There is still talk in Europe of Ucits products being allowed in China via the cross-border mutual recognition of funds (MRF) scheme, but it is wishful thinking, argues a senior executive at custody bank Brown Brothers Harriman.
Lobby groups, such as the Association of the Luxembourg Funds Industry, have previously pointed to talks happening on Ucits being included in the MRF.
“That [idea] seems crazy,” said Sean Tuffy, Dublin-based head of regulatory intelligence at BBH. Beijing would gain no advantage from allowing mainland investors to access Ucits funds access to Chinese investors – such a move would prevent China from developing its own investment industry, he noted.
Likewise, MRF merging with other Asian passporting schemes would not benefit China, he said yesterday during a visit to Hong Kong. While MRF is unlikely to merge with either the Asean Collective Investment Scheme or the Asia Region Funds Passport (ARFP), noted Tuffy, he did think it would logically come to include Taiwan.
Singapore a fund passport “linchpin”?
However, he does think that Asean CIS and ARFP should align, and that this would hinge on Singapore’s participation. “Many hope that Singapore will be the linchpin if it joins both. By default, [the city-state] could serve as a natural centrepoint.”
The Lion City originally agreed to participate in ARFP, but has since deferred joining, citing tax treatment issues, as reported.
“If Singapore is in, you have two hubs: Hong Kong and Singapore, which is not too dissimilar from Luxembourg and Ireland in Europe,” noted Tuffy. “That would be a good way to harmonise and build scale for the two passports."
With the emergence of local passports, global managers will have to invest more in the region, he said. Many will look at the pay-off – more investors – as worth the cost.
“Groups need to consider their plans for the region. While before they say my plan is to use Ucits to access the region, now they need a local plan, especially if they look to get into China where Ucits is not allowed,” said Tuffy.
Of the two passports, on paper ARFP looks more likely to prosper, given it has a bigger reach, said Tuffy, but a huge development curve needs to happen. “It will be a slow process, because you are dealing with a lot of countries with entrenched asset management industries.”
Ucits face “recalibration”
While Asian passports will take time to develop and gain traction, noted Tuffy, they will ultimately impact the attractiveness of Ucits funds in Asia.
“Everybody knows Ucits will face challenges as local passports start to take off. The global managers will move locally to take advantage of [Asian schemes], in the same way that US managers moved to use Ucits in Europe.
“The dynamics in the region will change,” he added, and this will be more pronounced in Hong Kong, where local funds in time will be preferred to Ucits funds. “You already see this happening in Taiwan, where there is restricted market access for Ucits funds.”
Tuffy said this such an approach was natural, given that local regulators want to develop their own fund management industries. “Why outsource both capital allocation and the regulation of the fund industry to Europe when they can have their own?”
Ucits will remain, he suggested, but there will be a recalibration of how it is used, from being a catch-all product to a more institutional product as local funds become the choice to speed up retail distribution.