The Corporations Amendment (Asia Region Funds Passport) Bill 2018 (Cth) was introduced to the Australian Parliament on 28 March 2018 as part of Australia's commitment to joining the Asia Region Funds Passport (Passport). The Passport is a multilateral framework allowing eligible funds to be marketed across member countries without the need for overly onerous additional regulation.
Like Australia, Japan, Korea, New Zealand and Thailand, have also signed a Memorandum of Cooperation (MOC), which sets out the agreed rules of the Passport and commits the signatories to implement the Passport Rules into domestic law.
Who will be interested?
It is envisaged that the Passport will appeal to Australian fund managers looking to offer their products in participating economies. As noted by the minister when she introduced the Bill "This will enable them to market their products to Asia's expanding middle class, and to the growing numbers of high net worth, and ultra-high net worth individuals in the region. Australian fund managers will be able to sell a single product across Asia and achieve greater economies of scale."
The Passport will also allow fund managers in participating economies to access the pool of investors in Australia – arguably the largest and most sophisticated funds sector in the region.
We note, however, that Passport Funds will only be able to invest in liquid assets, in order allow investors to redeem interests as and when required. As such, it is envisaged that funds investing directly in real estate will not be eligible for the Passport.
How does the Passport work?
Collective investment schemes (and their respective sub-funds) (Schemes) which are located in a participating economy will be able to register as a Passport Fund. The jurisdiction where a Passport Fund is first registered or approved will be designated as its Home Economy and a jurisdiction in which a Passport Fund applies (or is permitted) to offer interests to investors will be the Host Economy.
Host Economies will have the ability regulate matters such as disclosure, distribution, member complaints and other investor protections. In addition, Host Economies will be able to impose additional requirements on foreign Passport Funds, so long as these are:
- not unduly onerous on the foreign Passport Fund (when compared to the equivalent requirements for Schemes in the Host Economy); and
- reasonable to protect investor confidence.
Registering an Australian fund as a Passport Fund
In Australia, ASIC will be responsible for processing applications from Schemes to become Passport Funds and must only register a Scheme where it is:
- of the opinion that the operator of the Scheme (responsible entities in Australia) meets the eligibility criteria under the Passport Rules; and
- satisfied that the Scheme will comply with the corporations legislation in Australia, including the Passport Rules.
Foreign Passport Funds registering in Australia
In order to offer interests to investors in Australia under the Passport, funds registered in another participating economy must:
- register as a foreign company in Australia;
- lodge a notice of intention with ASIC; and
- provide ASIC with a PDS in respect of the fund.
ASIC will generally have 15 business days to consider an application, beginning on the day after the notice is lodged with ASIC. A notice may be rejected for reasons such as:
- the fund is unlikely to comply with the home or host economy's laws and regulations;
- the entry of that fund into Australia is not in the public interest;
- Australia has imposed sanctions against another economy and ASIC is of the view that allowing the passport fund to operate in Australia would breach those sanctions; or
- the name of the fund is unavailable.
If the notice of intention is not rejected, the fund becomes a Notified Foreign Passport Fund.
Given the arduous and complex process of registering a foreign company in Australia, we would have preferred to see this hurdle left out for operators looking to passport funds into Australia.
We will also await guidance from ASIC on the PDS requirements and whether this can be addressed by a supplement to the original offering document, or whether inbound funds will be required to go through the time-consuming and expensive process of drafting a PDS from scratch.
What comes next?
The Passport will commence when at least two of these participating economies formally confirm that implementation has completed from their side. At the date of writing, we are unaware of any other jurisdictions implementing legislation to implement the Passport, but we will continue to monitor the situation.
Industry is also calling for withholding tax reform to accompany Australia's entry into the Passport regime in order to ensure that Australian fund managers are not put at a disadvantage to other participating economies.
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