The Asia Region Funds Passport initiative

Lessons learnt

There are a number of lessons to learn from the ARFP that are relevant to other IRC initiatives.

Both countries could see clear benefits, and continue to cooperate on regulating therapeutic products, but formal and complex international regulatory cooperation can take a lot of time and resources.

In the end, it was not clear to both parties that the win from ongoing negotiations would outweigh the costs.

Good things takes time

It took 8 years of sustained effort to get the launch in place.

Start small

Select the least demanding form of IRC (in this case licensing) that gets you over the line rather than shooting for the moon and missing altogether (disclosure, distribution and disputes).

Build a coalition of the willing

Plurilateral negotiations amongst diverse economies are difficult to close out. Establishing a small core working group of committed countries meant the initiative could move forward.

The key role of a public entrepreneur

Willing to personally champion the initiative and go the extra distance to push it through.

Have the right people in the room

Keeping the group at the technical expert regulator level meant the parties were able to cut through a host of small prickly issues.

Political mandate helps but it is not enough

The APEC banner provided legitimacy and a political mandate which was helpful but was never enough on its own.

Context and capability matters

IRC between economies at different levels of development can be particularly difficult when mutual recognition of other regimes is required.

How it works – mutual recognition of fund licensing

Asian-domiciled managed funds have not been benefiting from the growing demand for cross-border funds in the region and most of this demand is met from funds based in Europe or the US. Currently there is limited transferability of funds management across borders and Asian funds are largely assembled, distributed, and administered within each jurisdiction. Each economy has its own regime covering the licensing, distribution, disclosure requirements, and options for redress.

ARFP streamlines the regulatory processes for cross-border offers by enabling mutual recognition of fund licensing. When implemented, ARFP will enable operators of collective investment schemes (CIS) such as a fund manager, to offer their products to retail investors in other member economies, without the need to meet different licensing requirements.

How the Asia Region Funds Passport initiative was developed

The genesis of the ARFP was a study that highlighted the potential for the large Australian fund management industry, which is underpinned by the Australian superannuation regime, to develop financial services exports. The concept was introduced to the APEC Finance Ministers in 2010. Since then, interested Asian APEC economies, along with New Zealand and Australia, have been engaged in a series of policy dialogues on the design of key features of a funds passport scheme, identifying and resolving any technical and policy challenges, and developing options to take the scheme forward.

There are several features of the brief chronology outlined in Box 1 that particularly deserve comment. The first was the role of the Australian Treasury, and 1 key person in that organisation, who championed the initiative in the region and kept it moving forward. This highlights how a public entrepreneur is often at the heart of a change process.

The second was the impact of establishing a small core working group from committed economies. The initial stage of the process involved a series of meetings in which economies outlined their positions. This helped to build a shared understanding but did not give the initiative any momentum. The core group was inclusive rather than exclusive. Initially the core was Australia, Korea, New Zealand and Singapore, and they were joined at later stages by Malaysia, the Philippines, Thailand, and Japan. In the end 5 countries launched the initiative: Australia, Japan, Korea, New Zealand, and Thailand. Others decided not to be involved in the initial launch. The experience with ARFP brings out the importance for other IRC initiatives of building a coalition of the willing to build up momentum and carry it forward.

The case also highlights the difficulty of IRC between economies at different levels of development because of the extent of regulatory trust required with mutual recognition of other economies’ regimes and systems. In this case, economies’ eligibility to join ARFP was linked to 3 main criteria:

1. Having a positive financial sector assessment program (FSAP) review by the IMF of the managed fund regulatory system
2. Having a robust information sharing regime in place through the International Organisation of Securities Commissions Multilateral MoU
3. Having a clean bill of health on anti-laundering from the Financial Action Task Force.

The third key feature was a deliberate choice to focus on mutual recognition of licensing requirements and to limit the funds it applied to. Coverage was limited initially to ‘plain vanilla’ funds by eligible fund managers that met specific criteria. These included having a track record of managing assets, having appropriate financial resources, and key personnel with appropriate qualifications. A more ambitious approach would have been to aim for full interoperability which raised a wider range of complex technical legal interface issues such as rules on disclosure, distribution, disputes and redress procedures. This highlights the importance of starting small rather than shooting for the moon and missing altogether.

The fourth key feature was having the right people in the room. The EU had pioneered the concept of passport funds through a scheme known as ‘Undertakings for Collective Investment in Transferable Securities’ (UCITS). The UCITS provided a model for the ARFP. Keeping the group at the technical expert regulator to expert regulator level meant the parties could cut through a host of prickly technical issues.

The fifth key feature was the role of APEC which provided the umbrella under which the initiative was developed. APEC provided legitimacy and a political mandate which was helpful but was not sufficient on its own.

The last feature was the length of time required to get the pilot over the line. It took 8 years of sustained effort to get the launch in place and the initial launch will not include either of the 2 major financial centres in the region: Singapore or Hong Kong. This length of time reflected both technical and other barriers.

The technical barriers arose because there were a range of complex technical regulatory challenges to resolve including whether the host or home country law applies, the common regulatory arrangements required and the rules for eligibility of passport funds. But with sustained will and determination, most technical barriers can be overcome. A second key barrier was distance, which limited the frequency of the meetings. The project required getting key people with busy day jobs from the 5 or 6 economies together for 2-day meetings with some people facing a day of travel on either side. This limited the project to a schedule of 2 to 3 meetings a year.

The most difficult non-technical barrier was the different regulatory mindsets. Both Australia and New Zealand run more principle-based licensing regimes whereas other jurisdictions (such as Singapore) run more prescriptive regimes.

Understanding the context for cooperation

The funds industry is a world-wide business which is characterised by significant economies of scale so there is significant benefit in having a world scale industry. It is also an industry where fund management can absorb a significant part of the return. The expense ratio of the EU funds available locally is typically 0.9%. By contrast many of the funds in Asia are small and are therefore not able to achieve the same economies of scale. As a result, the costs of managing funds in some of these economies are as high as 2.6% on average.

The ARFP, by enabling streamlining the regulatory processes for cross-border offers, is intended to increase the extent of fund management in the region and reduce the share of the returns on managed funds absorbed by expenses. However, ARFP is competing with 2 other cross border funds initiatives in the region.

The first, the Mutual Fund Recognition Programme between Hong Kong and mainland China, is still under discussion. The second, the ASEAN Collective Investment Schemes Framework, was announced in mid-2014 and includes Singapore, Malaysia and Thailand. The ASEAN CIS Framework is intended to facilitate cross-border offers of CIS to retail investors as part of the ASEAN regional capital market integration plan.

ARFP has attracted 5 economies some with significant funds management industries. It is hoped that the successful operation of the ARFP will attract others including big financial centres such as Singapore (or Hong Kong) to join. 

Conclusion – implications for IRC generally

This case study highlights that IRC, like most good things, takes time. It took 8 years of sustained effort to get the launch in place. Thus, IRC is a long game: it requires an investment of time and effort to build up trust and networks. The crucial lesson is the role of building and sustaining relationships as the soft stuff is the hard stuff.

This case study is a story of a long march by a small group of economies committed to the concept of passport funds and championed by 1 agency and 1 person in particular. The pilot launch in 2019 was the culmination of hard work by a wide range of officials who worked on resolving the highly technical problems posed by the subject matter. Making progress required working through technically complex issues about which economy’s law would apply, the common regulatory arrangements required and the rules for eligibility of passport funds. There were also tactical challenges about scope (limited to licensing or including disclosure and disputes) and which economies should be involved.

So, what are the lessons emerging from this case study that are relevant for IRC initiatives in other jurisdictions? 

While every example of IRC is unique, there are a number of lessons that can be learnt from the ARFP that are relevant to other IRC initiatives:

• IRC like most good things takes time: it took 8 years of sustained effort to get the launch in place
• Start small: select the least demanding form of IRC (in this case licensing) that gets you over the line rather than shooting for the moon and missing altogether (disclosure and disputes)
• Build a coalition of the willing: plurilateral negotiations amongst diverse economies are difficult to close out. Establishing a small core working group of committed economies meant the initiative got to go forward
• The key role of a public entrepreneur: willing to personally champion the initiative and go the extra distance to push it through
• Have the right people in the room: keeping the group at the technical expert regulator level meant the parties were able to cut through a host of small prickly issues
• Political mandate helps but it’s not sufficient: the APEC banner provided legitimacy and a political mandate which was helpful but never enough on its own
• Context and capability matters: IRC between economies at different stages of development is particularly difficult when mutual recognition of other regimes is required.

Key references

Asia region funds passport(external link) — Ministry of Business, Innovation and Employment

About(external link) —  Asia Region Funds Passport

APEC Policy Support Unit, 2014: 'Asia Region Funds Passport: A Study of Potential Economic Benefits and Costs'.

Asia-Pacific Economic Cooperation (APEC), 2014: 'Consultation Paper: Arrangements for an Asia Region Funds Passport', available at:

Arrangements for an Asia Region Funds Passport(external link) — Australian Government The Treasury

Godwin, Andrew and Ian Ramsay, 2015. 'The Asia Region Funds Passport Initiative – Challenges for Regulatory Coordination Company and Commercial Law Review, 236-243'.

Authored by Derek Gill, NZIER in 2018