By James Williams – Irish law firm Matheson has provided an update from its London office on the introduction of a new corporate vehicle for Irish funds – the Irish Collective Asset Management Vehicle (ICAV).
The ICAV is set to give managers another option in addition to the public limited company (plc) that has, to date, been the most popular vehicle for Irish collective investment funds.
The General Scheme of the ICAV Bill was approved for legal drafting by the Irish Government on 17 December 2013. Matheson notes that it is “anticipated that the ICAV will become the vehicle of choice for AIFs in Europe”.
Anne-Marie Bohan, partner, says the industry was looking for a new corporate vehicle. When UCITS was introduced, Ireland established a corporate vehicle through adaptation of the existing Irish Companies Acts “by taking existing legislation and dis-applying pieces that didn’t make sense in the context of an investment fund,” says Bohan.
“What the General Scheme intends to do with the ICAV is introduce a specific corporate vehicle that is designed as an investment fund vehicle,” says Bohan.
The ICAV will not have the status of an Irish company under the Irish Companies Acts. Rather, it will have its own legislative regime to distinguish it from ordinary companies, which Bohan says should make for a more streamlined process from a legislative perspective.
The ICAV will offer managers who choose to use it a number of advantages:
• It will be able to elect its classification under the US check-the-box taxation rules as an “eligible entity” i.e. an entity that can elect its classification under the check-the-box rules for alternative and more favourable tax treatment. “It will therefore give US investors into the ICAV the potential for more beneficial tax treatment,” says Bohan.
• The Irish Central Bank will be the single point of contact with respect to authorization and incorporation.
• Existing Part XIII companies will be able to convert into an ICAV and keep their performance history.
• For funds that want to redomicile into Ireland, legislation is in place to allow offshore funds to convert into an ICAV with their performance history intact.
• The ICAV will be available to both UCITS and alternative fund structures (AIFs); an important advantage in the context of managers wishing to passport their funds under the AIFM Directive
The ICAV will require a board of directors in the same way that an existing Part XIII company requires one. Moreover, the legislation specifically states that the ICAV must have a depositary in place.
“The ICAV is not dissimilar to the OEIC in the UK,” says Bohan “The benefit of introducing the ICAV at this stage is that we’ve been able to look at what doesn’t work in the context of the existing Part XIII company and improve upon it.”
Another key discussion point at yesterday’s press conference was the future of UCITS, specifically with respect to developments in Asia. To put things into context, an estimated 85 per cent of all funds sold in Hong Kong, one of Asia’s leading financial markets, are UCITS. They are hugely popular in Singapore and have become the gold standard for fund quality across Asia and Latin America.
Shay Lydon, partner, brought the audience’s attention to the fact that last year, discussions on the introduction of an Asian funds passport, which have been ongoing for several years, “started to come to fruition”. There are three options being discussed, the first two of which could see demand for UCITS drop off.
• ASEAN passport – the creation of a potential ASEAN funds passport is being mooted between Singapore, Malaysia and Thailand. The rules would be very similar to those already in place under the UCITS framework.
• APAC passport – a more ambitious, pan-Asian passport. Lydon says the main protagonists for this are Australia, New Zealand, Singapore and South Korea. There are a couple of sticking points to this happening. Firstly, it would prove difficult to introduce harmonised rules across a range of different socio-political regimes; something that UCITS has used to its advantage under a unified EU regulated framework. Secondly, as Lydon points out, “both the Australian and Korean markets are still quite closed to foreign penetration”.
• Hong Kong-China mutual recognition – this would allow a fund domiciled in Hong Kong to make an application to the Chinese authorities to market into China and vice-versa.
If either of the first two options comes to fruition the slice of pie available for promoters of UCITS funds as Asia’s middle class grows might reduce, but as Lydon notes, there are a couple of developments that “could swing the pendulum back towards UCITS, which could make 2014 a great year”.
1. Evolution of the RQFII scheme
One of the main routes for access to investing into China, the RQFII or Renminbi Qualified Foreign Institutional Investor scheme, originally required funds to be Hong Kong-domiciled.
“The managers of those funds had to be Hong Kong subsidiaries of mainland China firms,” says Lydon. Having only launched in 2012, by 2013 the CSRC – China’s financial regulator – had already announced plans to extend Hong Kong entities to include international asset managers.
“That opens up the door to large international fund managers with respect to investing in China.”
On 15 October 2013, London became the first place outside of China to be granted an RQFII license. George Osbourne at the time confirmed that FCA-licensed managers could apply for a license with the initial quota having been set at RMB80bn, thereby doing away with the need for investors to deal with Hong Kong counterparties to access China’s market.
“In addition, the CSRC removed the requirement that the fund itself had to be domiciled in Hong Kong. Hong Kong-licensed managers holding an RQFII license can now use UCITS and other schemes to invest into China,” says Lydon.
This was evidenced early this year when the first Irish UCITS was launched using the RQFII license. The Hong Kong-based manager was CSOP, whose ETF – CSOP Source FTSE China A50 UCITS ETF – gives investors the opportunity to invest directly into China A-shares.
2. Ongoing discussions around mutual recognition between Hong Kong and China
Whilst Hong Kong will have first-mover status the CSRC has already suggested over the last couple of months that mutual recognition could extend to Taiwan, and potentially London.
Currently, mutual recognition would only apply to Hong Kong-licensed domestic funds, which are typically unit trust-based schemes.
“If mutual recognition does indeed go beyond Hong Kong and China it could bring in other domiciles with more flexible fund structures and would provide an opportunity for managers to leverage the UCITS brand.
“There could be huge opportunities, going forward, for investment managers who are thinking about how China could fit into their overall global strategy,” says Lydon.