There is no doubt that Australia is ideally placed to play a significant role in the future growth and development of the Asian region. There are very few people who would disagree that Asia, in general terms, is set to become an increasingly key global power in financial and economic terms, and Australia should be able to benefit from and contribute towards this, thanks to both the quirks of geography and history, and the maturity and strength of our financial services industry.
However, there remains some disagreement on how well positioned Australia is to realise this potential and what, if anything, should be done to help ensure opportunities aren’t missed.
In 2010, the Australian Financial Centre Forum released a report on Australia as a financial centre (the Johnson Report), which sought to set out “…a small number of policy recommendations which, if implemented, can substantially boost our trade in financial services and further improve the competitiveness and efficiency of our financial sector” in the Asia-Pacific region.
In the ensuing three years, however, very little has actually been done to encourage or promote such activities, despite what seems to me to be a glaring need for steps to be taken.
There is a very real danger Australia will be left behind as other countries move faster and more effectively to expand into Asian countries and develop investment products and ideas for Asia-based investors.
Start or be disqualified
The key problem facing Australian asset managers, including superannuation funds, seeking to take their products and services to Asia is that there is no common structure allowing Australian funds to sensibly operate in Asia and meet the various regulatory, tax and currency issues. In many ways, other financial centres are already better placed than Australia to expand into Asia. Europe, for example, first introduced an Undertakings for Collective Investment in Transferable Securities (UCITS) structure in the mid-1980s that allows multi-currency and multi-fee classes within funds, as well as enabling appropriate tax to be paid according to the jurisdiction in which investors are based.
Europe is the second largest domestic funds management centre globally, with approximately US$6 trillion in funds under management, and has already started to produce funds that certain Asian countries allow direct or indirect investment into.
Likewise, it is just a question of time before US-based funds start to set up operations in Asia in significant numbers. The US is the largest funds management market in the world, with US$10 trillion in funds under management, and almost exclusively domestically focused at the moment, but it will continue to grow and moving into Asia is a logical next step.
Australia is a much smaller market, with US$1.5 trillion in funds under management, but is also mainly domestically focused and already under pressure from international players (for example, again, Europe) that are starting to offer Australian-dollar classes in their funds.
China is another potential threat. While little is known about its level of funds under management and it has historically been purely domestically focused, it has a history of watching, looking and learning, and then using “politics” to get a China-centric outcome. It recently signalled that Chinese investors will be able to invest in Hong Kong-domiciled funds, potentially opening up a number of global fund managers to Chinese investors. It is just a matter of time before China moves further into international investing.
If Australia is not to be left behind in this rapidly changing world, we need a solution that allows Asian-based investors to easily invest into our funds, while at the same time satisfying their governments that they won’t miss out on their tax base, and ensuring that currency fluctuations don’t become an deterrent for investors.
The way forward
The obvious answer is to adapt the existing European UCITS approach to create an Asian Unitised Collective Investments Trust or A-UCIT.
The A-UCIT approach solves the common structure hurdle; removes the concern about the erosion of tax bases in Asian countries; addresses the outsourcing of regulatory control (as each jurisdiction would get control of its class’s investors and disclosure via a country-specific wrapper offer document); and reduces, if not eliminates, the export of jobs as each jurisdiction gains its own employment.
By example, an Australian-domiciled global equity fund would be registered in Australia, but managed out of both Hong Kong and Sydney. The majority of the custodian and administration services would be provided in Australia, although there would be scope to outsource some processes to countries such as China to take advantage of cost efficiencies there.
There would be a registry in each country that the A-UCIT is available in, using the local currency – for example, an Australian-dollar class registry in Australia with an offer document (the principal offer document); a US-dollar or Korean-won currency class in South Korea with a Korean wrapper-offer document leveraging off the principal offer document; and a New Zealand-dollar class, again with its own offer-document wrapper.
There would be one set of financial accounts, lodged in Australia where the fund is registered, but three tax returns associated with the classes in Australia, South Korea and New Zealand. If required, country-specific reports such as the Annual Investment Income Report in Australia or reports for the Foreign Account Tax Compliance Act, could be generated per class to satisfy regulatory requirements in each participating country.
This system would offer additional benefits, such as more protection for investors, greater investment choice and flexibility, additional valuable diversification of the investor base for asset managers, reduced erosion of a country’s tax base, and allow each country to protect its domiciled investors (compared to outsourcing to Europe).
Without such an approach, Australia is vulnerable to the moves being made in other regions to expand into Asia. When talking to overseas investors, a comment I frequently hear is that Australian investment vehicles are “off the radar” as far as they are concerned, because our investment funds do not meet what are generally regarded as international standards.
Adapting A-UCITs for Australian investment funds means we are introducing a vehicle that international investors immediately recognise and trust, with the added advantage of being able to take advantage of the decades of work already put into their development in Europe.
Not only are UCITS are now the preferred structure throughout Europe, having been adopted by all members of the European community, but they are well regarded by the global investment community and are being picked up internationally.
If Australia is to become a financial services hub for the Asian region, then we need to offer investment vehicles that align with what is regarded as international best practice