Will technology make funds passporting redundant?
While efforts to promote greater adoption of a pan-Asian funds passporting scheme continues in different quarters, recent developments threaten to upend those efforts, according to fund industry specialists.
Financial technology developments such as robo advisers and digital distribution platforms have introduced new technological processes and channels into the fund management universe, with Asian platforms emerging in the retail and high-net-worth individual space over the last couple years.
These digital platforms promise low-cost, low-hassle portfolio construction. They could offer an alternative to passporting structures, while it’s possible their ease of use could make questions of taxation simpler to accept.
“If retail investors are willing to invest and they would like the flexibility and the ease at which they’re able to access the product range via technology, they might put up with it despite the fact they will not get any tax benefits,” said Mark Voumard, chief executive of Gordian Capital Singapore, a fund management platform provider.
While these investors may get hit with capital gains taxes when selling the funds or on any dividends they receive, accessing a multitude of different funds might prove too tempting to ignore.
The rise of passive investing in Asia could elevate robo advisory funds to rival passporting fund schemes, noted Tom McGagh, BNY Mellon’s head of trustee and fund accounting products for Asia Pacific.
With the shift toward passive, exchange-traded fund-focused robo advisers could provide competition to passporting schemes, he said.
Asia ex-Japan ETFs and other exchange-traded products saw inflows of $17.8 billion in the first five months of 2018, according to data provider ETFGI.
The funds included in passported schemes to date tend to pursue active investment strategies and can track more specific or thematic benchmarks or indexes. But ETFs or robo advisory strategies might appeal to more conservative retail investors.
The real appeal of such fintech solutions is that they exist today. “As long as fund managers can get regulatory approval to sell the funds and there’s enough demand from investors to set those up and develop those," said Voumard, "why would you specifically wait for a passport?”
ROBO FUND CHALLENGES
However, fintech fund solutions have their own challenges. For a start, digital platforms have to be registered with local authorities or regulators, which can put limits on how funds are marketed or sold through them. That has limited the appeal for non-regional fund platforms.
Hong Kong’s Securities & Futures Commission (SFC), for example, requires cross-border funds to comply with its Code on Unit Trusts and Mutual Funds. Few non-regional fund platforms can be bothered to jump through this regulatory hoop.
“Are these non-Asian platforms marketing specifically in Asia? Probably not, unless they have sought legal guidance and comply with the local marketing rules,” Ho Han Ming, partner at law firm Sidley Austin, said.
Additionally, there is a big question over whether retail investors in some markets will leap into technologically advanced distribution channels, when they’ re not even familiar with cross-border investments, said Shikkoh Malik, global head of fiduciary and fund services at Standard Chartered Bank.
For the near future, a truly pan-Asian digital funds platform appears unlikely.
Stringent rules around the marketing and selling of funds also exist to protect retail investors from unscrupulous providers. However, that also means the regulator of each country has to sign off on any products that are offered to retail investors. That’s a tall order. Some observers believe it’s insurmountable.
“Anybody who thinks they can come in with a technological distribution platform that can bypass local regulation is wasting their time,” said Stewart Aldcroft, Hong Kong based chairman of CitiTrust, which offers trust and wealth planning services.
Even if fintech innovations did bypass local regulatory barriers, it’s likely the regulator will find a way to plug it again, agreed Armin Choksey, Asia-Pacific asset and wealth management market research centre leader at PwC Singapore.
REGULATORY PUSH
Not all market participants are so cynical. BNY Mellon’s McGagh noted that countries are generally seeking to promote fintech solutions, with innovating companies and regulators working together to ensure that the innovations are both successful and safe.
Different Asian regulators, like the Monetary Authority of Singapore (MAS), have set up regulatory sandboxes where new fintech participants can operate within a new business area without regulatory oversight.
However, even if regulators are keen on technology, it’s likely that it will take time for them to become fully comfortable with such innovation. “Digital platforms will be embraced in some form or another, but it’s a new area. So there will be caution and things might move a bit slower than one would expect,” said Sidley Austin’s Ho.
Ultimately the priority of regulators is to ensure proper transparency and protection for retail investors. New digital funds platforms would need to meet obligations at each jurisdiction, including licensing arrangements and disclosure requirements.
Ged Fitzpatrick, senior executive leader of international strategy at the Australia Securities and Investments Commission (Asic), told AsianInvestor the regulator encourages providers to be innovative, but they still have to meet regulatory and legal requirements.
“It’s not necessarily that there’s a way around meeting legal obligations simply through a technological approach,” he said.
In addition, regulators are already pushing fund passporting schemes like the Asia Region Funds Passport and the Asean Collective Investment Scheme. It’s likely their first priority will be to get those initiatives live and kicking, said Malik.
“I would be surprised they would put so much effort into bringing these elements into a law while they believe that they can skip this through a technologically advanced platform.”
For the first part of this story, click here. The full story was published in the June/July edtion of AsianInvestor magazine.