20 May, 2015
The Asia Region Funds Passport (the "Passport") working group (comprising Australia, Korea, New Zealand, the Philippines, Singapore and Thailand) (the "Working Group") has issued a consultation paper to seek views from the public on the detailed rules and operational arrangements which it has developed following its previous consultation on the Passport proposals in 2014. The consultation closed on 10 April 2015.
In many respects, the 2015 consultation and draft rules are consistent with the proposals set out in the 2014 consultation paper. It is clear that while the majority of respondents were generally supportive of the initiative, issues about its future success such as the need for greater harmonisation by moving obligations into the Passport rules rather than leaving them to the laws of the Home or Host economy, and the neutrality of tax treatment, have been identified as issues that could impede the use of the Passport.
Some responses highlighted the need to create a management company passport. The Working Group replied that, at this stage, it is appropriate to limit the scope of the Passport framework to schemes with a local operator.
Some of the key developments with the Passport proposals include:
- Alternative tests are now proposed on what constitutes a "public offer" in a Home economy –
- one of the original proposals being that a fund could only be "passported" if there was a public offer of its securities in its Home economy.
- Additional flexibility has been proposed around the experience of an operator and the qualifications of its officers and employees, with some recognition of the impact of delegation on qualification requirements.
- There is some alleviation of the capital requirements for operators proposed – primarily through some of the capital requirements being met by holding professional indemnity insurance.
- There is confirmation of the requirements for assets to be held in custody by certain asset holders, with some exceptions.
- Delegation of investment management is still subject to restrictions depending on the regulation of the delegate and the experience of its officers.
- There are some proposed modifications to investment restrictions and feedback is still being sought on the limits of exposure which are proposed in the rules.
- Rules on standardised disclosure and key information for investors is not included, but are flagged as a future potential development.
The Asia Region Funds Passport regime is intended to achieve a number of goals, including to enhance liquidity in the financial markets in the region, increase the competitiveness of this region against other global trading zones and provide increased consumer choice of fund offerings under a regime which promotes and supports consumer trust and confidence.
However, at this point, key Asia Pacific economies, such as Hong Kong, Japan and Chinese Taipei, have not joined the Passport Working Group. Further, existing Working Group members may still decline to implement the Passport rules in their own countries. If there is not sufficient participation in the Passport regime at the start or shortly thereafter, it is unlikely that the operator of a collective investment scheme will consider it an attractive proposition for it to seek to rely on the Passport.
It is appropriate that the Passport regime in its earliest iteration contains restrictions on investment (such as concentration limits and caps on certain types of assets) which are appropriate to ensure that when launched, the Passport regime supports and facilitates collective investment schemes which are robust and will ensure the highest degree of consumer confidence in the structure. However, at present the investment restrictions proposed by the draft operating rules for the Passport are so restrictive they are likely to result in very few operators seeking to rely on the Passport in its early days, as they may operate funds which invest in asset classes or types which breach the investment restrictions.
Finally, the success of the Passport regime is also likely to depend on:
- sensible distribution and disclosure laws being applied by each Host economy; and
- the application of tax laws in each Host economy which do not discourage the promotion of or investment in Passport funds.
While the draft Passport rules attempt to limit goldplating of the Passport rules by a Host economy, this is ultimately still a matter for a Host economy and to-date the Working Group has not released any analysis of how the different tax regimes would apply to a Passport fund.
For further information, please contact:
Jonathan Gordon, Partner, Ashurst
Corey McHattan, Partner, Ashurst
Lisa Simmons, Partner, Ashurst