The appetite for mobile funds and products with passports extends beyond investors in the EU, Hence, the growth of UCITS funds around the world - PwC[1]
Investment funds are investment products created with the purpose of gathering investors’ with similar interests and investing the capital collectively through a portfolio of financial instruments like stocks and bonds and other securities. UCITS (Undertakings for Collective Investment in Transferable Securities’) are investment vehicles that pool investors’ capital and invest that capital collectively through a portfolio of financial instruments such as stocks, bonds and other securities. UCITS brought about the most successful present-day passporting of funds.
UCITS
Investment funds existed in Europe for long before 1985, but various issues were grappling cross border investments in the European Union such as regulatory hurdles and taxation difficulties which made funds a less profitable investment. So the UCITS Framework was enacted by EU Directive 85/611/CE of December 1985.[2] It is the primary European framework covering collective investment schemes.
UCITS was enacted with a view to create a single European market for retail investment funds, while at the same time to ensure sturdy investor protection. UCITS exclusively targets Collective Investment Schemes that invest in listed securities such as shares and bonds. The expression UCITS is only used to describe collective investment schemes falling within the scope of the Directive.
The Directive lays down uniform rules on investment funds, allowing cross border offering of investment funds and regulated at the European Union level. Introduction of UCITS opened up wider choices of products at a lower cost through more efficient supervision and UCITS market in the EU. UCITS lays down various rules pertaining to portfolio diversification, asset liquidity and use of hedging. Further, UCITS have to be open-ended, so as to allow the investor to redeem his holdings at any time.
Furthermore, the Directive lays down rules on issues such as European passport requirement for UCITS management companies, marketing standards (simplification of administrative procedures), and stronger supervision of UCITS and of companies managing them (through enhanced cooperation between national financial supervisors).
Directive 2009/65/EC of the European Parliament and of the Council of July 13, 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) is the VIth version of UCITS legislation, replacing UCITS Directive 85/611/EEC. Directive 2009/65 was amended by Directive 2014/91/EU (UCITS V) which introduced new rules on UCITS depositaries (the asset-keeping entity) e.g. the entities eligible to assume this role, their tasks, delegation arrangements and the liability of depositories. This was further supplemented by EU Regulation 2016/438 which addresses non-market risks related to the depositories’ activities.
Strong regulation of UCITS and the resulting high level of investor protection have made them popular with supervisory authorities and retail investors all over the world. Luxembourg is the uncontested leader in this field. But it has taken several decades for UCITS to gain the authority and popularity it has today.
Passporting in Asia
Similar to UCITS, there is the ASEAN Collective Investment Scheme or the ASEAN CIS, Asia Region Funds Passport or ARFP and Mutual Recognition of Funds or MRF.
ASEAN Collective Investment Schemes
ASEAN CIS Framework is an initiative of the ASEAN economic community. This framework covers and was launched by Singapore (Monetary Authority of Singapore), Malaysia (the Securities Commission of Malaysia) and Thailand (the Securities and Exchange Commission of Thailand) in August 2014. So far about 14 funds have been launched within its framework. Under the ASEAN CIS framework, the units of a fund authorized in one CIS domicile (home jurisdiction) can be offered in other participating countries (host jurisdictions) upon approval by home and host regulators.
There are two key documents acting as guidelines for participation vis. ‘The Standards of Qualifying CIS’ and ‘The Handbook for CIS Operators of ASEAN CISs’. The ASEAN CIS framework lays down compliances for fund and related parties. It allows access to traditionally closed fund markets such as Thailand and Malaysia.
Mutual Recognition of Funds
MRF is an initiative of Hong Kong Securities and Futures Commission (“SFC”) and is a bilateral regulatory framework to allow mutual funds of both countries to be distributed to retail investors in each market through a streamlined authorization process. At the onset of 2018, Memorandums of understanding (MoU) have been signed between hong Kong and Switzerland and France. MRF Passport provides cross-border mobility between asset managers in Hong Kong and Mainland China and about 55 funds have been launched under the MRF framework.
Asia Region Funds Passport
The ARFP is a region-wide initiative spread across Australia, New Zealand, Singapore, Thailand, Korea and Japan. It is a multi-lateral fund passporting framework with a mechanism designed to facilitate distribution across regional borders, of funds, manufactured, distributed and administered within the region. It first came into force by Signing of a Statement of Intent on September 20, 2013 at the APEC Finance Ministers’ meeting in Bali. The Memorandum of Co-operation on April 28, 2016 (which came into effect on June 30, 2016) sets out internationally agreed rules and co-operation mechanisms underpinning the passport.
S-VaCC
September 10, 2018 The Monetary Authority of Singapore (MAS) declared the finalization of the features of a new corporate structure for Investment funds, the Variable Capital Company (VCC). The aim of its introduction is to position Singapore to become a key fund domiciliation hub, and strengthen Singapore’s position as a full-service international fund management center. The VCC framework is intended to encourage consolidation of fund domiciliation and fund management activities locally amongst others. According to MAC, a VCC will be permitted to use Singapore and International Accounting Standards (such as the International Financial Reporting Standards and US Generally Accepted Accounting Principles) in preparing financial statements so that it can serve the needs of global investors. Furthermore, fund managers with foreign-domiciled investment funds may take advantage of the statutory regime for inwards re-domiciliation under the VCC framework to transfer the domicile of their foreign investment funds to Singapore.
Lessons from the extant Global Passporting regime
Currently, approximately 50% of all net sales into UCITS products are originating from outside the EU, with Asia representing between 30-40% of the total net sales into UCITS.[3] UCITS helped European funds industry to develop truly cross-border products, increased its attractiveness to investors looking for balanced portfolios with well-regulated products. The Asian Passporting frameworks are all new and will require some time to gain popularity. India is already a potential new joiner for ARFP.
India’s own stance on Passporting of domestic funds is still unclear. Currently, Indian funds wanting to sell schemes abroad have to register in that country with the regulator, a time- consuming process and similarly Indian investors wanting to invest in International schemes currently do so through Indian feeder funds, which invest into their parent firm’s funds abroad. Earlier this year, Business Standard wrote[4] about SEBI’s plan to allow domestic funds to be sold in Asian Countries without needing regulatory clearance in the host country. However, SEBI seemed to be worried about the excessive inflow of foreign money into mutual fund schemes, making it susceptible to sudden outflows and eventual uncertainty.[5]
According to the International Organization of Securities Commission (IOSCO)’s Annual Report for the year 2017 to which India is also a participant, participants exchanged views on funds passporting. However, no certain principles of passporting have emerged so far.
[1] https://www.pwc.com.au/industry/asset-management/assets/asia-region-funds-passport-nov10.pdf
[2] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A31985L0611.
[3]https://www.pwc.com.au/industry/asset-management/assets/asia-region-funds-passport-nov10.pdf.
[4] https://www.business-standard.com/article/markets/sebi-puts-plans-to-allow-mfs-to-be-sold-via-passporting-on-the-back-burner-118042601502_1.html.
[5] Ibid.