Mr SIN Chung-kai expressed concern about the "fit and proper" criteria for the controller, directors and chief executive of the applicant trust company. He suggested that detailed requirements including specific qualifications, years of experience and professional knowledge should be clearly stipulated in the subsidiary legislation. It would also be advisable to prescribe the proportion of different professionals on the board of directors of the trust company.

Addressing Mr SINs concerns, the Assistant Director, Regulatory Standards (ADRS) made the following points-

The "fit and proper" criteria had been drawn up with reference to the requirements imposed on registered persons by the Securities and Futures Commission (SFC).
"Suitable knowledge, qualifications and experience" for the directors and chief executive of a trust company include professional qualifications in disciplines such as law, accounting or actuarial studies, as well as substantial experience in retirement schemes and trust administration. These persons were required to declare inter alia whether they had any criminal records and that they were not undischarged bankrupts. They would be subject to positive vetting by the Mandatory Provident Fund Schemes Authority (MPFSA).
The Administration considered it unnecessary to stipulate the specific requirements in the subsidiary legislation but would consider issuing guidelines for reference by the industry. Moreover, channels were available for a company whose application was refused to appeal against the decision.

Mr SIN Chung-kai requested that the draft guidelines referred to in para.5(c) should be provided for members reference as soon as possible, prior to the introduction of the subsidiary legislation.

Capital adequacy and financial soundness of the trustee

In order to enhance confidence of scheme members on trustees and to ensure that the companies had the necessary capacity, Mr James TIEN suggested that the proposed minimum paid-up capital of $30 million required of a trust company should be reviewed and increased with the growth in MPF fund managed by it.

Mr SIN Chung-kai remarked that although the applicant company should be a subsidiary of a substantial financial institution with minimum capital and net assets of $150 million to provide it with continuous financial backing, he was concerned that the trust company might be adversely affected when its parent company experienced financial difficulties.

Mr LEE Cheuk-yan expressed concern that the interests of scheme members would not be adequately protected under schemes managed by individual trustees since the latter were only required to provide a performance guarantee.

In explaining the proposed criteria on capital adequacy and financial soundness of the trust company, the Director of Mandatory Provident Fund Office (D of MPFO) and ADRS advised as follows-

The requirements on paid-up capital and financial soundness were to ensure that the applicant trust company had a substantial capital base to undertake MPF business and to meet its obligations. The requirements had been proposed with regard to protecting the interests of scheme members and keeping the operating costs of the MPF system at a reasonable level. The level of capital requirement would be kept in view in the course of implementing the MPF system and adjustment would be made if necessary.
Notwithstanding the possible use of the capital assets of the trust company for indemnification of losses in scheme assets in the event of trustee default, the majority of compensation for losses would be covered by the professional indemnity (PI) insurance required to be taken out by the trustee. There would also be a compensation fund set up under the principal ordinance as a last resort.
As regards protection of scheme assets in case of financial difficulty of the trustee or its parent company, the requirement of separation of scheme assets from those of the trustee, the employer and other persons would ensure that scheme assets would remain intact. Experience of the Chilean system had shown that scheme assets held under trust were unaffected by changes in the corporate relationship of the trust companies.

On Mr LEEs concern about individual trustees, ADRS explained that although the requirements of capital adequacy and financial soundness would not be applicable to an individual trustee, he would be required to be covered by a performance guarantee by way of a bank bond or fidelity insurance policy for 10% of net asset value of the scheme up to a maximum of $10 million. The guarantee would help him indemnify losses up to the maximum deductible amount of $100,000 under the PI insurance. The Mandatory Provident Fund Schemes Ordinance (MPFSO) provided that the employer could decide on the trustee but individual trustees could only manage employer-sponsored schemes. In such cases, employee representatives who were scheme members, as well as independent trustee(s) would be appointed as individual trustees. The custodian and investment functions would be delegated to other service providers while the personnel department of the employer could assume the administrative function for the scheme.

Number of local or offshore corporate trustees

ADRS confirmed in reply to a member that the Administration would not restrict the number of approved local or offshore corporate trustees to be operating in Hong Kong. For offshore trustees, only very reputable corporations with undoubted financial standing and good track record could operate MPF business through their local branches. Offshore entities could also establish local trust subsidiaries. Given the huge size of the MPF funds, it was envisaged that a number of both local and overseas service providers would be attracted to the market, thus enhancing competition in the MPF system.

Duties of trustee

(LegCo Paper No. CB(1)345/96-97(03))

Statutory and fiduciary duties of trustee

Members expressed concern on the proposed monitoring mechanism to ensure approved trustees compliance with their duties in the management of retirement schemes and enquired about trustees liabilities on breaching their duties. Noting that the trustees could delegate certain duties, mainly the custodian and investment functions, to other service providers, members were also concerned about the adequacy and effectiveness of the trustees control over the engaged service providers.

In response, ADRS explained as follows-

Approved trustees must comply with their statutory and fiduciary duties. Statutory duties were specific duties prescribed in law while fiduciary duties were general standards of conduct of trustees under common law to be implied in the governing rules of schemes to enhance protection of scheme assets, to prevent misuse and mismanagement on the part of the trustee.
Trustees would be liable for breaches of statutory or fiduciary duties which might result in sanctions imposed by the MPFSA including suspension/removal or revocation of the trustees approval, financial penalties or prosecution. Moreover, breaches of fiduciary duties might also result in claims in damages by scheme members.
As regards effective monitoring on service providers, the trustee was duty-bound to prudently select and supervise the custodian and investment manager as well as other service providers. The investment manager were required to be independent from the trustee and the custodian of the scheme. The separation of functions would provide the necessary checks and balances to prevent fraud.
In actual practice, investment decisions were executed by the investment manager while the custodian was responsible for settlement of investment transactions and other services related to the custody of assets. The investment manager and the custodian would be required to submit periodic reports on details of investment and scheme assets to the trustee who could also engage auditors to audit the scheme accounts handled by the custodian and investment manager.

Custodial arrangement

(LegCo Paper No. CB(1)345/96-97(04))

Independence from the trustee and the investment manager

Members remained concerned about the relationship between the trustee, custodian and investment manager. Noting that there would be no restriction on companies of the same group to act as the trustee, custodian and investment manager for a scheme, they were concerned that there would be no real separation of functions to prevent fraud among the three parties and urged the Administration to further study the regulatory measures in this area.

In response, ADRS made the following points -

The Administration proposed that only a registered local trust company with a minimum paid-up capital of $50 million and whose parent company was a substantial financial institution could also undertake custodial function for MPF schemes. This would ensure that custodial service providers were of substance with adequate ability to perform their functions.
There were over 20 fund managers of retirement funds in Hong Kong and over 40 local registered trust companies. Many of these trust companies were subsidiaries of substantial financial groups which also offered fund management services. The cardinal principle of separation and independence in the functions of the trustee and the custodian from those of the investment manager would ensure adequate protection of the interests of scheme members. Compulsory requirement on schemes to have different service providers from separate financial groups might have the disadvantage of increasing operating costs.
The rules in separation and independence in functions of service providers were formulated on the basis of the best industry practices and were in conformity with international standards. Overseas experience had not indicated that the interests of scheme members were necessarily jeopardized when companies of the same groups provided trustee, custodian and fund management services for the scheme.

Upon request of some members, the Administration would try to procure the necessary information on current qualified trustees, custodians and investment managers, their corporate relationship and their paid-up capital, if available.

Sub-custodial arrangement

On the engagement of overseas sub-custodians, ADRS explained that it was a common practice in the industry to hire sub-custodians to facilitate the conduct of global investment activities. The proposed criteria would ensure the engagement of overseas sub-custodians of substance which were adequately regulated by overseas supervisory regimes.

Other concerns

Fund payment and related issues

Members noted that since employees were not required to transfer their accrued benefits from their previous retirement schemes to the schemes of their new employers upon change of employment, and that given the high job mobility of the local workforce, an employee might have several accounts in different MPF schemes. A member was thus concerned that family members of a deceased scheme member might have difficulty in collecting the latters accrued benefits from various MPF schemes. Another member also opined that the MPFSA should adopt a pro-active approach and offer necessary assistance to the families concerned.

In explaining the proposals in MPF fund payment upon the death of a scheme member and the keeping of account records, the Assistant Director, Scheme Operations made the following points-

Upon the death of a scheme member before the normal retirement age of 65, his family members could approach the MPFSA which would search the deceased scheme members account(s) by using the latters identity card number and the common computer data base system to be established between trustees and the MPFSA.
If a scheme member passed away after the age of 65 and his accrued benefits in various MPF schemes remained unclaimed six months after the trustee notified the scheme member for withdrawal, they would be transferred to the residual provident fund scheme to facilitate collection by the personal representatives of the deceased member.

III Any other business

To facilitate members who only joined the LegCo since the 1995-96 session in understanding the MPFSO enacted in July 1995, Mr SIN Chung-kai suggested that relevant information should be copied to these members for reference.

(Post-meeting note: With the concurrence of Dr LAW Cheung-kwok, chairman of this meeting, the MPFSO, report of the relevant Bills Committee to the House Committee and the information booklet on MPF system published by the MPFO were circulated to members vide LegCo Paper No. CB(1)384/96-97.)

As regards information papers for the rest of the briefings, members urged the Administration to provide all papers as soon as possible to facilitate early perusal and detailed study by members. In response, the D of MPFO advised that the Administration was still preparing information papers for the coming meeting on 29 November 1996 and she undertook to provide papers as early as practicable before each meeting.

The meeting ended at 5:15 p.m.

Legislative Council Secretariat
30 December 1996

Last Updated on {{PUBLISH AUTO[[DATE("d mmm, yyyy")]]}}

Subcommittee on Mandatory Provident Fund System

Minutes of Meeting held on Thursday, 21 November 1996 at 3:30 p.m. in Conference Room A of the Legislative Council Building

I Confirmation of minutes of meeting and matters arising

II Meeting with the Administration

Approval Criteria for trustees

Fit and proper criteria of the trustee