Korean firms lukewarm toward 'Asia Funds Passport' system

Framework for cross-border sale of funds to take time to settle

By Kim Bo-eun

The Asia Region Funds Passport (ARFP) system generated buzz when the initiative, led by the Asia Pacific Economic Cooperation to facilitate cross-border sale of investment schemes, was unveiled years earlier.

Five countries _ Australia, New Zealand, Japan, Korea and Thailand _ will take part in the regulatory arrangement. In Korea, the system enabling the sale of funds of the four countries will go into effect in May 27.

Cross-border sale of funds will become possible without regulatory approval by each country. The sale of funds will be governed by each country's regulations on customer protection.

The system aims to strengthen the capacity, expertise and international competitiveness of financial markets in the region and the fund managing industry. For investors, the system aims to provide a more diverse range of investment opportunities.

"The introduction of the Asia Region Funds Passport will make it easier for Korean asset managers to enter the Asian market and expand their investments into potential overseas markets beyond the limited investment base here," Financial Services Commission's then-Vice Chairman Kim Yong-beom said at a conference on the system held in May 2019.

He said this could present opportunities for Korea to develop into a financial hub in Asia.

But many questions can be raised over the system: are Korean asset managers competitive enough to benefit from the system? How far have we come in getting the system ready?

Opening up the market

Korean asset managers are lukewarm, at best, about the idea of being able to sell funds overseas.

Select top ranking asset managers already have extensive global operations.

"The system opens new sales channels for us," an official of one of the top firms said. "We are preparing to take part in the system."

However, the majority of investment firms do not have global operations. They will not likely hold competitiveness in foreign markets, as brand recognition is crucial to benefit from the system.

"Capabilities and circumstances differ according to each firm. Some may choose to focus on the local market. Those who are interested are reviewing their participation at the current stage," a Korea Financial Investment Association (KFIA) official said.

Firms without global operations will need to find partners in foreign markets that will serve as sales channels for their funds.

In the meantime, there are concerns that funds of foreign firms may take away market share of local firms.

Firms of Australia and Japan, two of the world's largest fund-investor markets, are expected to benefit from the system. Australia has one of the most sophisticated asset management industries in the Asia Pacific based on their robust pension program.

“Concerns can exist at a stage when Korea's financial industry develops. But the fund market here needs to become globalized,” the KFIA official said.

Lots to work on

While the system will go into effect in May, this doesn't mean that foreign funds will immediately begin to be sold here and vice versa.

Last month, the FSC gave a prior announcement of the legislation governing the system. It is currently in the process of collecting input from financial firms on the matter. The FSC plans to hold briefing sessions for firms to encourage them to take part.

ARFP benchmarks Europe's Undertakings for the Collective Investment in Transferable Securities (UCITS) framework that allows for the sale of cross-Europe mutual funds. UCITS funds are perceived as safe and well-regulated investments.

"It also took the UCITS framework about 10 years to get settled," an FSC official said. “The system needs to be viewed with a long-term perspective.”

She pointed out that like UCITS funds are regarded as safe investments, in the long-term, ARFP funds will be perceived the same way. More countries in Asia may join the framework, as several are currently reviewing the matter.

Meanwhile, authorities may need to work on the tax system in order to attract the ARFP member states' firms to sell their products here.

Another challenge is the fact that Korea is not an English speaking country. This serves as a hurdle for asset managing firms to sell their funds in English-speaking markets such as Australia or New Zealand and vice versa. So a key task is having key documents regarding the funds translated into English. The KFIA is currently working on this.

Finally, banks and brokerages that will sell foreign funds will need to establish a new computer network for the enablement of the system. The Korea Securities Depository will work with financial firms on setting up the network.