The Asia Region Funds Passport:
The ARFP Joint Committee has released interim guidance on the proposed requirements, with submissions on how New Zealand will implement its end of the deal due 19 September.
The Asia Region Funds Passport (‘ARFP’) is intended to provide a multilaterally agreed framework to facilitate offering high quality managed funds across participating economies.
The ARFP Joint Committee, which is responsible for the implementation of the regime, has set an aggressive target date for implementation: the end of 2017. With that date fast approaching, this Financial Law Insighttakes a look at what the ARFP regime means for New Zealand and how it is likely to work in practice.
What is the ARFP?
The ARFP is a mutual recognition regime for managed funds across Asia. New Zealand, along with Australia, Japan, and South Korea, are the original signatories under a memorandum of cooperation signed in April 2016. The Philippines, Singapore, and Thailand have since signed up to the ARFP regime, with Thailand set to join the original signatories in the first roll out of the new regime.
Key goals of the ARFP include deepening the region’s capital markets and promoting economic growth, strengthening the region’s funds management industry’s capacity and international competitiveness, growing the pool of funds available for investment in the region, providing investors with greater investment diversity, and promoting regulatory systems that protect investors and provide for fair, efficient, and transparent financial services markets.
The ARFP regime will enable New Zealand funds that meet the quite formidable conditions of entry to offer into other participating economies, and for those participating economies’ complying funds to offer into New Zealand.
The FMA hopes that opening New Zealand to funds offered under the ARFP regime will mean an increased range of investment options in high quality managed investment products will become available to retail New Zealand investors. The regime will also increase competition in the New Zealand managed funds market.
How will the ARFP work?
Each participating economy will recognise foreign funds that comply with certain foreign and local rules.
For funds looking to participate in the ARFP regime, the bar has been set high, with at least US$500 million of assets under management (‘AUM’) and at least US$1 million fund manager capital (with further amounts depending on the size of the fund) needed for entry. Additional qualification requirements for officers and track record requirements for fund operators, as well as ongoing compliance with investment diversification requirements and investment restrictions, will also apply.
The ARFP eligibility requirements and rules are in addition to local requirements – for New Zealand funds, those requirements are found in the Financial Markets Conduct Act 2013 (‘FMC Act’) and related regulations – and host economy requirements for managed funds.
A three-layer regulatory system will exist. It is built on the home economy’s regulatory system having primary regulatory oversight, with the ARFP requirements playing an intermediary role between the home and host systems.
This is intended to provide a high level of investor protection – whether there is a correlated level of expense, or whether the ARFP regime mitigates such expense, is something only time will tell.
Mutual recognition of funds in NZ today
New Zealand currently has one mutual recognition regime for funds, with Australia.
Mutual recognition regimes can be established under subpart 6 of Part 9 of the FMC Act and captured in the Financial Markets Conduct Regulations 2014 (‘Regulations’). The Australian mutual recognition regime exempts Australian issuers from most New Zealand disclosure requirements, with similar exemptions for New Zealand issuers in Australia (‘Trans-Tasman Regime’).
Sensibly, the Trans-Tasman Regime is likely to continue alongside the ARFP regime, in part because the ARFP eligibility conditions are substantially higher than those of the Trans-Tasman Regime. Australian and New Zealand issuers will therefore have two options for trans-Tasman offer expansions.
ARFP in New Zealand
The domestic laws of each participating economy need modification to enable implementation and recognition of ARFP requirements. In New Zealand, this means new regulations, to be made under subpart 6 of Part 9 of the FMC Act, to ensure that both overseas and New Zealand ARFP funds can use the passport into and out of New Zealand.
In the interim Guidance on host economy laws and regulations document published by the Joint Committee in July (‘Interim Guidance’), the FMA indicated that the ARFP regime will generally be the same as for Australian offers currently. However, a number of additional elements not present in the existing Trans-Tasman Regime are likely to complicate matters, such as:
The Joint Committee’s annual report for 2017 indicates that New Zealand is targeting finalised regulations being ready in late 2017 for implementation by the end of 2017.
Interim Guidance on host economies’ laws
Ahead of implementation, the Joint Committee’s Interim Guidance aims to provide participating economies with an overview of each economy’s laws and regulations that are likely to apply. The Joint Committee has identified six key areas of relevant regulation, which are:
While the Interim Guidance is currently under consultation and has not yet been finalised, it does provide a helpful first-cut view of how the core regulatory areas across each participating economy operate. New Zealand fund managers contemplating international expansion into the Asia region will be able to undertake a rough and ready analysis of foreign requirements likely to apply – or at least see where they should be asking for more comprehensive local advice.
The Joint Committee is currently seeking feedback on the Interim Guidance, with the feedback on the New Zealand provisions to be provided to the FMA.
In addition to seeking clarification on current law, the consultation is also an opportunity to engage with the FMA on how the current mutual recognition regime with Australia could be adapted and enhanced to facilitate the new ARFP regime.
The deadline for submissions on the Interim Guidance to be made to the FMA is 19 September 2017.
Conclusion and our view
The ARFP regime could open up New Zealand’s managed funds industry to a much wider audience of fund managers and investors. It is likely to operate similarly to the current Trans-Tasman Regime in place, although the added overlay of ARFP eligibility criteria will restrict participants.
The Trans-Tasman Regime is likely to continue, giving New Zealand and Australian issuers the option of offering under the current regime or under the ARFP regime – or offering different funds under each.
The deadline for ARFP domestic implementation is rapidly approaching. The consultation process on the Interim Guidance presents what might be a final opportunity to engage with the FMA about how the ARFP regime will operate. In our view, the policy settings for the ARFP are largely locked in, and the Interim Guidance is relatively mechanical in signalling how that policy will be implemented.
Interestingly, the FMA chose not to impose capital adequacy requirements on New Zealand fund managers as an FMC Act licensing requirement, so opting in to the ARFP will be a step up and possibly a shift in thinking for most New Zealand fund managers.
Given the high bar to entry and challenges with offshore distinction, it is hard to see too many New Zealand managers taking advantage of the ARFP to offer offshore. However, we are likely to see an increased range of offshore funds becoming available to New Zealand retail investors, potentially cutting the lunch of domestic managers.
If you would like a specific briefing on the Asia Region Funds Passport, offering funds into or out of New Zealand, and what you can do now to plan for the new regime, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Nick Summerfield on +64 9 915 3357, Karen Mace on +64 4 496 5941, or Tom McLaughlin on +64 4 498 0886, or email the team at email@example.com