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Asia Pacific – All Aboard… Asia Region Funds Passport .

11 November, 2013


Legal News & Analysis – Asia Pacific

 

At the recent September Asia Pacific Economic Cooperation (APEC) summit in Bali, Indonesia, Finance Ministers of Australia, Korea, New Zealand and Singapore inked a Statement of Intent to push forward with establishing the Asia Region Funds Passport (Passport). In this article, we explore the key features of the proposed Passport as described in the Framework Document contained in the Statement of Intent.


Genesis


Under the auspices of APEC, finance officials have, since late 2010, been discussing the nuts and bolts of a multilateral platform to facilitate cross-border offering of funds within Asia. Besides the signatory countries to the Statement of Intent, numerous other Asia-Pacific countries1 were involved in capacity, technical and policy workshops to conceptualise and develop a suitable working model for the Passport.


Rationale


Recognising Asia’s rising contribution to global trade and increasing wealth generation, APEC members identified the benefit of increasing regional trade in financial instruments and the re-cycling of wealth generation for investments, particularly in infrastructure projects, in the region. The Passport is modelled on the EU’s UCITs framework and aims to facilitate cross-border distribution of retail collective investment schemes across participating APEC economies (the Passport Members). The Statement of Intent recognises that APEC economies are at different stages of development and that the Passport framework will inevitably need to be reviewed periodically to ensure it remains relevant and can broaden to create a ‘wider, more inclusive regional Passport’.


How Does It Benefit You?


If you are or intend to become a manager of a collective investment scheme, you will benefit in a myriad of ways. The Passport embraces the principle of ‘mutual recognition’ to reduce (to the extent possible) existing regulatory inconsistency and overlap between Passport Members. So long as the jurisdictions in which you intend to operate are Passport Members, you will face less regulatory hassle (and cost) in having to apply for multiple licences on a jurisdictional-basis, resulting in greater access and cost-savings when distributing your products in Passport Member economies.

 

If you are an investor, the Passport will open the door to a wider spectrum of financial products beyond those available in your home jurisdiction. Such increased competition for your dollar should see a decrease in product charges and increased liquidity for your investments. A fundamental tenet of the Passport is also to provide a ‘baseline’ consistency to ensure that investor protection measures are in place in each Passport Member’s regulatory regime.


Which Funds Will Qualify?


An eligible Passport fund can take any legal form but must, amongst other things:

 

  • be constituted and authorised/ registered in a Passport Member (the Home Economy);
  • be managed by an operator who is authorised and licensed and who has its principal place of business in the Home Economy2;
  • be well diversified in terms of its exposure to issuers of financial products;
  • be liquid and not contain complex features that may increase risk; and
  • have interests which are generally redeemable on request.

How Will The Passport Rules Interact With Laws Of Passport Members?


A ‘stepped’ approach is envisaged in delineating when the rules of the Home Economy, the rules of the other Passport Member jurisdictions in which a Passport fund will be offered (the Host Economy) and the Passport rules themselves, will apply.


Laws of the Home Economy will regulate the authorisation of the Passport fund and the manager, the general duties of the manager and its key officers, as well as in respect of outsourcing and service providers, risk-management requirements and meetings of members of the Passport fund.


Laws of the Host Economy will govern the interaction between investors in that Host Economy and the Passport fund in areas such as distribution, disclosures to investors, investor complaints, marketing and communications. Crucially, the Framework Document recognises that a Host Economy may impose additional rules on a Passport Fund, over and above those applicable to local funds, provided these rules are not unduly burdensome and are reasonable to promote confident retail investments in the Passport Fund.

 

The Passport framework itself will set out rules providing for a streamlined authorisation procedure for Passport funds being offered in a Host Economy3 with a long-term goal of regulatory easing into a notification process. The Passport rules will also deal with:

 

  • a manager’s capacity and track record;
  • separation of a Passport fund’s assets from those of the manager and its other collective investment schemes (save for permitted use of omnibus accounts);
  • appropriate valuation of a Passport fund’s assets and independent oversight of a Passport fund;
  • limited use of derivatives and a general prohibition against money lending, underwriting, provision of guarantees and short-selling by a Passport fund;
  • reasonable redemption rights and clarity as to when redemptions may be suspended; and
  • preparation of audited accounts in accordance with applicable standards.

While regulators will retain oversight of Passport funds constituted and authorised in their respective Home Economies, a Joint Committee with representation from all Passport Members will oversee the operation of the Passport regime including assessing future applications from APEC countries applying to be Passport Members.


Challenges


The UCITs experience demonstrates the hurdles presented by differing legislative, political and taxation systems that need to be surmounted before an ambitious project like the Passport can take flight. Beyond reaching agreement on principles of mutual recognition and regulatory equivalence, these challenges are arguably amplified in the APEC context when we consider the marked difference in economic development between some APEC economies, whether in terms of market size or investor/regulatory sophistication. Moreover, the APEC context lacks a common currency and a single regional body like the EU (although sceptics may argue instead that these have been impeding factors in the EU context).


Next Stop?


Joint public consultations are expected to be held in the 1st half of 2014 with refinement of technical and procedural rules scheduled in the latter half of 2014. The initial bandwagon of Passport Members are proposing to sign up to an arrangement agreement in February 2015 and thereafter will implement national laws to effect these arrangements by end-2015 with a view to launching the Passport in January 2016. Beyond admitting additional Passport Members in later years as the framework continues to be reviewed and refined, commentators have already begun suggesting that the next step could be to extend the Passport beyond Asia into Europe by way of a mutual recognition arrangement.


Only time will tell how far and where the Passport will take us.

 

Endnotes:


1 Notably Chinese Taipei, Hong Kong, China, Indonesia, Japan, the Philippines, Malaysia, Thailand and Vietnam.


2 Manager-friendly jurisdictions like Singapore can expect to benefit in this regard. The Framework Document reiterates that measures will be instituted to prevent operators based in non-Passport Members from utilising the Passport to side-step regulatory requirements in a Passport Member that would otherwise apply.


3 For example, standardized application forms and a commitment by regulators of a Host Economy to adhere to a condensed timeframe in accessing an application.

 

Stamford Law

 

For further information, please contact:

 

Daniel Yong, Director, Stamford Law
daniel.yong@stamfordlaw.com.sg

 

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