Part one: Raising awareness

Regulation has been one of the biggest challenges facing fund companies in recent years. A series of post-financial crisis regulatory initiatives have created seemingly endless work for compliance departments, service providers and senior management.

Funds Global Asia partnered with Calastone to examine the intersection of regulation with technology to establish whether technical solutions could improve the efficiency of the industry. In other words, could fund companies use technology to meet regulatory demands without sacrificing profits?

Based on a global sample that included respondents from Sydney to Singapore, the main survey examines this question from various angles. The results contain insights that we hope will assist fund companies at all levels in their efforts to plan ahead for an uncertain future.

The Australian market has unique characteristics, however, which is why Funds Global Asia arranged a poll of only Australian respondents with a view to determining the main issues facing fund companies in this country.

Consistent response
The first finding was a near-unanimous agreement with the statement that “it is important for Australian investors to diversify their exposure to managed funds that invest abroad”. Half the respondents strongly agreed with this and another 44% simply agreed, yielding a total of 94% (see fig.A). This was almost exactly the same result as in last year’s survey, when a total of 95% gave their assent. The results indicate a consistent view among respondents that Australian investors stand to gain by allocating more of their portfolios to overseas investments.

But what is the most significant factor preventing Australian investors from increasing their allocations to managed funds that invest abroad? The most popular choice, by a clear margin, was “lack of education”, which was chosen by a majority (58%) of respondents (see fig.B). The next most popular option was “tax or regulatory issues”. Other factors such as “not enough products on offer” and “problems with Asia regional passporting” attracted relatively few responses.

Calastone_Australia_fig.A-BAgain, this result echoed our finding from last year when our Australian respondents were asked the same question; however, the focus on education was even more pronounced this time around. Last year “lack of education” was chosen by 53% of respondents, meaning this factor’s popularity has risen five percentage points in a year. Perhaps respondents have become even more convinced of the importance of educating their investors about the benefits of overseas investment.

Certainly, there is widespread agreement that improving investors’ understanding would be in the interests of the industry as a whole.

Foreign offerings
Could Ucits, the 30-year-old European funds regime that facilitates passporting of investment products within the European Union and beyond, be the tool to open up Australia’s funds industry to greater international exposure? Ucits are not widely distributed in Australia, where locally domiciled funds tend to be the vehicles of choice. We wanted to know if this might change. Could Ucits become an important part of the product mix in Australia?

Respondents were somewhat undecided. Although a total of 44% agreed with the statement (of which 11% strongly agreed; see fig.C), the same proportion were neutral, meaning they either didn’t know or chose to withhold judgement. However, this result did represent a shift from last year, when a total of only 30% agreed that Ucits would become an important part of the product mix.

What can be concluded from this finding? Clearly, there is optimism among some segments of the funds industry that Ucits will play a role in Australia. Although this opinion is not universally shared, the proportion who see an important role for Ucits in Australia is rising.

There remains some indifference towards this vehicle, however. Perhaps the enthusiasts need to focus on making a case for the value of Ucits versus locally domiciled Australian funds which, the local firms may argue, fulfil local investors’ needs just as well, if not better than funds domiciled in distant jurisdictions such as Luxembourg or Ireland.

There was slightly more optimism around the Asia Region Funds Passport (ARFP) than Ucits. In total, half of respondents said they thought the ARFP would be significant in raising Australian investors’ international exposure (of which 8% held the view strongly; see fig.D). That finding was in line with last year’s result, when 49% of respondents showed a similar level of faith in the passport.

Calastone_Australia_fig.C-DHowever, this year there was more opposition to the statement than last time. A total of 25% disagreed that the ARFP would have a significant effect on international exposures, a larger proportion than the 13% who said the same last time.

This finding will disappoint proponents of the ARFP. In the past year, the proportion of enthusiasts for the passport has barely changed, while the proportion who are pessimistic has roughly doubled.

The pessimists may have become disillusioned by the relatively slow pace of progress of the ARFP. Years in the making, the passport has yet to launch, and debates over aspects of the scheme – notably on tax treatment of foreign compared with domestic funds – appear intractable. In fairness to those organising the scheme, the task of organising the multiple stakeholders, many of which have conflicting needs, is formidable.

The problem, though, is that the longer it takes the ARFP to launch, the more funds industry participants will lose faith in the project. The 14-point rise in the proportion of people who expected Ucits to be significant in raising Australian investors’ foreign exposure could be explained as a result of respondents becoming pessimistic about the future of ARFP and pinning their hopes on Ucits instead.

An echo of figure two was sounded by the next question, which asked respondents to identify the main challenge facing the ARFP. “Lack of awareness” was the most popular choice, attracting half of the responses (see fig. E). The tax problems just mentioned were also highlighted – by the 22% of respondents who chose “lack of agreement on tax” as the main issue.

Calastone_Australia_fig.E-FThe result recognises an important fact – no matter how much success is achieved by the ARFP in terms of overcoming technical barriers to launch, the scheme will not gain traction unless investors are made aware of its benefits. This finding indicates that the countries backing the ARFP have some work to do if they want their populations to recognise the potential of the scheme.

Fair fees
If there were divided opinions on passporting, there was one issue on which respondents were (almost) of one voice. The question, new for this year’s survey (see fig.F), was whether respondents supported regulatory action to improve transparency in the Australian funds industry. It was met with assent by all but 3% of the respondents.

The question is topical given the Royal Commission into banking that has examined the workings of superannuation funds in response to claims that customers have been charged excessive fees.

Perhaps mindful of the commission and the public outcry surrounding it, nearly all the respondents to this question said they felt regulators did have a duty to intervene for the purposes of transparency.

But there was some dissent. The 3% who did not support regulatory action for transparency were asked to say why they held the view. Of two options, “this is not the role of the regulator” gained support while “there is sufficient transparency already in today’s funds industry” was not chosen.

Clearly, transparency is recognised as important. That nearly all our respondents supported regulatory efforts to achieve it is a notable finding. The funds industry has not always been welcoming to regulatory interventions, which are often seen as costing it time and money. But in the current climate, near unanimity on the question of transparency has been reached. That, in itself, is an encouraging development.

©2018 funds europe



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