected that the passport will be implemented and operational by 2016. There has been no slip in timelines.”
Some custodians are preparing their offerings in Singapore with the initiatives looking likely to appear within the next two years.
Standard Chartered recently added trustee services to its global custody and fund services capabilities for collective investment schemes in Singapore. With the new service, the bank now offers fund administration, fund trustee, custody, and cash management for fund managers looking to offer authorised funds in the jurisdiction.
Alan Naughton, global head of product management for investors and intermediaries at Standard Chartered, commented: “Expansion of our fund trustee services in Singapore is a natural progression for us as a comprehensive securities services provider in the region.”
“We have undertaken extensive research to ensure that not only do our broad capabilities meet client requirements but that we differentiate ourselves from other players in the region. We are extremely grateful for the support given to us by the Monetary Authority of Singapore during the licensing process.”
Harrold says that custodians remain divided about the new initiatives in Asia: some are skeptical, while others are more bullish.
“I would argue that some of the regional service providers are not being bullish enough. I think international custodians such as HSBC, Deutsche Bank and Citi, which already have custody, accounting and trustee capabilities on the ground in many of the Asian countries, would probably have an easier time of putting together a package to support these fund structures than perhaps indigenous banks.”
“I think what we’re going to see is more domestic custodians that have a Asian regional footprint devising programmes to support fund managers. I think the majority of these domestic custodians will want to protect that business and take the lead in delivering cross regional services. I think global custodians will have a harder time keeping traditional fund managers if these passport schemes take off—as, they will not have the footprint nor access to domestic product to cater to these fund mangers’ needs. And once they are up and running, I suspect most domestic custodians will probably be less prepared to share their strategic advantage with the global custodians.”
Asian fund passports will be an enticing prospect for managers, particularly those looking for an alternative to UCITS. But it will take time for the Asian passports to develop the reputation that UCITS currently enjoys, and it is down to the managers to discover their best uses, and make them count.
Singapore has a hand in the Association of Southeast Asian Nations (ASEAN) Collective Investment Scheme (CIS) Framework for Cross Border Offering of Funds and Asia-Pacific Economic Cooperation (APEC) Asia Region Funds Passport. These initiatives, covering Singapore, Malaysia, Thailand, South Korea, the Philippines, New Zealand and Australia between them, will fill cross-border void for fund distribution in the region.
“There are currently no established schemes to facilitate the cross-border dissemination of funds in Asia, unlike the UCITS initiative in Europe,” says Stephanie Magnus, who is an associate principal in the corporate and securities practice group and head of the financial services and regulatory practice in Singapore at law firm Baker & McKenzie.
“It is hoped that these passport arrangements will open up Asian markets (with their very disparate laws and regulatory frameworks) to fund mangers and funds (and streamlining the cost of compliance), while giving increasing choice for investors,” she explains.
“With Asia’s rising importance, particularly in the financial services sector, and with the increasing affluence of Asia, it is hoped that these scheme will improve investment choice, and strengthen Asia’s status as a key global investment hub.”
A consultation paper on the Asia Region Funds Passport was released in April. Speaking at the time, John Brogden, CEO of Australia’s Financial Services Council, echoed Magnus’s comments.
He said: “Asia is currently punching below its weight in terms of the share of global funds management activity. It has 60 percent of the world’s population but only 12 percent of the worldwide funds under management. There is significant potential for Asia to increase its share.”
Asia’s funds under management do not reflect its share of the world’s population because the avenues currently available to set up new vehicles limit managers, according to Roger Harrold, who is a managing director of securities and financial services consultancy AlfaSec Advisors in Singapore.
Funds can be set up locally in the domestic market or through a UCITS, explains Harrold. This works in domiciles such as Singapore, Hong Kong, South Korea or Australia, where funds are established and sold within their borders.
UCITS structures allow funds managed out of Dublin or Luxembourg to be marketed in Singapore, Hong Kong or Taiwan, but some Asian domiciles, including the Philippines and Malaysia, have not embraced them, while others, namely China and India, do not recognise them at all.
Harrold explains: “Why is it changing? Fund passports allow one fund established in one country to be distributed in another country that embraces similar rules and regulations. Obviously, with the growth of the markets in Asia, the local regulators are keen to have a greater say in these savings channels—mutual funds, trusts and banks are harbouring a lot of savings—and how their market develops. At the moment, unless it’s a home-grown structure, your only alternative is UCITS, and while the local regulators have some oversight, it is ultimately controlled out of Dublin or Luxembourg.”
The main hurdle that fund managers looking to disseminate their funds across Asia are facing “is the disparate regulatory requirements across the different Asian countries”, says Magnus.
“The implementation of the initiatives will help to uniformalise the regulatory requirements, which will in turn give fund managers a consistent standard to adhere to, thus increasing the efficiency of cross-border fund dissemination, and prospectively lowering the regulatory costs for fund managers.”
The benefits of the initiatives will be many, says Magnus, with fund managers in Singapore set to enjoy the best of both.
“At the moment, Singapore is the only country that has participated in both the ASEAN Framework and the Asia Region Funds Passport. With Singapore as a financial centre, the local regulator, the Monetary Authority of Singapore (MAS), has been taking active steps to keep the country’s regulatory regime robust.”
“Currently, the ASEAN Framework’s regulatory standards are broadly in line with MAS’s requirements, and it is projected that the finalised Asia Region Funds Passport standards will likely also be similar to Singapore’s domestic regulatory standards. Singapore fund managers will therefore have a head start in terms of familiarity with the cross-border investment schemes’ regulatory requirements.”
Harrold says that the ASEAN Framework and the Asia Region Funds Passport will “probably benefit fund managers that are already have physical presences in the region”.
“If you’re a fund manager in the UK, trying to set up an office in Singapore in order to distribute your funds and invest in the ASEAN Framework, that is probably going to be a hard sell because the rules specify that you need to have some form of presence in each of these markets,” explains Harrold.
Managers will also benefit from being able to run a larger, more efficient fund that does not need more than one custodian or administrator, says Harrold. There is also the prospect of dealing with a lighter regulatory environment.
“Some would say that a fund manager would benefit from a lighter regulatory environment if your only alternative to setting up a local fund is using a UCITS structure.”
“European managers have done a great job over the past five years dealing with very onerous regulation in UCITS IV and V. Anyone that is setting up a UCITS structure needs to comply with that, so I think there is a certain amount of benefit for a management company in using a different structure that which is outside of that regulatory environment.”
He explains: “If you think about Singapore and Hong Kong, they may take a different view on what type of reporting and regulating that is required from managers. It doesn’t always go hand in hand, that whatever is good for Europe is good for Asia. The lighter regulatory touch may be appealing to some fund managers, if they have an alternative.”
The new initiatives are still in the making. Magnus says: “There has been little news about the ASEAN Framework since the release of the Standards of Qualifying CIS framework document last year. However, since the ASEAN Framework was originally targeted for release in the first half of 2014, we should expect to receive further updates about the framework’s implementation soon.”
“The Asia Region Funds Passport is currently undergoing consultation, following the release of the consultation paper on 16 April 2014. It is projected that the passport will be implemented and operational by 2016. There has been no slip in timelines.”
Some custodians are preparing their offerings in Singapore with the initiatives looking likely to appear within the next two years.
Standard Chartered recently added trustee services to its global custody and fund services capabilities for collective investment schemes in Singapore. With the new service, the bank now offers fund administration, fund trustee, custody, and cash management for fund managers looking to offer authorised funds in the jurisdiction.
Alan Naughton, global head of product management for investors and intermediaries at Standard Chartered, commented: “Expansion of our fund trustee services in Singapore is a natural progression for us as a comprehensive securities services provider in the region.”
“We have undertaken extensive research to ensure that not only do our broad capabilities meet client requirements but that we differentiate ourselves from other players in the region. We are extremely grateful for the support given to us by the Monetary Authority of Singapore during the licensing process.”
Harrold says that custodians remain divided about the new initiatives in Asia: some are skeptical, while others are more bullish.
“I would argue that some of the regional service providers are not being bullish enough. I think international custodians such as HSBC, Deutsche Bank and Citi, which already have custody, accounting and trustee capabilities on the ground in many of the Asian countries, would probably have an easier time of putting together a package to support these fund structures than perhaps indigenous banks.”
“I think what we’re going to see is more domestic custodians that have a Asian regional footprint devising programmes to support fund managers. I think the majority of these domestic custodians will want to protect that business and take the lead in delivering cross regional services. I think global custodians will have a harder time keeping traditional fund managers if these passport schemes take off—as, they will not have the footprint nor access to domestic product to cater to these fund mangers’ needs. And once they are up and running, I suspect most domestic custodians will probably be less prepared to share their strategic advantage with the global custodians.”
Asian fund passports will be an enticing prospect for managers, particularly those looking for an alternative to UCITS. But it will take time for the Asian passports to develop the reputation that UCITS currently enjoys, and it is down to the managers to discover their best uses, and make them count.
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