MPF scheme member employees in Hong Kong now have a say over which investments their savings are held in. Glenn Turner, chairman of HK’s IFA Association, looks at the changes, and how they are expected to affect employees, employers and those involved in marketing MPF investments.
From the first of this month, two fundamental aspects of Hong Kong’s Mandatory Provident Fund (MPF) regime changed.
The first is that employees now have more control over the choice of investments in their savings schemes. The second involves the introduction of “best practice” standards at the point-of-sale for the sales people (“SI”) who market MPF products and the (MPF licensed) companies (“PI”) under which the sales people themselves are licensed.
With respect to the employee control enhancement, the employee now has control over his or her half of the contributions, and may now place their MPF investment with any one of the 19 existing MPF schemes.
Importantly, though, the employer still retains control – via a trustee arrangement for the employee – over the employer’s half of the contributions, in terms of which MPF scheme product provider looks after this share of the total savings pot.
At the same time, there has been a significant upgrade in the requirements of the sales person (the “SI”, or “subsidiary intermediary”) and his/her employer (the “PI”, or “principal intermediary”) that covers the way such individuals are to conduct themselves when “inviting, inducing or giving regulatory advice” in connection with MPF investments.
Significant numbers of the new practices at the point of sale mirror those required by the Securities & Futures Commission (SFC), with some elements even more demanding than those required by the SFC. For example, a “reason why” must be documented for the MPF activity, whereas the SFC does not require this specifically from retail financial advisors.
Penalties for breeches of the new rules are also steep: penalties of up to seven years in prison and a HK$5m (US$645,000) for PIs who do not measure up, and HK$1m fine and two years in prison for SIs who fall short.
This means those sales people who hold an insurance license alone should probably make more of an effort to ensure they are getting things right than those who hold an SFC license, because, being in the insurance industry, they will be less in tune with this up-graded MPFA “best practice” regime.
One strength of these regulations is that the Monetary Provident Fund Schemes Authority appears to have gone out of its way to be descriptive in its regulations rather than prescriptive, which is a common complaint with SFC regulations.
There are, though, some areas left undone by the MPFA in setting up the ECA. Many argue, for example, that the average fund expense ratios, currently running in some instances up to 4.62%, are unacceptably high.
The regulators – notably the MPFA, SFC and Office of the Commissioner of Insurance – also have yet to fully align the way they handle similar types of products and services sold under their respective regulatory oversight.
(One glaring example is when giving advice on the (mutual) funds under MPF (and under insurance ILAS products), no investment advice type license is required, yet under the SFC, when selling (pure) retail mutual funds, a license is required.)
It has also been pointed out that although the regulations address the point-of-sale process, for now they do not mention how investors are to be looked at after the sale has been made. Such clients need to be serviced until they are 65, and begin to receive their benefits.
Finally, of course, there is the argument that employees, not their employers, should be able to choose the MPF provider for all of their savings, not just the half they contribute to themselves.
Nevertheless, most observers – including my organisation, the Independent Financial Advisors Association – believe that the changes which took effect at the beginning of November are welcome, and move the MPF in the right direction.