Australia-Korea Business Council Joint Meeting Andrew Bragg Financial Services Council Seoul, Korea - October 2014

Agenda Asset management: the problem KAFTA - asset management Asia Region Funds Passport Australian asset management industry National savings Australia’s superannuation system

Asset management: the problem Asset management regulation in the Asia Pacific is fragmented and domestically oriented Asia has a larger population than Europe; Europe has a much larger funds management industry The Asian region is developing quickly and increasing national savings; Europe is the beneficiary Consumers in Australia and Korea do not have widely available access to foreign investment funds Foreign asset managers find it difficult to do business in Australia and Korea in an efficient manner There are no regulatory mutual recognition provisions in existence between Australian and Korea

The problem continued Administrative decisions, such as those on licensing applications, take a long time, which exacerbate registration requirements such as those imposed by Korean or Australian law for offshore funds Investors in both nations require offshore diversification / varying asset allocation SOLUTION As leaders in our region, Australia and Korea must work together on: Mutual bilateral recognition between Korea and Australia (KAFTA); or Asian regional multilateral mutual recognition “passport” scheme (Asian Passport).

The regional opportunity: population and funds under management

KAFTA – key funds management commitments

KAFTA – an opportunity for both nations Korean access to the Australian market is granted under Chapter 8 of KAFTA through collective investment schemes For the purposes of paragraph 1, "collective investment scheme" means: for Korea, any of the schemes established for making collective investment as defined under articles through of the Financial Investment Services and Capital Markets Act (FSCMA). Regulatory mutual recognition is now required between Australian and Korean to give effect to this market access commitment

Asia Region Funds Passport In parallel to KAFTA, the passport will permit free trade of investment funds in the Asian region It is currently being negotiated between the following APEC member economies: Australia Korea Singapore Thailand The Philippines New Zealand A commercially viable multilateral agreement between the group is essential Timing – the package needs to be agreed and legislated in each country by 2016.

Australian funds management industry Assets under institutional management are $2.4 trillion (ABS 2014) 483 Responsible Entities / trustees (ASIC 2013) 4,152 registered managed investment schemes (ASIC 2013) A largely domestically oriented industry – just 3.4% of AUM sourced offshore (ABS 2014) 96% of Australian funds are local funds (AT Kearney 2014) Almost 100 foreign fund managers operate in Australia with few barriers to entry

Level of foreign sourced funds

National savings Both Australia and Korea have been regional leaders in increasing national savings through pension and superannuation policies (#1 and #2 in the Asian region – OECD 2012)

Superannuation system – key features 1.Regulated by the Australian Prudential Regulation Authority (APRA) 2.Private pension system in which only licensed superannuation funds are able to operate 3.Compulsory employer contributions – 9.5% of employee salary 4.Limited access to retirement funds – Age based ‘preservation’ rules. 5.Incentives provided through concessional taxation treatment relative to other investment vehicles.  15% on contributions  15% investment earnings ~ 0% exit* * if over 60 years of age

Superannuation system - key features (continued) 6.Investor choice and portability of benefits between funds. 7.Superannuation savings are not guaranteed by government – defined contribution regime. 8.Minimal government intervention in relation to investments made by funds and/or investors. 9.Self-Managed Superannuation Funds: Individuals have the ability to personally manage their retirement savings. 10.Regulated under a trust structure (trustees act as fiduciaries) 11. MySuper reforms commence from 1 January 2014.

Superannuation funds (pension funds) - Key statistics Superannuation funds under management $1.8 trillion (APRA 2014) Approximately 30% of superannuation assets are invested offshore – this will increase 120 MySuper default superannuation funds (APRA 2014) 500,000 Self Managed Superannuation Funds (ATO) Expected to grow to $6 trillion by 2037 (Australian Treasury) Average fees 1.1% (2013)

Asset allocation – superannuation (all) Source: APRA / ATO 2014

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