The Asia Region Funds Passport (ARFP) is potentially one of the most challenging cross-border fund passporting schemes among all available, due to the large number of jurisdictions and authorities involved. With the official start date now in sight, asset management participants should begin exploring regional collaboration on the practical aspects of offering passport funds.
But first, some background: ARFP is an initiative led by the Asia-Pacific Economic Cooperation (APEC), which aims to attract and retain finance within the region; to foster its economic growth, as well as to strengthen the investment management industry as a whole. The five countries currently participating in the scheme are Australia, Japan, South Korea, New Zealand and Thailand.
The ARFP Joint Committee announced on 20 September 2018 that ARFP is set to officially launch on 1 February 2019. This is one-year later than originally planned; it was initially expected to commence on 1 January 2018. This follows a fifth face-to-face meeting of representatives from financial regulators in the participating markets in New Zealand at the end of September.
ARFP’s scale is one reason it has taken many years to progress. However, regulators, particularly in Australia, still have high hopes for the scheme. As of October 2018, Japan, Thailand and Australia have officially completed preparations for implementation; whilst South Korea and New Zealand are in the process of establishing the necessary legal and regulatory requirements.
Challenges to full implementation
Given the Asia-Pacific region is hugely diverse, arbitrages over tax, regulation and economic developments are substantial and are likely to pose challenges to ARFP initially. It would not be surprising if ARFP starts small and then flourishes over time. There are differing languages; customs; political environments; consumer demands; regulatory restrictions; tax structures; and market agendas among participating jurisdictions, all of which make it difficult to operate under a unified, standardised framework.
The main hurdle that financial institutions need to overcome, therefore, is adapting their current infrastructures to be compatible with the ARFP framework. The lack of a central governing body, common currency and harmony across each jurisdiction, are all potential reasons standing in the way of success.
Another consideration is the additional personnel required for successful implementation of ARFP, especially in back-office operations, marketing, sales, and client service; as the financial services institutions enter new markets. It is critical to have local staff who are familiar with the market, as adaptations will be needed before implementation next year. Standardisation is expected to take place in IT infrastructures, back-office operations, fund registrations, trade executions, legal agreements, bookkeeping and fund servicing, but it is suggested that the process to achieving this will be fairly gradual.
Despite challenges with the scheme, one competitive edge that ARFP has over ‘Undertakings for the Collective Investment of Transferable Securities’ (UCITS) is that being based solely in Asia-Pacific avoids time difference delays from Luxembourg, which can be burdensome for asset managers based in the region.
Potential development of ARFP
At present, five countries are fully involved in ARFP. However, as it gathers momentum, we should expect to see more South East Asian nations wishing to participate in the scheme. An indicator of future success is that regulators from other jurisdictions in the region have already inquired about joining ARFP.
For instance, at the joint committee meeting in September this year, representatives from the Monetary Authority of Singapore (MAS) and Taiwan’s Securities and Futures Bureau attended to observe.
The role of technology in facilitating cross-border initiatives
According to a recent research commissioned by Calastone, titled ‘The Impact of Technology and Regulation for Funds’, only 7% of surveyed participants considered ARFP to have the best chance of success relative to other cross-border fund distribution schemes . Comparatively, 29% of participants are confident in the Mutual Recognition of Funds (MRF) between Hong Kong and mainland China, which was first implemented in 2015.
Technology is particularly crucial for the success of any cross-border fund distribution scheme, and it is set to play an important role in addressing inconsistencies in processes, practices and standards across the region in relation to ARFP as well.
ARFP encompasses a diverse range of jurisdictions – from Australia, to Thailand, to Japan, for example; each with their own operating standards. For instance, currently there is no common method for messages to be sent and received, as each jurisdiction may have their own systems, as well as message formats.
This gives rise to the need for a different infrastructure for each transaction, along with the necessity of message transformation interfaces to be put in place for each cross-border communication. However, this all hinders the process, making it costly, inefficient and time-consuming. This also defeats the ultimate purpose of ARFP, which aims to efficiently and effectively facilitate fund flows, both in and out of participating jurisdictions.
Standardisation, supported by automation, is the key to enabling the cross-border distribution of funds. It would eliminate the need for infrastructure adaptation, while also streamlining processes, providing clarity and cutting operational costs. Calastone’s technology normalises all message types, to enable smooth communication between the receiver and sender.
The ARFP scheme certainly faces several challenges before successful implementation can be achieved, given the diverse range of jurisdictions it encompasses. However, after a predictably slow start, we remain confident that, with gathered momentum and the appropriate measures in place, ARFP will gain traction, benefitting asset managers and fund distributers across the Asia-Pacific region.
Leo Chen is Managing Director and Head of Asia at Calastone.