In September 2013, a Statement of Intent was signed to establish the Asian Region Funds Passport (ARFP). The ARFP was developed by the 21-member nation Asia-Pacific Economic Cooperation (APEC). Its goal in establishing the ARFP was multi-fold. APEC wanted to give more fund choices to investors, while building the participating nations’ funds industries. In doing so, ARFP will attract investment dollars into the participating countries thereby stimulating economic growth.
ARFP Initiative Steadily Advancing
Since the initial Statement of Intent, much progress has been made to advance the ARFP initiative, including:
- Signing of ARFP Statement of Understanding, September 2015
- Signing of the ARFP Memorandum of Cooperation, June 2016
- Formation of Joint Committee, December 2016
- Release of the ARFP Consultation Paper, “Guidance for Laws and Regulations,” August 2017
- Launch of ARFP Pilot Program, January 2018
- Finalization of Local Legislation, 1st Quarter 2018
- Signing of Memorandum of Understanding by five nations (i.e., Australia, Japan, New Zealand, South Korea and Thailand), May 2018. (Note: Once operational, other countries expected to participate include: India, Indonesia, the Philippines, Singapore and Vietnam.)
ARFP Drives New Opportunities
Clearly, the ARFP initiative is moving forward and for good reason. There are many opportunities to be gained by the participating nations and the broader investment community. The ARFP is expected to help funds become licensed for cross-broader sales at a much faster pace than funds designated for single jurisdictions. This, in turn, will give asset managers the opportunity to expand into new markets and build a broader client base and drive economic growth for the ARFP nations.
Deloitte Access Economics conducted research using Australia as an example. It determined that through the ARFP initiative, Australia could grow its overseas-sourced funds under management to equal that of Hong Kong over the next decade. To put some financial perspective to this, the research stated that Australia’s Gross Domestic Product (GDP) would increase by over $4.2 billion, its tax revenues would increase by $1.2 billion, and an estimated 10,000 jobs would be created. The other participating nations too would be expected to derive significant economic benefit.
Not Without Its Challenges
Of course, along with the opportunities ARFP will generate come certain inherent challenges primarily related to multi-nation regulations and tax policies. Without a common framework, asset managers will need to do their homework to understand the different regulations, tax treatments and currency restrictions of the various nations. For example, currency restrictions in South Korea and Thailand include onshore FX requirements, overall foreign investment quota and foreign currency transaction restrictions. There are also fund operator responsibilities such as appointing suitable local representatives, distributor and transfer agents in the host jurisdictions.
Further, asset managers will need to carefully consider their marketing, portfolio and distribution strategies to meet the needs of investors in these various nations; investors with vastly different investment philosophies, risk tolerances, etc. They also will have to consider the impact of ARFP on fee structures. Generally, increased competition drives lower fees.
Funds too have criteria that must be met, including:
- Being established as a regulated Collective Investment Scheme (CIS) or a sub-fund of a regulated CIS in one of the participating ARFP jurisdictions
- Being distributed in the fund’s home jurisdiction
- Having a minimum net asset value of USD 500 million
- Investing only in specific asset classes (i.e., transferable securities, money market instruments, deposits, depository receipts over gold, derivatives, units of other funds).
Fund operator are also required to have a minimum capital of USD 1 million, plus 0.1% of Assets under Management (AuM) above USD 500 million of AuM, up to USD 20 million. The ARFP is indicating a 21-day application review timeframe to determine ARFP eligibility.
Develop a Clear Strategy to Capitalize on ARFP
To take advantage of what will be a game-changer for the Asian-Pacific region and specifically, participating ARFP nations, asset managers should develop a strategic marketing plan that carefully delineates strategies for each nation and the desired target markets within them. It will require a detailed breakdown of which products should be presented to which markets and a full understanding of each nation’s regulatory and tax conditions. Additionally, it is essential that asset managers ensure that they have the right back office administrative systems and related client service managers in place to assure the highest quality of service as they pursue new opportunities under ARFP.