With the official launch of the Mandatory Provident Fund (MPF) System in 2000, more employees are entitled to retirement protection. Both the SFC and the Mandatory Provident Fund Authority (MPFA) take part in regulating MPF products. As an investor, you should note the difference between MPF funds and ordinary funds, as the former stems from a more conservative philosophy.
What are the responsibilities of the Mandatory Provident Fund Schemes Authority (MPFA) in regulating MPF schemes?
The MPFA is the lead regulator of MPF schemes. It oversees the general management of the MPF schemes, including the registration of these schemes, authorisation of their constituent funds and pooled investment funds, approval and regulation of trustees (parties that are independent of fund managers and are responsible for safekeeping the scheme assets), and formulation of relevant codes and guidelines to ensure a smooth operation of the MPF schemes.
Regarding the regulation of the MPF intermediaries, the MPFA requires that a company and its representatives must at least be regulated by either the Securities and Futures Commission (SFC), the Monetary Authority (HKMA)or the Office of the Commissioner of Insurance and comply with the other relevant requirements before they can be registered as MPF intermediaries. The Code of Conduct for MPF Intermediaries published by the MPFA supplements the code of conduct issued by the various aforementioned regulators. MPF intermediaries must comply with both sets of code of conduct simultaneously.
What are the duties of the SFC then?
The SFC authorises MPF schemes (including their constituent funds) and pooled investment funds. Offering documents and marketing materials of these products must be vetted by the SFC before they can be distributed to investors.
The SFC also grants licences to companies which manage MPF funds (i.e. MPF fund managers). Qualified MPF fund managers should be incorporated in Hong Kong and have a paid-up share capital of not less than HK$10,000,000 and net asset value of at least the same amount. Moreover, they must be licensed by the SFC and qualified to manage authorised unit trusts or pooled investment funds. In addition, the SFC also monitors the conduct of its registrants in marketing the MPF schemes.
How do MPF funds differ from other investment funds?
The biggest difference between the two is that MPF funds must comply with the additional investment restrictions laid down by the MPFA, including strict restrictions on investments in derivatives and cash/securities borrowings, prohibition on gearing, minimum requirements on credit rating for debt securities and a weighting of at least 30% of Hong Kong dollar investments (in market value) in each constituent fund, and restriction on depositing no more than a prescribed percentage of cash into one single bank to avoid over-concentration.
What shall I pay extra attention to in choosing an MPF fund when compared with selecting an ordinary investment fund?
An MPF scheme usually provides choices of equity funds, bond funds, balanced funds, guaranteed funds and capital preservation funds. When considering these investments, investors should differentiate capital preservation funds from guaranteed funds. According to existing legislation, each MPF scheme must comprise at least one capital preservation fund which invests in short-term high quality Hong Kong dollar debts and short term Hong Kong dollar bank deposits. Administrative expenses can only be deducted from a capital preservation fund if its return exceeds the monthly savings rate prescribed by the MPFA. However, capital preservation funds are not the same as those guaranteed funds. Under the MPF scheme system, a "guaranteed fund" is a fund which offers a guarantee on the capital invested or a minimum rate of return on investment.
In addition, high-risk funds such as warrant funds are not allowed in an MPF scheme, while regional, country or sectorial equity funds are also available in the retail market.