Citi 2018 FinReg Outlook

Singapore notably pulled out of the ARFP discussions in 2016. Is there a chance that they will eventually join the ARFP? Whilst Singapore did not sign the Memorandum of Cooperation in 2016, it was a signatory to the original Statement of Intent in 2013 and was involved in the detailed consultations that occurred in 2015. Singapore remains very close to the working group discussions and has continually shown interest in ARFP’s progress. Personally, I will be surprised if Singapore doesn’t join, given the rising interest in the Passport across Asia. What does the ARFP mean for asset managers selling UCITS into the region? In the short term, I’m not expecting many changes for asset managers selling UCITS into Asia. Eventually it may be more attractive for managers to set up an ARFP fund for the region, rather than operate a UCITS structure. UCITS wasn’t really designed to be a global regime, it was designed by the EU and maintained by the EU for the specific needs of European investors. The UCITS regime doesn’t take into account the needs of Asian investors and Asian regulators do not have a say in how the rules are developed. Asia is the next financial services powerhouse and it deserves to have control over its regulatory environment. The question for managers as to whether they set up an ARFP product will be based around cost, market access, and tax treatment. We certainly hope the ARFP will become the UCITS of Asia. It doesn’t make sense for Asian investors to access Asian markets via Europe. It also doesn’t make sense for economic activity generated by Asian managers servicing these Asian investors to flow to the EU. While the ARFP is regulator led, to what extent is there interest to participate from Australian fund managers? Regulators are doing the heavy lifting on the ARFP but don’t forget it was signed off originally at Ministerial level, so it is a government initiative. Interest is growing rapidly and we are fielding calls daily from interested fund managers. There will be a pilot of the scheme in early 2018 to test how the regulations work in practice. Momentum is definitely building and once the market starts to see the output of the pilot, we expect interest will continue to grow. Having said that, UCITS took 30 years to become an “overnight success”, so we expect numbers to be modest for the first few years whilst people understand how the scheme will operate. Australia has been the lead proponent of the ARFP. What measures have been taken locally to position it to take advantage of the ARFP? The government is currently consulting on a new collective investment vehicle which will be similar to the UK’s open-ended investment company. We expect that this corporate style vehicle will be more attractive to foreign investors than our existing trusts, which are based in English common law and can be difficult for investors to understand. The CCIV [Corporate Collective Investment Vehicle] will allow for an umbrella fund structure and will make it easier to run multi-currency class funds. Currently our trusts don’t fully support multiple-currency classes due to the way our tax rules work. One element of the CCIV that has stirred some controversy is the creation of a Depository Regime, similar to what exists in Europe. What is the issue? The main issue with the Depository is the level of independence that is applied to entities operating custody (depository) businesses are also fund managers. The FSC’s view is that the Australian regime should not impose a more stringent independence test than UCITS. What tax changes do you think Australia needs to make to be competitive in the ARFP? Australia’s main taxation issue is the complex and high rates of withholding taxes that are levied on foreign investors. ARFP funds are limited to equity and bond investments. Under Australia’s current rules these types of investments usually end up being exempt under existing policy. The complexity of our regime makes it difficult to guarantee this outcome for investors and heavy tax disclosure is required in product offering documents — or investors are encouraged to seek their own taxation advice. This situation puts Australia at a significant competitive disadvantage to Singapore, where foreign investors in collective investment vehicles are not charged withholding tax. We would like to see Australia adopt a clear 0% withholding tax rate for ARFP investors, consistent with the general taxation principle that the investor should be taxed in their home country based on their personal income tax rates, rather than the fund taking out taxation along the way. What are the future prospects for Australia as a leading cross-border fund hub? If Australia gets its policy settings right, it certainly could be a leading fund management center. We have a high-quality regulatory environment, a stable government, a common law system, and are English speaking. Our funds management capabilities are clearly world class and we are incredibly experienced at managing money as a result of our globally envied superannuation system. Citi Custody & Fund Services – FinReg Outlook 2018 37 36