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4 October, 2013Financial Times BeyondBrics, October 3 2013
Asian fund passport plans, to borrow the old cliché, are like London buses: you wait ages for one and then three come at once.
Wednesday’s announcement between the regulatory bodies of Singapore, Malaysia and Thailand to create a system for cross-border distribution of mutual funds was the third in the region this year.
For years, Asian fund managers and regulators have pondered the idea of mimicking Europe’s UCITS (Undertakings for Collective Investment in Transferable Securities) scheme: a harmonised framework of product regulation that allows funds from one member state to be distributed in another. According to the European Fund and Asset Management Association (EFAMA), total net assets in UCITS stood at €6.5tn at the end of June 2013; they logged net inflows of a record €132bn in the first quarter alone.
Getting anything similar done in Asia, though, is problematic. There is no mechanism as sturdy as the EU through which to adopt region-wide standards, and instead what little agreement there has been has tended to be bilateral, or among a small number of states.
In January, for example, Alexa Lam, the deputy chief executive of Hong Kong’s Securities and Futures Commission, proposed mutual recognition platform for public funds between Hong Kong and the mainland.
Under the arrangement, Lam proposes that SFC-authorised funds domiciled in Hong Kong and in China can obtain authorisation to be sold directly into each other’s market. Hong Kong already has mutual recognition with Taiwan, for exchange-traded funds, and with Australia.
This was a significant step: as Lam herself said, “Because of capital account restrictions in the mainland, cross-selling of funds between the mainland and Hong Kong is effectively off limits.” Her initiative, she said, “will open the gate to this mutual fund traffic flow for the first time,” and she was right to call it a “substantial breakthrough”. But it was bilateral, between two parts of what are technically the same country, and a long way from an Asian passport.
September’s meeting of Asia Pacific Economic Cooperation (APEC) in Bali brought another initiative, this time between the finance ministers of Australia, New Zealand, Singapore and South Korea, who signed a statement of intent to develop a passport for cross-border fund sales, with scope for other nations to join in due course. The aim is to launch this in 2016 after a period of joint public consultation next year on the regulation and mechanisms involved.
It makes a lot of sense: Australia, which boasts a A$1.6tn ($1.5tn) superannuation (pensions) sector, one of the largest in the world, punches enormously above its weight relative to its population in terms of its asset management industry, and it is natural for it to wish to move in to Asia’s fast-growing fund management industries for a next phase of growth. At APEC, John Brogden, chief executive of Australia’s Financial Services Council, called it “the most significant trade-related development to date for Australia’s financial services industry”, saying it “opens up the possibility of Asia’s savings being managed from Australia.”
Throughout all this the most obvious candidate for a regional fund passport has been missing: Asean, the Association of Southeast Asian Nations, which has been working for years to harmonise everything from trade tariffs to debt capital markets among its member states. A fund passport has been talked about for years – and Wednesday’s announcement appeared to be a first step towards it.
Malaysia’s Securities Commission, the Monetary Authority of Singapore, and Thailand’s Securities Commission have signed a memorandum of understanding to establish a framework for cross-border distribution of collective investment schemes, with a tougher timetable than the APEC plan: implementation is meant to take place in early 2014. Funds must have a five-year track record and at least $500m in assets to be eligible.
Good news, and not a moment too soon: the plan will increase the diversity of individual investment holdings in Asean nations, make the industry bigger and more resilient, and help with broader integration. But there’s just one problem: Asean’s got a lot more than three member states. Where is Indonesia? Where is the Philippines?
Apparently both had been included in original plans, along with Vietnam, but both were absent from the announcement (unlike Singapore, which is tagging itself to everything). It is understood that the other Asean nations could not come to an agreement. So Wednesday’s announcement both represents a positive start, and underlines the challenges involved in getting anything done in a financially and culturally diverse region.
