Fund CEOs question benefits of passporting

Regulation is shaping the agenda for fund passporting and not always for the best, according to industry experts at a forum. And with the rise of Asian digital fund platforms, passporting may become irrelevant.
Fund CEOs question benefits of passporting

Mutual recognition is the only Asia fund passporting scheme with a good chance of success, say fund industry executives.

Whether the schemes go live or not, the question has been raised if their formation will create a level playing field across markets.

With digital fund platforms on the rise in Asia, whether passporting schemes succeed or not may become a moot point as disruptive technology makes them increasingly irrelevant.

Douglas Eu, CEO of Allianz Global Investors in Asia, speaking on a panel at the FundForum Asia conference in Hong Kong this week, said the funds industry, from regulators to service providers, had put so much effort into developing the concept of fund passporting that it will definitely happen.

“The bigger question is whether there will be any lasting benefit to it,” he said.

Regulation has shaped the market in recent years and not always for the best. Eu said: “All the power is with the regulators now. Mutual recognition is designed to bring investment capability from someplace else to Hong Kong.

“The regulators are looking at passporting and saying, if we don’t do it now, in 10 years time, it may be too late.” The implication being that some markets of the region will be marginalised, including potentially Hong Kong in relation to China.

Right now the potential passporting players include Hong Kong-China mutual recognition, the Asean Collective Investment Scheme and the Asia Region Fund Passport.

Mark Konyn, CEO of Cathay Conning Asset Management, said that while the regulators push for greater portability of funds, it is difficult for any fund management firm to plan for passporting if they don’t know what’s going to materialise.

“For the larger fund firms,” said Eu, “they can afford to double down on their bet, and set up a local platform.” For many others, it is not a key aspect of their strategic thinking.

Blair Pickerell, head of Asia for Nikko Asset Management, also wondered if the imbalance of fund flows, for example in Asean, will result in some countries pulling out of the scheme.

Amundi is one of the companies to have set up a plan for a Hong Kong funds platform with mutual recognition in mind. Konyn told AsianInvestor that some of the major Hong Kong fund players are working behind the scenes on passporting, but probably more as a defensive measure than with any great strategic vision in mind.

There has been a lot of talk in the past year about Asia-domiciled funds threatening the dominance of Ucits as a passportable fund structure in Asia. At the same time proponents of Ucits, notably the Luxembourg lobby, have been suggesting that Asia, including China, should adopt the Ucits model for the regional passport.

Konyn’s view is that, “I can’t imagine the US allowing Ucits funds to be distributed across the country, so I don’t see why China would invite Ucits funds in.”

They are not going away, though. Ajay Kaul, CEO for Asia-Japan at AllianceBernstein, said: “I don’t believe Ucits is disappearing. It will still be the dominant fund structure five years from now. But you are seeing a concerted effort by regulators in the countries of Asia not to be marginalised.”

Pickerell said the industry is in danger of being regulated out of existence in its current form. With the ease of dealing online where, from his perspective as an American, it is easier to buy a fund from a Charles Schwab account in the US than it is to walk into your local bank in Hong Kong and buy a fund, the threat is clear.

He added: “We are still in a part of the world where funds are sold and not bought. And we don’t have a no-load market, where people can invest cheaply. In fact we have made it hard for people to buy a fund, with all the know-your-client and anti-money laundering questions you must answer before being able to buy a fund here.”

Digital fund platforms might make all this talk of passporting irrelevant and, naturally, the subject of the Alipay platform was raised. Kaul said: “Alipay will be disruptive and with 100 million users already signed up, we know there are asset managers talking to them about how they can develop the platform to include a broader range of products.”

Alipay is a popular online payment platform run by Chinese e-commerce giant Alibaba.

But it may be that this phenomenon is isolated to China. Konyn predicted that in 10 years time, financial services will be dominated by online platforms in China. In other countries, it is less clear-cut and as Kaul points out, “We have experience of such platforms failing in Asia, notably in Singapore where the concept has not taken off.”

Eu added that regulation will limit the speed of development of online platforms: “Again, it comes down to what do the regulators want?”

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