Enhancing regulation of intermediaries to better protect MPF members’ interests

By Emily Song

The Mandatory Provident Fund Schemes Authority (MPFA) announced in September that in order to enhance protection of the interests of over two million employees, it has proposed to reinforce the existing regulatory regime of MPF intermediaries through legislation and that the government has agreed to the proposal. This means that the launch of Employment Choice Arrangement (ECA), which had been scheduled for April, 2011, will be postponed while the MPFA pursues other measures to assist employees in their choice of their own trustee and to increase market competition. Asia Asset Management spoke with an MPFA collective to find out how the organisation is placed to cope with the ongoing issues affecting the system which has seen assets under management expand to more than HK$300 billion in the last 10 years.

AAM: What is the government’s legislative agenda in regard to the optimisation of MPF intermediaries?

MPFA: As at the end of September 2010, there were 28,352 MPF intermediaries. Of these, 477 were corporate intermediaries and the rest individual intermediaries, coming mainly from the banking, securities and insurance industries.

The MPFA has proposed that, in order to enhance protection of the interests of over two million employees, the existing regulatory regime of MPF intermediaries will be reinforced through legislation and the government has agreed to the proposal. The above was announced in late September 2010.

The MPFA and the government will, in consultation with other regulators, work out details of the legislative framework in the next few months and will listen to the views of the industry in the process.

It is hoped that a public consultation on the proposed legislative framework will be conducted at the end of this year or early next year and a bill tabled to the legislature next year.

Can you tell us when Employee Choice Arrangement (ECA) will finally be introduced?

As the legislative process takes time, the launch of the ECA will have to be deferred. The MPFA believes that, for the protection of the interests of over two million scheme members, it is a better and more prudent approach to have legislation for the regulation of intermediaries in place before implementing ECA.

MPFA’s main considerations are:

  • Subsequent to the launch of ECA, the selling and marketing activities of MPF intermediaries will be directed at over two million employees and not just 200,000-plus employers.
  • With over two million employees becoming the direct sales targets of MPF intermediaries, the MPFA expects a growing number of companies and individuals joining the field and selling MPF schemes. Hence, putting in place a legislative framework to regulate the sales practices of intermediaries will be prudent and will better protect the interests of scheme members.
  • After the Lehman Brothers incident, the public expect and demand tighter regulation of the selling activities of financial products. The incident has also prompted financial regulators including the MPFA to revisit current regulations.
  • There have been calls from different stakeholders, including trade union representatives and political parties, to enhance regulation of intermediaries to better protect the interests of scheme members.

Could MPF portability lead to a reduction in fees?

The fees and charges of the MPF System are designed to be regulated by market forces. It is therefore essential that market forces are allowed to operate effectively. Portability or ECA is designed to ensure that fund operators are more sensitive to market needs, to bring in greater competition and help keep fees at a reasonably low level in the long run.

Under the Mandatory Provident Fund Schemes Ordinance, the MPFA has no power to set the level of fees; however, the MPFA has continuously urged trustees to reduce fees. The MPFA also strives to streamline the operation of the MPF system to lower the operating costs of trustees which, in turn, should help to lower fees.

Over the years, the MPFA has enhanced disclosure of fund and fee information and launched various programmes to educate scheme members in making MPF investment decisions.

In the past three years, almost all MPF trustees have reduced the level of fees with about half having made more than one round of reduction. The average fund expense ratio, an indicator of the level of fees, has dropped from 2.1% in January 2008 to 1.91%. In fact, some trustees have started to introduce new MPF funds with much lower fees.

Before the launch of ECA, the MPFA will continue to:

Study ways to further streamline the operation to enhance the administration efficiency of the MPF System such as reviewing the workflow of the transfer of accrued benefits, standardising relevant forms, etc.,
Urge trustees to answer to the public’s call for further fee reduction and more low cost funds.

Why are so many MPF funds using ETFs listed in the US, which are traded outside Asian hours and charge withholding tax of 30% on dividends?

At present, there are 97 approved index-tracking collective investment schemes but the number of index-tracking funds approved may not reflect in any way the extent of investments in such funds. In view of the international nature of financial markets and many MPF funds, trading hours would generally not be a concern.

The trustee and the investment manager however have the responsibility of making decisions regarding the investments of the scheme. They are bound by the duties and powers laid down in the law, the investment mandate of the fund and the list of permissible investments prescribed in the regulations. The tax efficiency of an investment should be one of the factors that trustees and investment managers should take into account when deciding on whether to invest in it.

Does the MPFA intend to authorise swap-based ETFs in the future?

A fully swap-based index fund will be inconsistent with the investment restrictions set out in the MPF legislation and, in accordance with our published policy, will not be approved.

How can trustees improve the delivery of MPF services to their clients?

The MPFA sets conduct and operational standards that apply to all. All trustees are required to comply with those standards regardless of their market share.

The MPFA also seeks to ensure MPF trustees operate effectively and efficiently and provide quality customer service to scheme participants. Any reduced costs of operating MPF schemes should be passed on to scheme members and reflected in lower fees and charges.

How can the MPF system be further improved to cater for the needs of employers and employees?

Ever since the MPF system was launched in December 2000, the MPFA has been making a number of improvements to it; smoothing and streamlining operations in the early years and more recently, implementing more fundamental policy changes, such as increasing the penalty on defaulting employers and improving the transparency of fees and facts about funds.

Apart from the introduction of ECA and the regulation of MPF intermediaries, the MPFA has also started to take forward a number of other reforms. They include:

Reviewing the grounds for early withdrawal of MPF benefits to see if they should be relaxed. The MPFA is also studying whether to give scheme members the option of withdrawing benefits in phases instead of only in a lump sum.
Reviewing the range of funds that are suitable for offering to MPF members for retirement purposes.

Stepping up enforcement against employers or employees who abuse the system. The MPFA is considering blacklisting employers who have been fined by court for defaulting on MPF contributions.

Enhancing investment education to ensure scheme members know what factors to consider at different decision points along their MPF journey.