NZ has fallen behind Australia in the race to get ready for the Asia Region Fund Passport (ARFP) regime, according to DLA Piper principal, Alasdair McBeth.
McBeth said the NZ industry was awaiting draft regulations – currently in process with the Ministry of Business, Innovation and Employment (MBIE) – before it could design ARFP-compliant products.
He said unlike Australia, which had to pass federal legislation to prepare for ARFP, NZ only required regulations under the existing Financial Market Conducts Act to enter the nascent regional funds regime.
“Australia is leading the charge,” he said, with ARFP funds likely to be rolled out across the Tasman before the end of this year.
The NZ ARFP draft regulations should be out next month but would be subject to a consultation period likely to drag final approval into early next year.
Both Japan and Thailand had also completed ARFP groundwork while South Korea just tabled enabling legislation. The five countries have been engaged in an ARFP ‘pilot program’ this year intended to highlight potential problems in the proposed regime such as tax or other regulatory sticking points.
McBeth said the fund passport program could ultimately cover the entire ASEAN group of countries that includes China, India and the US.
Under the ARFP rules eligible fund managers would be able to offer products across the member states without establishing operations in each jurisdiction or issuing separate prospectuses – similar to the UCITS (Undertakings for Collective Investment in Transferable Securities) regime in Europe.
“But funds still need to comply with disclosure regulations and consumer laws in each host country,” McBeth said.
Managers would also have to sell products through licensed distribution and financial advisory channels in each country, he said.
To begin with, too, managers would only be able to offer “vanilla” diversified products under the ARFP umbrella with tight restrictions on derivatives, securities lending, short-selling, borrowing and performance fees.
Eligible AFRP managers would also require at least US$500 million under management and US$1 million in equity as well as meeting other qualitative standards.
Despite the limitations, McBeth said the ARFP presented long-term opportunities – and threats – for the NZ funds management industry.
He said the NZ market could emerge as an attractive venue to host offshore managers under the ARFP regime – given its relatively low cost of doing business and flexible portfolio investment entity (PIE) tax rules. Local managers could also use the ARFP system to boost offshore investor flows into domestic funds.
On the downside, NZ-domiciled funds investing in offshore assets could face more competition from ARFP-enabled foreign managers.
“We think the opportunities outweigh the threats,” McBeth said. “But it will be a 10-year plus game. It will take some time to build confidence in the ARFP.”
But as the ARFP regime moves from pilot phase to full-flight conditions over the next year the toughest obstacle to a smooth take-off could be tax.
“There’s not yet a clear understanding of how the different tax treatments across the ARFP members will work,” he said.
And it’s unlikely, too, that the new regional system would supplant NZ’s established fund-swapping agreement with its closest neighbour.
Under the trans-Tasman mutual recognition regime, introduced in 2008, managers are able to offer funds (and securities) in both Australia and NZ with a single prospectus – albeit with specific warnings on host country offer documents.
To date, however, the mutual recognition has been more-or-less one-way traffic: just under 800 of the 1,180 investment offers listed on the Disclose website were issued by Australian providers under the agreement.
It is understood just a handful of offers have been made by NZ providers under the mutual recognition pact, although relevant data is not published by the Australian Securities and Investments Commission (ASIC). There is no equivalent in Australia of the NZ Disclose register.