LegCo Sub-Committee on MPF System
Information Note
Minimum Standards on Trusteeship and Investments

Purpose

This paper sets out the following minimum standards on trusteeship and investments to be met by an MPF exempted ORSO registered schemes:-

  1. Prudent Man’s Rule (paragraph 2 below);
  2. Ivestment Advisers (paragraphs 3 to 4 below);
  3. Investment Standards (paragraph 5 below); and
  4. Trustee Standards (including Standards of Alternate/Emergency Trustees) (paragraphs 6 to 10 below).

Proposal

Prudent Man’s Rule

2. The trustees and investment advisers are required to discharge the following duties with respect to an MPF exempted ORSO registered scheme:

  1. the duty of care, skill, diligence and prudence reasonably to be expected of a person familiar with :
    1. in the case of trustee, the administration, management and maintenance of an ORSO scheme in the prevailing circumstances; or
    2. in the case of investment adviser, the investment management of the assets of an ORSO scheme in the prevailing circumstances;
  2. the duty to diversify investments of scheme assets so as to reduce the risk of large losses, unless under the prevailing circumstances it is prudent not to do so;
  3. the duty to act in the interest of the beneficiaries of the scheme and not in his own interest ; and
  4. the duty to act in accordance with the express and implied terms of the governing rules of the MPF exempted ORSO registered scheme.

Investment Advisers

3. Existing appointment of investment advisers of all MPF exempted ORSO registered schemes will be grandfathered.

4. However, any newly appointed investment advisers of the scheme should either be :

  1. investment advisers duly registered with the Securities and Futures Commission (SFC) may be appointed; or
  2. investment advisers registered with an authority recognised by the SFC. (The authorities currently recognised by SFC are Securities and Exchange Commission (SEC) in the United States and the Investment Management Regulatory Organisation (IMRO) in the U.K.)

Investment Standards

5. The following investment standards are required to be followed by the MPF exempted ORSO registered schemes from the commencement date of the MPF System:

  1. Derivatives are not allowed for gearing or leveraging the overall assets of the scheme.
  2. Borrowings are not permitted for gearing or leveraging the overall assets of the scheme.

Trustee Standards

6. Existing trusteeship arrangement of all MPF exempted ORSO registered schemes will be grandfathered, viz.:

  1. where there is only one trustee in the trust, he shall be a non-employer trustee;
  2. where there are two or more trustees, there must be at least one non-employer trustee;
  3. non-employer trustee cannot be
    1. the relevant employer of the scheme; or
    2. an associate of such employer, except where the associate is a registered trust company; or
    3. an employee of such employer.

    7. It is proposed that upon any changes to the existing trusteeship arrangement, including any changes to the directors of the appointed corporate trustee (except for Registered Trust Company), the new appointments, including newly appointed alternate trustee, emergency trustee or co-trustee, must meet the following requirements :

    1. Local corporate trustee

      Any newly appointed local corporate trustees must be:

      1. a company registered under the Companies Ordinance (Cap. 32); and
      2. a registered trust company (RTC) under Part VIII of the Trustee Ordinance (Cap. 29).

    2. Offshore corporate trustee

      Any newly appointed offshore corporate trustee must be comparable to an RTC (as prescribed under paragraph 9 below) with sufficient presence in Hong Kong (as defined under paragraph 10 below).

    3. Directors of a corporate trustee

      If the existing appointed local corporate trustee is not an RTC or the existing appointed offshore corporate trustee is not comparable to an RTC, when a director of such corporate trustee is replaced, the replacement director must be a fit and proper person. In addition, at least one of the directors must have relevant experience in retirement scheme matters or trust business. The fit and proper director must provide satisfactory evidence as to suitability with respect to his reputation, character, knowledge, qualifications and experience.

    4. Individual non-employer trustee

      Any newly appointed individual non-employer trustees must meet the following requirements -

      1. must be a fit and proper person with relevant experience in retirement scheme matters or other trusts business. He must provide satisfactory evidence as to suitability with respect to his reputation, character, knowledge, qualifications and experience;
      2. shall not have any past or present financial or other connection with the employer, any associate of that employer, any director, controller or chief executive of the employer and of any associate of that employer, other than as a professional adviser which might affect his exercise of independent judgment;
      3. must not be the auditor, investment adviser or actuary of the scheme; and
      4. must be ordinarily resident in Hong Kong.

    5. Individual employer trustee

      Any newly appointed individual trustees must be a fit and proper person .

8. In addition, upon any changes to the existing trusteeship arrangement, if the board of trustees is composed of individual trustees only, then there must be at least two trustees with one of them being a non-employer trustee and satisfy the requirements prescribed under paragraph 7(d) above.

9. To be comparable to an RTC, an offshore corporate trustee has to meet the requirements under section 77(2)(a) to (c) of Part VIII of the Trustee Ordinance, that is:

  1. the objects of the company are restricted to the provisions contained in section 81 of the Trustee Ordinance, that is, restrict the company’s business to trust business only;
  2. the issued share capital of the company is not less than HK$3,000,000; and
  3. at least HK$3,000,000 of that capital is bona fide paid up for a cash consideration.

10. The following criteria will be applied in determining whether the offshore corporate trustee has sufficient presence in Hong Kong :

  1. the corporate trustee should be registered under Part XI of the Companies Ordinance;
  2. it must maintain a local office with its own relevant qualified staff and with a "chief executive" who is ordinarily resident in Hong Kong;
  3. a "chief executive" is a person employed by the offshore corporate trustee who, alone or jointly with others, is responsible for the conduct of the whole of the business carried on by the offshore corporate trustee within Hong Kong, not being a person who :
    1. is also responsible for the conduct of business carried on by the offshore corporate trustee elsewhere; and
    2. has a subordinate who is responsible for the whole of the business carried on by the offshore corporate trustee within Hong Kong;
  4. the administration, management and maintenance of the MPF exempted ORSO registered scheme are carried out in Hong Kong; and
  5. the local office should have adequate expertise and management resources to effectively conduct its business in Hong Kong.

Justifications

Prudent Man’s Rule

11. The proposal in paragraph 2 above merely codifies the essential fiduciary duties implied on a trustee and investment adviser under the common law.

Investment Advisers

12. In order to minimize the interference on the existing arrangements, we propose to grandfather the existing arrangement. However, the proposal in paragraph 4 will ensure that, in the long run, the assets of the scheme will be managed by qualified investment professionals.

Investment Standards

13. The proposal in paragraph 5 above is intended to avoid having the assets of the scheme being exposed to unnecessary high risk in order to minimise the risk of large losses.

Trustee Standards

14. Under current market practice, the board of trustees of ORSO schemes are usually composed of :

  1. one properly qualified corporate trustee which may be on-shore or off-shore; or
  2. one corporate trustee which is established for the relevant scheme only and some of the directors of such corporate trustee are employees of the relevant employer; or
  3. a group of individual trustees where the non-employer trustee may or may not have any experience in retirement matters or trust business; or
  4. a group of individual trustees and a corporate trustee.

15. The Administration has some concerns on those boards of trustees where none of the directors of the corporate trustee or the individual trustees has any experience in handling retirement matters or trust business. Thus we wish to enhance the standard on qualification of trustees so that the board of trustees will have at least one member who is either a qualified corporate trustee or an independent individual trustee who has the knowledge and experience in retirement scheme matters or other trusts business.

Mandatory Provident Fund Office
Financial Services Branch
[Ref.: Paper/MPF/SC-OI-5]
8 January 1997

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