Ministers sign landmark deal for Asia funds passport

In a landmark move that promises to reshape the Asia-Pacific asset management industry, four nations have agreed to start a pilot programme to pave the way for a regional funds passport.

At the Asia Pacific Economic Cooperation (Apec) meeting in Bali, Indonesia, last Friday, finance ministers from Australia, New Zealand, Singapore and South Korea signed a statement of intent to develop a passport to facilitate cross-border fund sales. The understanding is that other Asian markets could join at a later date.

The so-called Asia Region Funds Passport (ARFP) will offer fund managers operating in a passport economy a direct, efficient route to distribute their funds in other passport economies.

At last week’s ceremony, the ministers endorsed a framework document that sets out high-level principles, basic arrangements and an indicative timeline that will guide the passport’s development.

Each of the four markets will conduct a joint public consultation next year on the rules and arrangements needed to implement the scheme. Thereafter, economies that decide to participate will work together towards the passport’s launch in 2016.

“With 60% of the world’s population and 12% of the world’s total funds under management, the funds market in Asia has the potential to grow exponentially and to become the global centre of GDP growth,” says John Brogden, chief executive of Australia’s Financial Services Council, which represents retail and wholesale fund houses, super funds, life insurers, advisory networks and trustee firms.

In a statement, the Monetary Authority of Singapore (MAS) welcomed the initiative, noting that investors in the region would benefit from having access to a broader range of investment products, ultimately helping to deepen regional capital markets.

“As an inclusive regional initiative, the ARFP will strengthen the region’s fund management capability, deepen capital markets, and provide finance for sustainable economic growth,” MAS stated.

The next six to 12 months will involve extensive consultation with the industry and regulatory bodies from the four participating nations, notes Brogden.

The driver behind the quartet's move appears clear. Both Australia and New Zealand are eager to reach out to the region to increase the diversity of their own fund markets, as well as to counteract their own domestic market limitations.

Meanwhile, South Korea and Singapore also fear for their growth prospects as fund firms in mainland China and Hong Kong count down to the start of the mutual funds cross-border recognition scheme.

Taiwan is widely expected to join Hong Kong and China to create a Greater China regional funds passport, although Shiv Taneja of data provider Cerulli told AsianInvestor he would not be surprised if a non-Asian jurisdiction – such as Luxembourg or Dublin – joined next.

If anything, it appears that progress on mutual recognition has served as a catalyst for the introduction of an Asia passport scheme.

A series of policy dialogues and technical workshops to explore ideas and strategies for establishing an Asia passport pilot have been held over the past two years. Authorities have been exploring options for creating a regional framework that would remove barriers to trade and allow cross-border distribution of funds.

But the prospect of progress has often been dismissed by industry practitioners, with the scheme seen as too difficult to implement due to competing market interests and regulatory discord.

Brogden pointed to last week’s Apec summit as a potential breakthrough in an interview with AsianInvestor earlier this year. At that time he noted China was not heavily involved in the process, adding: “But when it [China] is it will take off.”

Asked then if he thought the proposed cross-border mutual funds recognition scheme between Hong Kong and China could be counterproductive to an Asian funds passport, he sounded an optimistic note.

“I do not think it slows [Asian funds passport] down,” he says. “If anything it indicates why there needs to be a multi-lateral agreement because people see the importance of the flow of funds around the region.

“We would be disappointed if China or Hong Kong decided that because they had their own relationship, they would prefer that to a multi-lateral arrangement.”

Japan has the largest mutual fund market in Asia Pacific by assets, at $576 billion as at June 2013, closely followed by Australia with $573 billion, finds data provider Cerulli Associates.

China’s funds market has $414 billion under management, and Korea $276 billion. By stark contrast, the US stands at $12.9 trillion and Europe at $7.7 trillion.

By number of onshore products at the end of the first half this year, Korea had 2,967 and China 1,283, by Cerulli data. In contrast, Europe had 27,834 and the US 6,452.

Apec finance ministers first met in Honolulu in 1994 and have met annually since. Member economies exchange views and information on regional macroeconomic and financial developments and on domestic and regional policy priorities.

Partners in the process include the World Bank, the International Monetary Fund, the Asian Development Bank, the Inter-American Development Bank, and the Apec Business Advisory Council.