LegCo Subcommittee on MPF System
Information Note
Communications between MPFA,
Auditors and Service Providers

Purpose

This paper describes the proposal on communications between the MPFA, auditors and other service providers as a regulatory measure on MPF schemes (paragraph 2).

Proposal

2. We propose to provide for requirements regarding communications between the MPFA, auditors and service providers as follows :

  1. Relevant persons, including auditors of both the MPF trustees or schemes and other service providers appointed by the trustee in respect of the administration and management of a scheme, will have a duty to report to the MPFA certain matters that comes to their attention in the performance of their normal duties, and which in their opinion :
    1. adversely affects the financial position of the trustee or the scheme to a material extent; or
    2. significantly threatens the safety of members’ assets.

      The specific matters that these relevant persons have a duty to report to the MPFA are set out at Annex A.

  2. Relevant persons do not have a duty to seek out reportable matters, but if they identify them in the course of performing their normal responsibilities or duties, they must report.

  3. Relevant persons must be permitted to discuss these matters with the trustees to give them an opportunity to explain and, if necessary, rectify these matters within a reasonable timeframe. The one exception is where they feel it may be in the interests of scheme members to report directly to the MPFA, e.g. in the case of fraud perpetrated directly by the trustees. Significant matters which are not rectified by the trustee will also be communicated to the MPFA.

  4. Relevant persons will be given legal protection in the MPF legislation from prosecution for breach of their duty of confidentiality for reporting these matters to the MPFA.

Justification

The Duty to Report to the MPFA

3. We believe that auditors and the MPF service providers involved in the administration and management of an MPF scheme will very likely be able to obtain first-hand information in respect of an MPF scheme during performance of their normal duties. The "whistle-blowing" requirements will therefore improve the overall regulatory system by allowing important matters relevant to the functions of the MPFA to be brought to its attention on a timely basis. For example, auditors would report details of an accounting break-down by a trustee as soon as it came to their attention rather than the MPFA discovering this from a qualified audit report, issued perhaps several months later.

4. There are many precedents for such requirements in Hong Kong, for example, in the Banking Ordinance, Securities Ordinance and Insurance Companies Ordinance. Similar requirements also exist in other jurisdictions (e.g. in the UK and Australia). Some of the precedents are summarised in Annex B.

Who has Duties to Report?

5. It is proposed that auditors, including auditors of MPF schemes and scheme trustees respectively, have duties to report relevant matters to the MPFA. The auditor’s role in independent auditing places the auditor in a position to identify certain areas of non-compliance with MPF legislation.

6. In addition to auditors, other service providers such as custodians will also be well placed to identify areas of non-compliance. They are involved in the transactions and activities of MPF schemes on a day to day basis. An example is where an independent custodian is appointed to hold custody of investments and record the investment transactions of an MPF scheme. This custodian will be able to know if the investment manager breaches any investment restrictions or makes forbidden investments, on a day to day basis.

What Matters Need to be Reported?

7. We propose that relevant persons have a general duty to report to the MPFA on specific matters of non-compliance of major significance (details at Annex A). These are matters that may have adverse impact on scheme members’ interests and need to be dealt with promptly.

Responsibilities of Relevant Persons are not to be Extended

8. We propose that relevant persons merely need to report relevant matters which come to their attention, in the course of performing their normal duties and responsibilities, but do not need to search out reportable matters. This is to ensure that unreasonable demands are not made of relevant persons. This will also prevent extra costs being incurred by such persons which ultimately will need to be recovered from MPF members through higher fees and charges.

Relevant Persons to Discuss and Attempt to Resolve Matters with the Trustees

9. Relevant persons must be permitted to discuss these matters with trustees. This will allow trustees to explain and, if necessary, rectify these matters within a reasonable timeframe.

10. This requirement has the following advantages :

  1. It is possible that trustees can inadvertently contravene MPF requirements. If this is pointed out to the trustee and he rectifies the situation, then MPF scheme members interests are adequately protected, without the involvement of the MPFA.
  2. Only those significant matters which the trustee does not rectify will be communicated to the MPFA. This will enable the MPFA to concentrate its resources on genuine cases of non-compliance.

11. The one exception to the right of relevant persons to discuss these matters with the trustee is where they feel it may be in the interests of scheme members to report directly to the MPFA. An example would be in the case of fraud perpetrated directly by the trustees.

Relevant Persons to be given Legal Protection to Breach of the Duty of Confidentiality

12. This proposal is necessary to prevent relevant persons being exposed to the risk of legal action against them by the trustee for breach of the duty of confidentiality as a result of report to the MPFA. Similar protection is also granted under other legislation such as the Banking Ordinance and the Securities Ordinance.

Mandatory Provident Fund Office
Financial Services Branch
4 March 1997

Annex A

Matters where auditors and other service providers have duties to report to the MPF Authority

Duties of Auditors

Auditors will have a duty to report the following matters to the MPFA :

  1. Any matter which will result in the auditor qualifying his audit report on the accounts of the trustee or the scheme. The information note "Accounting and Reporting Requirements" sets out the proposed content of an auditor's report.
  2. Where they identify payments or other transfers from scheme assets which are not for the benefit of scheme members or other instances of misappropriation of assets and fraud.
  3. Where they become aware that the assets of the scheme are co-mingled with those of the employer or the trustee or another third party. The only exception would be in the case of pooled assets held by custodians on behalf of several schemes or entities where the assets of the scheme are accounted for separately.
  4. If they discover that the corporate trustee has not maintained capital adequacy as set out in MPF legislation.
  5. Where they identify that the scheme has engaged in forbidden investment practices as defined in MPF legislation.
  6. Where they identify payments or other transfers from the registered scheme to scheme members who have not reached the retirement age or do not meet the other early withdrawal criteria set out in MPF legislation.
  7. Where it comes to their attention that the trustee has not reported default contributions to the MPFA.

Duties of Other Service Providers

These persons will have a duty to report matters in (b) to (g) above. They also have to report to MPFA where they believe the trustee of the scheme is not keeping, or causing to keep, proper books and records.

Annex B

"Whistle Blowing" Precedents

Hong Kong

1. Banking Ordinance

    Auditors are given legal protection for breach of duty if they report to the Monetary Authority (HKMA) in relation to any matter that is relevant to the functions of the Authority under the Banking Ordinance.
    The HKMA can inform auditor of matters relevant to the auditors role.

2. Securities Ordinance

    Auditors are given legal protection for breach of duty if they report to the Securities and Futures Commission (SFC) in relation to any matter which is relevant to the functions of the SFC under the Securities Ordinance.
    This Ordinance imposes a duty on auditors to report certain matters to the SFC, if during the performance of their audit they discover the following:

      Þ Any matter which in the auditor’s opinion adversely affects the financial position of the securities dealer to a material extent.

      Þ Evidence of contravention by the dealer of

        - His capital requirements.

        - His duty to keep proper records.

        - His duty to ensure securities are held in safe custody or registered in the correct name as soon as practical.

      Auditors are also required to give notice to the SFC where they include a qualification in the audit report on the annual accounts.

    3. Insurance Companies Ordinance ("ICO")

      Auditors and certain other advisors e.g. actuaries and lawyers are given protection for breach of duty if they report to the Insurance Authority (IA) in relation to any matter which is relevant to the functions of the Authority under the ICO.
      Auditors and certain other advisors have a duty to report certain matters to the IA, if during the performance of their duties in respect of the insurer they discover the following:

        Þ Any matter which in the auditor’s opinion adversely affects the financial position of the insurer to a material extent.

        Þ Evidence of contravention by the Insurer of:

          - His capital requirements and adequacy.

          - Any requirements imposed by the IA as a condition of authorising the insurer to carry on insurance business.

          - The ICO.

          -The requirements to keep separate the assets and liabilities of long term insurance business.

          - Any requirements imposed by the IA prohibiting the insurer from certain categories of insurance business or investing in certain classes of investments.

          - Any requirements imposed by the IA on the insurer obliging the insurer to maintain assets in Hong Kong at a level relating to the insurer’s liabilities in Hong Kong.

          - Any limits placed by the IA on the size of its premium income.

          - Any demand by the IA to have an investigation into the financial condition of the insurer by its actuary.

          - Any demands by the IA for acceleration of information normally provided any additional information or documents.

          - Any additional requirements that the IA can make in exceptional circumstances to protect policy holders.

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