10 July Manager International Unit Retail Investor Division The Treasury Langton Crescent PARKES ACT Dear Ms Wykes,

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1 Perpetual Trust Services Limited ABN Level 12 Angel Place 123 Pitt Street Sydney GPO Bx 4172 Sydney NSW 2001 Australia DX 365 Sydney Telephne Facsimile July 2014 Manager Internatinal Unit Retail Investr Divisin The Treasury Langtn Crescent PARKES ACT 2600 Dear Ms Wykes, RE : ARRANGEMENTS FOR AN ASIA REGION FUNDS PASSPORT Perpetual Crprate Trust is a divisin f Perpetual Limited and acts as trustee, respnsible entity and/r custdian fr a wide range f financial services and prducts acrss bth the retail and the whlesale market in Australia and Singapre. This submissin largely ges t the Q3.17 f the Cnsultatin Paper: Arrangements fr an Asia Regin Funds Passprt, and discusses the plicy bjective f ensuring independent versight. This an area in which Perpetual Crprate Trust has particular experience, insight and track recrd. We als address sme general issues assciated with the prpsed arrangements fr an Asia Regin Funds Passprt. Yurs faithfully Rupert Smker Head f Respnsible Entity Services Perpetual Limited

2 Perpetual Crprate Trust Submissin APEC Cnsultatin Paper: Arrangements fr an Asia Regin Funds Passprt Rupert Smker Head f Respnsible Entity Services Perpetual Limited 11 July 2014 Executive summary: The Asia Regin Funds Passprt (the Passprt) represents a significant pprtunity fr the regins funds management industry and ther assciated industries. The Passprt will prvide a cmpelling platfrm fr the sectr t capture the immense pprtunities cming ut f Asia s ecnmies. It wuld als serve t increase cmpetitin amngst the regin s prminent fund managers, which will lead t innvatin, efficiency and better utcmes fr investrs. The Passprt need nt be an inventin; it shuld replicate the success f UCITS funds. In particular, the Passprt platfrm shuld seek t mirrr the key investr prtectin, independence and prduct requirements f UCITS. Central t this is independent versight f the cllective investment scheme peratrs by gatekeepers and regulatrs. Australia s single respnsible entity regime is cntrary t bth the UCITS funds mdel and the fund mdel adpted by mst f ur cunterparts in the Asia-Pacific regin. Fr Australia t integrate its cllective investment market int the glbal system, we must cnsider t hw t imprve independent gvernance within ur legislative framewrk (r change the framewrk). Develping the Passprt will require significant effrt amngst member ecnmies, particularly in respect f tax regimes and permissible prduct structure. Hwever getting sme imprtant key structural issues settled ahead fr 2016 will be imprtant t the lng term success f the Passprt system. 1. Abut Perpetual Crprate Trust Perpetual Crprate Trust (Perpetual) is a divisin f Perpetual Limited and is the leading prvider f fiduciary services t the debt capital markets and the funds management industry in Australia. It currently administers ver A$548 billin in assets n behalf f a glbal netwrk f clients (as at 31 December 2013). Perpetual has ver 125 years experience as a trustee cmpany and acts as trustee, respnsible entity (RE) and/r custdian fr a wide range f financial services and prducts acrss bth the retail and the whlesale market in Australia and Singapre. Our cre services include: 2

3 2. Fcus f this submissin This submissin largely ges t the Q3.17 f the APEC Cnsultatin Paper: Arrangements fr an Asia Regin Funds Passprt (Cnsultatin Paper), which discusses the plicy bjective f ensuring independent versight. This an area in which Perpetual Crprate Trust has particular experience, insight and track recrd. We als address sme general issues assciated within the prpsed arrangements fr an Asia Reginal Funds Passprt. 3. General Statements Perpetual supprts the Passprt, and the bjectives stated in the Cnsultatin Paper. Like ther Australian financial institutins, integrating ur services within Asia is a key strategic pririty. Thrugh ur wnership f The Trust Cmpany, we have a lngstanding presence in Singapre, where we are licensed as a trustee by the Mnetary Authrity f Singapre. We believe a passprt system will further prmte the free flw f funds t thse financial institutins within ur regin wh can demnstrate excellence in a cmpetitive multi-natinal envirnment. In that regard, Australia has enjyed great success in attracting freign capital in recent years. 4. Cntext fr Australia The 2013 Australian Investment Managers Crss-Brder Flws Reprt cmmissined by the Financial Services Cunsel and The Trust Cmpany (Part f Perpetual Limited) identified that freign fund flws int Australia have increased by 78% since January As set ut in the table belw as at 31 December 2012, sme 66% f freign inflws have riginated frm the Asia-Pacific regin, representing a ttal amunt f $18.71b. As the reprt ntes, with the right plicy settings in place, Australia can take advantage f the ptential fr dmestic fund managers t frm a significant and grwing prprtin f future exprt activity. Surce: FSC/The Trust Cmpany (Part f Perpetual Limited) Australian Investment Managers Crss-Brder Flws Reprt cmmissined by the Financial Services Cunsel and The Trust Cmpany (Part f Perpetual Limited) 3

4 As the abve data suggests, the Australian funds management industry has perfrmed well in abslute terms in recent times. Hwever, there remains significant ptential within the ecnmies f the Asia-Pacific regin as they cntinue t underg a perid f significant ecnmic grwth and transfrmatin. Mre specifically fr fund managers, the current assets/funds under management as a prprtin f GDP in mst Asian natins are currently well belw their ptential (cmpared t the US). The fllwing table sets ut the prprtin f natinal funds under management as a percentage f GDP. It shws the sheer ptential f ecnmies such as China, Taiwan, Krea and Japan. Surce: PwC 2 5. Glbal Cntext and UCITS As glbal capital flws becme easier there has been significant demand fr, and grwth in the number f, crss-brder cllective investment funds. Crss-brder funds are funds perated ut f ne jurisdictin and sld int anther. PwC 3 has tracked the number f crss-brder funds perating glbally, and suggest that between 2001 and 2013, there was an increase f 200% f the number f crssbrder funds. The number nw stands at 9,869, the majrity f which are registered in Luxemburg and Ireland, and are UCITS funds. Asian appetite fr UCITS funds is strng, and Asia represents between 30-40% f net sales int UCITS funds. Mst f retail investments int cllective investment vehicles in Singapre, Hng Kng and Taiwan are nw made int UCITS funds indicating that the investing public are cmfrtable with the structure f these prducts. Als, Australian fund managers are nw creating UCITS funds t attract freign investment. As an example, AMP Capital annunced in April 2014 that it had created bth a Glbal Listed Infrastructure Fund and a Glbal Real Estate Securities fund targeting investrs in the Eurzne, Asia and the Americas. 4 Australian fund managers targeting Asian investrs thrugh the prmtin f the Passprt shuld lk at the successful penetratin f Eurpean fund managers int 2 PwC, Asset Management Insights, Distributing funds in Asia s grwth market: 3 PwC Glbal Fund Distributin Investr Daily, AMP Capital Expands UCITS platfrm t Asia, 14 June

5 key Asian market. We can nly infer that the structure f the UCITS platfrm is part f that success. Essentially, UCITS funds have the fllwing features: They are apprved in their hme cuntry; They have investment restrictins (securities traded n markets, certain mney market instruments, derivatives with risk limits); They must have specific diversity with the fund s prtflis; They must be pen ended; and They have specified financial reprting and disclsure bligatins. A key feature f UCITS funds are that they must use a separate custdian and must be subject t independent versight frm an external party referred t as a depsitry. The depsitry has a blended rle cnsistent with the rle played by a traditinal trustee and by a custdian. The depsitry cncept is nt dissimilar t many ecnmies within the Asia-Pacific, whse cllective investment laws recgnise the need fr bth an investment manager and an independent guardian (nrmally a trustee) wh versees the cllective investment s that it is perated in the best interests f its investrs. Unfrtunately, accrding t the Australian Gvernment crprate law adviser CAMAC, UCITS funds cannt be registered as a managed investment scheme under the Crpratins Act, as the UCITS structure des nt recgnise Australia s single respnsible entity regime. Cnversely, it is nt pssible fr a registered scheme (that is, a managed investment scheme registered under Chapter 5C f the Crpratins Act) t be a UCITS fund, again, because f the single respnsible entity regime. Structurally, Australia cannt integrate its funds int the UCITS platfrm. This alne stands t questin whether Australia shuld recnsider bth the single respnsible entity regime as it cnsiders entering the glbal funds management cmmunity thrugh the Passprt. 6. Analysis f the independent versight within Australia s Cllective Investment market Perpetual agrees with the Cnsultatin Paper statements abut the imprtance f independent versight. The paper states: A key element f CIS gvernance is the presence f independent versight ver perfrmance f the peratr s duties. Internatinally, independent entities are the primary surce f independent versight. The independent entity s main bjective is t ensure that peratrs cmply with the applicable rules, their cntractual bligatins, and their duties frm an utside perspective, and, therefre, prtect members frm divergent behaviurs f the peratr. 5 We agree with the duties that shuld be impsed upn the independent entity enumerated in the Cnsultatin Paper. Hwever, we cnsider that further duties shuld be vested in the independent entity. In particular, the independent entity shuld have duties in relatin t: Any disclsure dcuments issued by the cllective investment peratr, t be satisfied they d nt cntain misleading r deceptive statements; 5 ARFP Cnsultatin Paper p21. 5

6 financial reprts issued in respect f a cllective investment vehicle t ensure disclsures meet statutry and accunting standard requirements; supervisin f related party transactins by the cllective investment; and fees paid t the peratr f the cllective investment (including perfrmance fees). The Cnsultatin Paper wuld appear t suggest that Australia s single respnsible entity regime can achieve the equivalence f independent versight r an utside perspective withut the use f an independent entity (such as a trustee r depsitry). It suggests that the utside perspective may be achieved thrugh either a majrity f independent directrs n the bard f a RE r thrugh an independent cmpliance cmmittee. Fr a few select financial institutins in Australia, represented by its banks and the largest fund managers, we agree with this psitin. Hwever, fr a large majrity f the Australian funds management sectr, the prtectins f either independent directrs f an RE r a Cmpliance Cmmittee are illusry. A feature f Australia s regulatry regime fr managed funds market is that it is relatively simple t apply fr and be authrised as an RE. It is similarly simple t apply fr and have registered a managed investment scheme. As such, Australia has apprximately 500 licensed respnsible entities, which is far mre than ther jurisdictins given its pen regulatry architecture. This is the perfect illustratin f Australia s efficient markets apprach t financial regulatin emanating frm the 1997 Wallis Inquiry. While recent regulatry enhancements have led t imprving the financial capacity f REs (thrugh increasing regulatry capital requirements), there are many recent examples f the inadequacy f the single respnsible entity regime. These inadequacies have led t numerus reviews by Gvernment authrities including tw reviews by the Parliamentary Jint Cmmittee n Crpratins and Financial Services 6. The cllapses and failures f varius schemes ver the past few years as the result f the financial and ecnmic cnditins have stress tested Australia s cllective investment regulatry framewrk fr the first time since its intrductin in This has highlighted numerus weaknesses in the rbustness f the regime. With regard t the bjectives f ensuring a single pint f accuntability and imprving the cmpliance culture acrss the industry we believe that the single respnsible entity regime has been successful. Hwever, we believe that many f the recent failures have raised the questin f whether the independence f decisin making f sme REs was adequate. Unlike the directrs f a listed cmpany, independent directrs f an RE are pitted against the resurces f an institutin ver which they d nt have the pwer t hire r fire. Even where there are a majrity f independent directrs in place, the majrity is generally slight (as ppsed t a clear majrity in the case f a listed cmpany). This hrizntal dynamic (where the independents are effectively visitrs t an rganizatin) as ppsed t a vertical dynamic (where the independents clearly feel tp f the tree ) cannt be ver-emphasised. The additinal respnsibility t ensure the separatin f the activities t thse f the spnsring entity als requires clse attentin. These factrs heighten the required qualities f the individual t ensure rbust questining and scrutiny. 6 The Inquiry Int the Cllapse f Tri Capital, Inquiry int Financial Prducts and Services in Australia

7 The ptin f having a majrity f independent members n a Cmpliance Cmmittee t satisfy the test f independence is a weakness in the framewrk since a Cmpliance Cmmittee has a far mre limited rle t that f a respnsible entity. Many decisins that can cause prejudice t investrs can be made withut Cmpliance Cmmittee invlvement. Furthermre, the Cmpliance Cmmittee des nt necessarily prvide realtime mnitring r check an RE s actins and is similarly appinted and may be dismissed at the whim f the RE. The single respnsible entity mdel is a surce f, at a minimum, cnsternatin, if nt strng aversin frm many verseas institutinal investrs, especially in the UK and Eurpe. Even when the scheme spnsr pssesses an excellent pedigree, many institutinal investrs frm these jurisdictins may be reluctant t invest in any vehicle that des nt have an independent trustee. The ptential fr cnflict in the single respnsible entity regime is perceived t be unacceptable by many freign investrs and the regime flies in the face f what is regarded as internatinally accepted investment standards such as UCITS funds. We nte that anther passprting cncept by member natins f ASEAN is being flated fr launch in The ASEAN Cllective Investment Scheme Framewrk (ACIS) invlves cllabratin by Singapre, Malaysia and Thailand and seeks t achieve similar utcmes as the passprt. Like the UCITS platfrm, ACIS will als require passprting funds/peratrs t be verseen by an independent trustee r supervisr 7. Fllwing n frm the glbal financial crisis, we have als seen strng investr demand fr the installatin f independent entities t versight the peratin f cllective investment vehicles. Under the single respnsible entity regime, independent REs are nt cmpulsry. Hwever, Perpetual has cnducted $10.5 billin in public market transactins since 2010 and is seeing listed entities whse structures incrprate a registered management investment scheme increasingly recgnise the benefits f appinting an independent RE. The market appears t supprt ur view that, utside f the largest banking and financial institutins in Australia, independent REs ensure best in breed crprate gvernance and risk management. The cncept f independent versight by an independent entity such as a trustee r depsitry is widely accepted as an apprpriate way t enhance the interests f investrs and minimise risks. Such an entity is there t prtect investrs frm nncmpliant, illegal and fraudulent cnduct f the schemes peratr (investment manager). It is desired by, and understd by glbal investrs. In develping a lasting structure t advance the chances f success f the passprt, we shuld adpt this glbal standard. We therefre suggest that an peratr f a CIS participating n the Passprt platfrm may nly be supervised by an independent entity that is licensed t d s. 7 Are we ready? Hng Kng mainland China mutual fund recgnitin cnsideratins and future utlk. EY 7