Revised Explanatory Memorandum(Circulated by authority of the Minister for Revenue and Financial Services, Minister for Women and Minister Assisting the Prime Minister for the Public Service, the Hon Kelly O'Dwyer MP)
Chapter 1 Context
Outline of chapter
1.1 This chapter sets out the context and background to the Bill. The Bill introduces into Australian law a multilateral framework that allows eligible funds to be marketed across economies participating in the Asia Region Funds Passport with limited additional regulatory requirements.
Context of amendments
1.2 The Passport provides a multilateral framework that allows eligible funds to be marketed across participating economies, with limited additional regulatory requirements. The Passport is intended to support the development of an Asia-wide managed funds industry through improved market access and regulatory harmonisation. This will bring many benefits for Australia and the Asia region.
1.3 Australia has the largest funds management industry in the Asia region, largely as a result of our pool of superannuation assets. As a result, Australian fund managers can achieve greater economies of scale and can sell a single product across Asia through the Passport to create regional economies of scale. This should lower costs for consumers.
1.4 The Passport will let managed fund providers from other participating economies sell their products in Australia. This will increase competition and choice for Australian consumers. It will provide cost-effective opportunities to gain investment exposure to a wider range of assets. A study of global pension assets by Willis Towers Watson found that Australia was second only to the United States in its home equity bias. 
1.5 In turn, Australian managed fund providers can sell their products in other Passport economies, including to Asia's expanding middle class and high net worth individuals. This will continue an existing trend of Australian providers managing overseas funds.
1.6 The 2009 Johnson Report recommended a package of reforms to make it easier for Australian fund managers to attract overseas investors into funds operated out of Australia. The wider objective of the Forum was to recommend reforms that would better position Australia as a leading financial services centre.
1.7 In relation to funds management, the Johnson Report recommended the establishment of an Investment Manager Regime (IMR), the introduction of new collective investment schemes (CISs)  and the development of the Passport.
1.8 The IMR clarifies that investments by non-residents in foreign assets will generally be exempt from tax in Australia. This ensures that Australian fund managers can compete with overseas financial centres, including Hong Kong, Singapore, London and Tokyo. Parliament passed legislation establishing the IMR in June 2015.
1.9 The new tax and regulatory framework for CISs will complement the existing MIS framework. It is anticipated that the new corporate collective investment vehicle, which the Government is also currently implementing, will enable funds management exports including through the Passport, using a corporate structure that many Asian investors are already familiar with. Fund managers are also likely to use corporate collective investment vehicles to sell their services to domestic investors.
1.10 The Australian Government supported the recommendation to introduce the Passport and, in order to determine whether there was sufficient interest in the concept of a Passport, introduced it as an exploratory policy initiative within the Asia-Pacific Economic Cooperation (APEC) Finance Ministers' Process. This provided a region-wide platform to collaborate with financial policy makers, regulators, industry participants, and technical experts with the aim of examining how a Passport could be developed.
1.11 An APEC policy dialogue was held on 27 October 2010 in Kuala Lumpur, Malaysia to engage with relevant stakeholders and targeted APEC economies to discuss the idea of a Passport. During this dialogue, participants identified various policy and technical challenges, and looked at the options to further progress the concept.
1.12 Since 2010, a model for the Passport has been developed through a series of policy and technical workshops attended by representatives from 13 APEC economies. In May 2014, six economies (Australia, Korea, New Zealand, The Philippines, Singapore and Thailand) publicly released a consultation paper detailing proposed arrangements for the Passport. In February 2015, draft Passport Rules were released for public consultation. In September 2015 the then Assistant Treasurer and the Minister for Finance jointly announced that Australia had signed a Statement of Understanding signalling its commitment to join the Passport.
1.13 On 28 April 2016, the then Minister for Small Business and Assistant Treasurer, the Hon Kelly O'Dwyer MP, signed the Memorandum of Cooperation (MOC).  Japan, Korea, New Zealand and Thailand are also members of the Passport. Under the MOC, further economies may join the Passport at a later stage.
The passport arrangements
1.14 Currently, differences and duplication in regulatory requirements across economies can add significantly to the difficulties faced by fund operators attempting to sell CISs across borders (and in this way export their fund management services to foreign residents).
1.15 In some economies, foreign CISs may not be sold at all, or can only be sold to institutional or professional investors. To access these economies, a fund operator would, as a minimum, need to set up a subsidiary that is locally licensed to manage CISs. In a small number of other economies, notably New Zealand, Australian CISs enjoy relatively easy market access due to a bilateral mutual recognition arrangement.
1.16 The Passport allows certain CISs based and regulated in one economy (the home economy) to be 'passported' or sold to investors in other economies in the region (host economies). This will occur through mutual recognition, whereby two or more sufficiently equivalent jurisdictions agree to recognise aspects of each other's regulatory systems. Accordingly, there will be some host economy requirements applying to the operation and sale of schemes that CISs from participating economies do not have to meet.
1.17 The home economy regulator is generally responsible for supervision and enforcement of requirements relating to the operation of the CIS, as set out in the home economy laws and regulations and in the Passport Rules. The host economy regulator is generally responsible for supervision and enforcement of investor-facing requirements such as disclosure.
1.18 Each Passport economy must incorporate the Passport Rules into their domestic law. The MOC obliges each economy to ensure their domestic Passport Rules are substantially the same as the Passport Rules in Annex 3 of the MOC. The Asia Region Funds Passport Joint Committee (Joint Committee), as part of its oversight of the implementation of the Passport, will work to ensure consistency in the Passport Rules across the Passport economies.
1.19 To ensure the appropriateness of these arrangements, the government of each Passport economy has assessed the regulatory framework of each other Passport economy in terms of its regulatory outcomes for regulated CISs. Each Passport signatory:
- must be a signatory to Appendix A of the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Co-operation and the Exchange of Information;
- must not be on the Financial Action Taskforce's list of high risk and non-cooperative jurisdictions; and
- must have fully or broadly implemented the relevant IOSCO principles relating to enforcement, cooperation and CISs.
Each government has determined that the other Passport economies' regulatory frameworks are equivalent to their own frameworks on that basis.
1.20 Regulator co-operation is central to the continuing operation of the Passport since host economy regulators place considerable reliance on home economy regulators to regulate the operation of the funds. The MOC sets out several mechanisms for regulator co-operation which have been incorporated into legislation. For example, in determining whether to reject a notice of intention to offer interests in Australia, or whether to issue a stop order against a foreign passport fund, the Australian Securities and Investments Commission (ASIC) must write to the home economy regulator if a decision to reject a notice of intention or issue a stop order would be made on the basis that a home economy law is not likely to be complied with.
1.21 Home regulators are only able to take enforcement action against funds registered in their jurisdiction that commit offences outside their territorial borders if offences have extended geographic reach. Australian authorities require extended geographic reach to take enforcement action with regard to offences committed outside Australia by funds for which Australia is the home regulator.
1.22 The MOC is structured as follows:
- The body of the MOC sets out the signatories' commitment to participate in the Passport, establishes a governing framework and a mechanism for the resolution of differences, and sets out the eligibility criteria for economies wanting to participate in the arrangement. Paragraph 5 of the MOC establishes the commitment to implement the Passport arrangements and outlines what this means for participant economies.
- Annex 1 of the MOC outlines how a participant may impose obligations on passport funds from other economies that are offered in its economy (the host economy obligations).
- Annex 2 of the MOC sets out the common regulatory arrangements for passport funds that each participant will give effect to - how passport funds are to be registered and supervised by regulators and how the Passport arrangements are to be enforced (the common regulatory arrangements).
- Annex 3 of the MOC sets out the Passport Rules. This is a common set of obligations which the operators of passport funds will be required to comply with on an ongoing basis. They will apply to a passport fund concurrently in both the home and any host economies.
- Annex 4 of the MOC sets out arrangements for cooperation between regulators.
- Annex 5 of the MOC defines the form to be used for formal notification of participation in the MOC by subsequent participants.
1.23 Following the signing of the MOC, it is necessary to reflect the Passport arrangements in Australian law through amendments to the Corporations Act 2001 (Corporations Act), the Australian Securities and Investments Commission Act 2001 (ASIC Act) and related legislation. The Bill implements the following key changes:
- It establishes a mechanism for incorporating the Passport Rules in Annex 3 of the MOC into Australian law, and imposes an obligation on passport funds and operators registered in Australia as well as foreign passport funds and operators offering interests in Australia to comply with the Passport Rules.
- It establishes a new Chapter 8A in the Corporations Act which mainly implements the common regulatory arrangements in Annex 2 of the MOC. Chapter 8A, among other things, sets out the process whereby Australian CISs may be registered by ASIC as passport funds. It also sets out the process whereby foreign passport funds may notify ASIC of their intention to offer interests in the fund to Australian investors and the circumstances in which ASIC may reject such notifications.
- It makes amendments to other parts of the Corporations Act clarifying how the obligations in those parts are to apply to foreign passport funds, as allowed under Annex 1 of the MOC. Key areas in which obligations are made to apply to foreign passport funds in this manner include financial reporting, licensing and disclosure.
1.24 Other amendments to the law are required to implement the Passport arrangements. These include amendments to the Corporations Regulations 2001 (Corporations Regulations) and related regulations, and the making of the Passport Rules for this jurisdiction.
1.25 The amendments in the Bill commence on a date set by a proclamation. This mechanism is used so that the same commencement date can be set for the amendments in the Bill, the Passport Rules and the amendments to the regulations. The Passport arrangements in the Bill would not apply appropriately if they were to commence before the Passport Rules were made or relevant regulations were amended.
1.26 If the date is not proclaimed within six months of the Bill receiving Royal Assent, the amendments automatically commence at the end of the six months. This is a standard provision and ensures that laws which have not commenced do not sit on the statute books indefinitely.
1.27 The detailed amendments in the Bill are explained in full in the following chapters of this Explanatory Memorandum. All provision references in this Explanatory Memorandum are to the Corporations Act unless otherwise stated.