Hong Kong’s open ended fund company (OFC) legislation just marked its first birthday but market response to the new structure has been muted so far. Meanwhile, Singapore’s own variable capital company (VCC) regime is expected to go live by the end of 2019, although its popularity could also be affected by concerns around the unclear advantages of these Asian regimes when compared with the far more established Undertakings for the Collective Investment in Transferable Securities (UCITS) and Cayman frameworks.
The lack of pickup for Hong Kong’s OFC structure has possibly been due, on a broader scale, to the relatively limited overall number of new fund launches seen in the jurisdiction.
However, for investment managers and distributors that have the ability to rely on the UCITS structure for overseas fund distribution, they have had little reason to consider the Hong Kong’s OFC, noted Dean Chisholm, Regional Head of Operations, Asia Pacific, Invesco.
“Most managers try to run the most efficient structure possible. They have an umbrella structure to add funds easily without the need to issue new prospectuses. As a result, the most recent launches have been under existing umbrella funds,” said Chisholm.
The slow adoption of the OFC regime is also not surprising given the evolution of the fund industry. It took nearly ten years for the now globally popular UCITS regime to find proper footing as market participants familiarised themselves with the new legislation and regulators ironed out a few kinks, Chisholm added.
For Singapore’s VCC, however, the outlook may be slightly brighter.
“Singapore aimed to set up a legislation that would be distinct from the corporate legislation regime, a legislation that could stand on its own, but also gel well with other existing regulations. Achieving this under three years is in itself remarkable,” noted Armin Choksey, Partner, Asian Investment Fund Centre and Market Research Leader, PwC Singapore.
With the final leg of the public consultation on the new regime concluded last month, the VCC framework will now have to prove its appeal. Choksey reports that there has already been plenty of interest even at an operational level around the new rules.
“VCC will have uses across different asset classes, which gives it an expanded appeal for wealth managers and private banks,” Choksey said. The framework targets both open ended and private funds, allowing for more ad hoc structures to be set up, when compared to Hong Kong’s open fund-focused regime.
In both cases, an educational process is par for the course before product launches can start to happen.
The strength of existing frameworks could of course hinder the success of these ambitious Asia-driven regulatory initiatives. The Cayman framework, for example, is already very familiar to the vast majority of private investors in the region. For these sophisticated investors, the new Asian frameworks will have to prove to be cheaper or operationally easier to run than the Cayman offering to become a viable alternative.
“If you go to a major investor from China or Japan at this point in time, they already understand the Cayman rules, so they will need time to gain familiarity with these new structures,” said Invesco’s Chisholm.
As for the UCITS regime, the target audience for new product launches play a key role. If a new fund aims to attract European investors, it would be necessary to implement a UCITS or Alternative Investment Fund Managers Directive (AIFMD) structure. With costs being an important consideration for investment managers, a doubling up of fund structures is unlikely, and the distributors’ own desires to contain the number of funds on offer at any one time should also be taken into consideration.
But UCITS are not entirely popular universally. The possibility of having to pay taxes in the European domiciles, for example in Ireland where chargeable events are involved for Irish taxable investors, and the Luxembourg annual subscription tax, plus the need for a management company on the ground to represent the managers. This means issuers could face multiple layers of fees associated with launching a UCITS fund.
That being said, with the appeal of tax arrangements under Hong Kong’s OFC still uncertain, fund issuers will wait to get the full picture of the pros and cons for each jurisdiction before testing the water.
Sophie Wong, Head of Tax and Regulatory Affairs, Asia Pacific for Asset Servicing at BNY Mellon, noted that despite the uncertainties in these early stages, the structures have potential.
“It is too early to tell what the future holds for Hong Kong’s OFCs. For VCCs, there is an opportunity between now and the official launch for Singapore to learn from the initial market feedback to the OFC structure on areas such as taxation arrangements and treaty networks. Should Singapore manage to get the tax issue right, we could indeed see this new fund structure compete for attention on a regional scale, if not beyond,” Wong said.
The growing number of mutual recognition arrangements in Asia could prove a turning point for these new funds structures. One such initiative, launched in 2015, was the Mutual Recognition of Fund (MRF) scheme between Hong Kong and Mainland China.
“MRF has attracted some fund managers to launch Hong Kong funds already. But the MRF still has restrictions on the percentage of funds that can be raised cross-border, as well as on the location of the fund’s managers. If those restrictions are removed it could become much more attractive. There are other schemes in South East Asia but these markets are still quite small. You want to have that critical fund size before launch. Most distributors are not going to allow you on the platform unless you have $100m. You need to be able to get through that AUM barrier and offer good returns,” said Chisholm.
While China remains the obvious opportunity, other regional initiatives could gain momentum as they address real needs for the region’s investment industry. The Asia Region Funds Passport (ARFP) which was first conceived in 2013 and launched in 2019, stands out with recent developments including New Zealand ratifying the ARFP rules on July 26 this year, and South Korea expected to come next.
“The ARFP was not built to compete with UCITS, but is meant for APAC-wide fund distribution by regional managers. Most of the managers involved are not global names but those from local markets that want to go to a neighbouring market without having to go to Europe and back through the UCITS regime. The ARFP setup, which had to gain consensus without the presence of a central regulator, was built in five years, another commendable effort in itself. No funds have launched under it yet, but we had 15 fund managers involved in the pilot stage,” said PWC’s Choksey.
Hong Kong which is not part of the ARFP has made its own efforts at cross-border integration beyond mainland China with specific bilateral mutual recognition agreements with the likes of the UK, Switzerland and Netherlands.
But Choksey believes the VCC could end up having the upper hand.
“We believe VCC is a game changer, the conversations we have had are with service providers that have been looking to plant their flag in the region. They say the VCC is the right opportunity to finally do that.”
As a result, the recent introduction of VCC could not only provide impetus to fund launches, but more broadly offer the green light for a new wave of fund managers to register and launch operations out of Singapore.
The views expressed herein include external speaker and may not reflect the views of BNY Mellon. This does not constitute legal, tax, accounting, investment, financial or other professional advice on any matter and does not constitute a recommendation by BNY Mellon of any kind.
©2019 The Bank of New York Mellon Corporation.
Vice President and Head of Tax and Regulatory Affairs, Asia Pacific
Sophie Wong is responsible for the provision of tax technical expertise, regulatory insight, client support, tax product development and enhancement for the Asset Servicing business at BNY Mellon in the Asia Pacific region.View Profile