The proposed Asia Region Funds Passport (ARFP) scheme has moved a step closer with the release of draft rules and operational arrangements.

The memorandum of understanding (MoU), published last Friday, took into account industry feedback following a consultation paper launched last April.

While there were no substantive changes, what the document offered was a great deal more clarity on the application process and operational details.

Justin Ong, head of asset management practice at consultancy PWC, pointed to one positive inclusion as a proposed “21-day speak-up-or-be-silent rule” designed to streamline fund entry and the notification process.

Under the proposal, a host country is given 21 days to assess the eligibility of a fund for passporting. If it does not respond, each application will be deemed complete.

This would seem to address concerns around the time it takes for funds to launch, which was one of the issues raised in the Asean collective investment scheme (CIS) between Singapore, Malaysia and Thailand, as reported

Fund firms Maybank and Nikko launched passport funds in Singapore last November, yet they have still to be distributed in Malaysia and Thailand.

Ong also pointed to the inclusion of professional indemnity insurance for financial services as another plus point in the ARFP draft. This offers protection to individuals and firms in certain circumstances for negligence claims and legal damages.

The paper had sought feedback on whether professional indemnity insurance should be permitted as a substitute for capital requirements in relation to the size of a company’s assets.

Initially it had been proposed that firms would be required to maintain at least $1 million, plus 0.1% of AUM in excess of $500 million – up to a maximum of $20 million.

The opinions of industry players were mixed, with some saying it would allow smaller operators to participate, while others feared they would be inadequately capitalised.

The draft MOU has proposed that professional indemnity insurance be allowed as a substitute for only 80% of the additional capital requirement.

The draft MoU also modifies previously proposed restrictions on delegating investment activities. Operators of passport funds will be allowed to delegate investment functions for up to 20% of a fund’s AUM to any entity regulated by an Iosco signatory and subject to a similar regulatory regime.

To delegate more than that the officers of the party being outsourced to must meet minimum experience requirements.

Ong suggested the changes had been positive, giving him confidence that the ARFP scheme can be launched by the third quarter of 2016.

“Participating economies have committed to [ARFP] and so a live fund launch will come quickly, especially as managers in Singapore will already have had experience dealing with cross-border distribution under the Asean CIS, and so can move faster,” said Ong.

The question, he noted, was whether distributors would be ready. “Managers can have funds ready for launch and approval, but if distributors in host economies are not familiar with the rules, it may cause delays or hurdles,” Ong cautioned.

“There is also a question as to whether anti-money laundering rules across all participating economies are broadly aligned, otherwise managers launching products will need to do more to ensure their capital-raising activities in cross-border markets meet their home regulator expectations.”

The four original signatories to the ARFP scheme – Australia, New Zealand, Singapore and South Korea – are all members of the Financial Action Task Force, for example, an intergovernmental body set up to combat money laundering. However, subsequent signatories Thailand and Philippines are not.

Ong suggested that the two other markets that would add significant depth to the ARFP scheme would be Indonesia and Japan. “Clearly having China come to the table would be fantastic, but this would be longer-term,” he added.

ARFP is one of the three cross-border schemes either in operation or pending in Asia. The other two are Hong Kong-China mutual recognition and the Asean CIS.

Public consultation will now take place jointly with government agencies from Korea, New Zealand, Singapore, Thailand and the Philippines

Submissions will be closed on April 10 this year, and the MoU is aimed to be finalised by August. Once members agree to the MoU they will be expected to implement changes to legislation and regulation within a year. Eligible funds would then be able to be passported in those economies.