Report supports need for Asia Funds Passport on APEC agenda

A joint research report by the Financial Services Council of Australia and PwC shows Australia is one step closer to gaining access to the rapidly growing investment markets across Asia.

The report, released today by the Prime Minister of Australia, the Hon Julia Gillard MP, at APEC in Yokohama, Japan, shows Asia’s funds management industry strongly endorses the proposed development of an ‘Asia Funds Passport’ that would enable and encourage funds to flow across the region.

The findings give strong support to APEC taking the next step and establishing a working group to discuss the proposal.

Titled ‘Asia Region Funds Passport: The future of the funds management industry in Asia’, the report shows that under an Asia Funds Passport, Australian fund managers would be able to offer investment funds throughout the Asia Pacific region.  It would also provide Australian investors with easier access to investment funds from within the region.

Presently, Australia only has access to the New Zealand and Hong Kong markets under regulatory mutual recognition agreements. In some Asian markets, up to 90 per cent of funds offered are located outside the region, predominately in Europe.

John Brogden, CEO of the Financial Services Council, said: “The region needs to take control of its regulatory environment to correct the balance. We must ensure that Australian retail investment products are available for purchase throughout the region.

“Australian superannuation funds and members would benefit significantly from accessing a wider range of investment opportunities in attractive Asian markets. An Asia Funds Passport would also increase competition in the funds management industry resulting in lower investment costs.

“The introduction of an Asia Funds Passport would have significant economic benefits flowing from enhanced regional capital flows, growing and deepening financial markets and higher levels of employment in Asia’s funds management industry. It would also increase the industry’s scale and efficiency across the region.

“We are therefore encouraged by the inclusion of the Asia Funds Passport on the APEC agenda and with the Australian Government’s leadership role in this regional initiative,” Mr Brogden said.

The Financial Services Council/PwC research shows 86 per cent of the Asia Pacific region’s industry bodies and all market participants surveyed believe the establishment of an Asia Funds Passport is of importance to the funds management industry’s growth regionally.

Andrew Wilson, Asset Management Leader, PwC Australia said:  “The establishment of an Asia Funds Passport presents complex challenges for the region, particularly across differing legislative and tax regimes. However the challenges are not insurmountable.

“Of the 11 markets that were surveyed, there were many similarities between regulatory frameworks across areas such as disclosure requirements, custodian arrangements and approval processes. This provides a strong foundation from which to establish an Asia Funds Passport.

“Similar challenges to those facing the Asia region have been overcome by the European Union to establish an ‘Undertakings for Collective Investments in Transferable Securities’ (UCITS) regime.  There is much that can be learned from the EU’s experience over the past 25 years,” Mr Wilson said.

Mr Brogden said once an Asia Funds Passport was established, mutual recognition with jurisdictions outside the region could also be developed.

“Australia has the fourth largest funds management industry in the world and the largest in Asia, with $1.4 trillion in funds under management.  Funds are expected to reach $5 trillion over the next 20 years,” Mr Brogden said.

“It makes sense to capitalise on this and export our financial expertise to the rest of the world and attract a much greater share of funds to be managed by Australian based enterprises.”

According to the report, some of the benefits of an Asia Funds Passport include:

• Increased investor choice.  An Asia Funds Passport would provide broader investor choice through direct access to otherwise inaccessible markets, instruments and offshore expertise.   Greater product variety would provide retail investors with better diversification and the ability to participate in the growth of offshore markets.
• Access to capital.  Emerging markets are undergoing significant expansion and have intensive capital requirements. Mature economies with well-established pension systems have the assets and capital to fund this demand.
• Improved efficiency and cost reductions.  Cross-border capital flows would provide fund managers with access to larger client savings pools and allow them to achieve greater economies of scale.  Greater fund size would help drive competition and place downward pressure on the fees paid by investors.  Fees across the region currently range from 0.4 to 3.0 per cent, offering potential for significant reductions.  Direct access to offshore funds rather than through an intermediary would help eliminate extra layers of fees and commissions.
• Retention of asset management jobs, regionally.  Increased growth in the region’s funds management industry would lead to employment growth and retention of expertise in Asia.

Mr Wilson said: “Asia will be the future growth engine for the global funds management industry. The region accounts for USD2.757 trillion, or 13 per cent, of global funds under management but nearly two-thirds (60 per cent) of the world’s population.

“Combined with the terrific growth of Asia’s middle class over the last 20 years, these disparities suggest enormous opportunities for funds management growth across the region.”