Asia passports could merge in five years: State Street

Far from competiting with each other, Asia’s three proposed funds passport schemes will become gradually aligned and merge with each other within the next decade, says State Street.

Chris Taylor, senior managing director and head of business development for Asia Pacific, sees recent announcements about cross-border distribution programmes in Asia as a key starting point.

Malaysia’s Securities Commission, the Monetary Authority of Singapore (MAS) and Thailand’s Securities and Exchange Commission signed a memorandum of understanding on October 3 to establish a cross-border distribution framework.

This came just 10 days after finance ministers in Australia, New Zealand, Singapore and South Korea signed a statement of intent to develop an Asian Region Funds passport (ARFP) for cross-border fund sales. That follows a proposed mutual funds recognition platform between China and Hong Kong, first unveiled in public in January this year.

These funds passports, designed to facilitate cross-border collaboration and domestic market development, remain mutually exclusive, highlighting not only the competition between Asian jurisdictions, but also the difficulty of regional regulatory coordination.

“I don’t see an Asean passport covering all countries within a reasonable time as the differences among the Asean countries are currently too wide,” says Tino Moorres, CEO, representative director and president of BNP Paribas Investment Partners, Japan.

But contrary to industry sceptics, who focus on competing regional interests and regulatory differences, Taylor does not expect the three proposed schemes to remain separate permanently. “The first clue is the fact Singapore is in two of these [schemes],” he argues.

“Governments and the industry broadly are looking to open up more opportunities. Once they get their heads around the ability to look across domiciles for investment opportunities, it will become the norm."

Taylor expects these passport schemes to merge in the next five to 10 years. He suggests that the Asean (Association of Southeast Asian Nations) scheme will be quicker and easier to put into place, “as there is probably more regulatory alignment and cultural similarities across the Southeast Asian markets”. He suggests that investment products will most likely be simpler to construct.

The ARFP scheme, meanwhile, features developed countries with "less homogenous regulation and tax legislation", Taylor adds.

He concedes that setting up these schemes is by no means straightforward. “Jurisdictions [still] have a lot of work to do to break down the regulatory hurdles and tax complexities,” he notes.

And for the moment, Asian countries will remain fragmented, continuing to pose challenges for Asian Pacific asset managers.

In fact, fund management respondents to a recent State Street survey confirmed that Asia's splintered markets make it difficult to expand their distribution presence or offer new funds.

The regional funds passport schemes could be a welcome solution for regional asset managers, who in the survey highlight Malaysia and Thailand as the countries they're targeting for near-term expansion.

Expanding distribution capabilities in new markets is also a top priority for regional fund managers. The firms surveyed – mostly located in Australia, China, Hong Kong, Japan and Singapore – are often “faced with low returns and a limited market size at home”, and as such, are looking to developing economies for growth. Deepening emerging market penetration was a top priority for 24% of respondents.

The survey also finds 38% of managers cite compliance and evolving regulations as a big concern, with 51% saying they need to make “substantial changes to develop strong risk management strategies tailored to each market”.