A blind spot in MPF reform: who regulates the investment advice intermediaries give?

This article is a rewrite of a report from July 2012.

MPF reform entered a new phase on November 1, 2012: the MPFA gained statutory power to sanction rogue intermediaries and firms, scrapped the old four intermediary categories, and kept two-tier supervision — the MPFA delegating frontline oversight to the HKMA, the SFC and the Insurance Authority. But one blind spot escaped even practitioners.

How did two-tier supervision work?

The MPFA did final enforcement; three financial regulators did the frontline. At end-June 2012, 490 intermediary firms were registered: category 1 (bank staff only, 744 people) under the HKMA, category 2 (5,612) under the SFC, categories 3 and 4 (23,798 combined) under the Insurance Authority. Different frontline bodies meant different standards for the same conduct — as the Lehman minibonds saga showed, when banks and brokerages were punished differently.

Why was investment advice unregulated?

Because MPF schemes are not securities in law. MPF schemes and constituent funds are collective investment schemes but not securities, so selling them is not an SFC “regulated activity”; the investment advice intermediaries give falls outside the SFC, the IA and the HKMA — it is the MPFA’s direct remit, yet the MPFA had published no rules on investment advice. Nearly 80% of intermediaries answered to the insurance regulator, though MPF is not an insurance product — a puzzling arrangement.

How could workers protect themselves?

Confused is fine — asking is what matters. These subtleties baffled practitioners, let alone workers. Without MPFA guidance, future disputes between workers and intermediaries would be hard to settle, and semi-portability would lose its meaning.