LegCo Subcommittee on MPF System
Information Note
Sanctions of Trustees

Purpose

This paper describes the arrangements for the monitoring of trustee performance and compliance, and the application of sanctions (suspension, removal and revocation) in the event of breach on the part of trustees, comprising:

  1. review of trustees' reports and audits by MPFA (paragraph 2 below);

  2. investigation of trustees by MPFA (paragraph 3 below);

  3. corrective and remedial actions by trustees prior to suspension or removal (paragraphs 4, 5 and 6 below);

  4. causes for suspension or removal of trustees (paragraph 7 below);

  5. notice by MPFA of suspension or removal (paragraph 8 below);

  6. causes for revocation of approval of trustees (paragraph 9 below);

  7. notice by MPFA of revocation (paragraph 10 below);

  8. rescinding a sanction (paragraph 11 below);

  9. application of sanctions (paragraph 12 below); and

  10. duties of the suspended or removed trustee to continue (paragraph 13 below).

Proposal

Review of Trustees' Reports and Audits by MPFA

2. We propose that the following reporting and auditing practices be carried out to facilitate the assessment by the MPFA of trustees' compliance with prescribed standards and duties:

  1. on-going reportable events/conditions by trustees, including-

    1. trustee or service provider no longer in compliance;

    2. significant change or significant event affecting trustee; and

    3. loss of accrued benefits;

  2. annual report on compliance by trustees, including -

    1. annual return of the scheme(s);

    2. annual return of the corporate trustees;

    3. administration return; and

    4. key control checklist;

  3. ad-hoc reports by trustees as may be required by the MPFA; and

  4. on-going communication with the MPFA from auditors and other service providers concerning matters of compliance.

Investigation of Trustees by MPFA

3. The MPFA will conduct an investigation when it reasonably believes that the Ordinance has been contravened, the trustee is or has been in breach of his duties or where circumstances may exist which may be prejudicial to the interests of the scheme members. A written notice will be provided to the trustee prior to the conduct of the investigation.

Corrective and Remedial Action by Trustees Prior to Suspension or Removal

4. Generally, we propose that a trustee be given an opportunity to be heard prior to the MPFA suspending or removing the trustee. The trustee may be allowed to take corrective actions to remedy any default where in the MPFA's opinion a trustee has:

  1. not acted illegally or with gross negligence;

  2. within his power, not allowed any other person to act illegally or with gross negligence;

  3. not caused material asset loss;

  4. not intentionally fallen into non-compliance with approval criteria/conditions;

  5. not intentionally breached the Ordinance, any of its regulations or rules, or any provision of the governing rules of the scheme;

  6. co-operated openly with the MPFA's investigations;

  7. of his own initiative advised of his default or non-compliance;

  8. the resources, the ability and the intent to remedy the default within a reasonable period;

  9. not shown himself to be incompetent; and/or

  10. shown sufficient evidence why he should be allowed to remedy the situation.

5. In particular, the MPFA may require the trustee to:

  1. take such corrective actions in respect of the matters concerned as the MPFA may consider appropriate; or

  2. appoint such external specialists as may be agreed with the MPFA to assist with the correction of matters of concern; and

  3. in either of the cases of paragraph 5(a) or 5(b), complete such corrective actions to the MPFA's satisfaction within a specified time.

6. Regarding the opportunity to correct default situations, we further propose that the trustee should agree in writing with the MPFA on the following items:

  1. a definition of the situation to be corrected;

  2. the date of satisfactory completion of the correction;

  3. the measures by which satisfactory completion will be judged;

  4. progress review dates, if any;

  5. specific impositions by the MPFA, e.g. use of external resources, providing audit certification on completion; and

  6. any other factors that may be required to correct the situation or ensure sustained compliance thereafter.

Causes for Suspension or Removal of Trustees

7. The MPFA will consider suspending or removing a trustee from his duties with respect to a registered scheme where the trustee:

  1. has contravened the approval criteria or fails to report non-compliance with the approval criteria;

  2. carries on any conduct or course of conduct in relation to a registered scheme which has, had or may have an adverse effect on the financial position of the registered scheme;

  3. commits investment-related breaches which has, had or may have an adverse effect on the financial position of the scheme; or

  4. fails to conduct accurate member-record keeping and unit-registry record keeping for scheme members, resulting in missing or erroneous member benefit entitlements.

Notice by MPFA of Suspension or Removal

8. We propose that before any sanction of suspension or removal is applied, the MPFA should give not less than one month's written notice to the trustee of the MPFA's intention to apply the respective sanction (The MPFA should, however, retain the right to reduce the period of one month's notice in circumstances which require prompt action to be taken). Such written notice should contain:

  1. the decision of the MPFA to suspend or remove the approved trustee;

  2. the reasons for the MPFA's decision;

  3. the scheme(s) to which the sanction applies;

  4. the manner in which the MPFA intends to exercise the sanction(s);

  5. in the case of suspension, the period of the suspension (which will not exceed 6 months but which may be extended by the MPFA by further notice);

  6. the effective date of the sanction(s); and

  7. the name of the replacement trustee to be appointed (if any).

Causes for Revocation of Approval of Trustees

9. The MPFA will consider revoking the approval of a trustee where the MPFA is satisfied on reasonable grounds that the trustee:

  1. has contravened a condition to which the approval is subject;

  2. is unable to perform, in the proper manner and for whatever reason, the duties of an approved trustee of a registered scheme; or

  3. is or has become unable to meet the MPF requirements of capital adequacy, financial resources, or of particular qualifications, e.g. suitability criteria, as an approved trustee.

Notice by MPFA of Revocation

10. We propose that before the MPFA revokes the approval of a trustee, the MPFA should give a written notice of its intention to the trustee. Such written notice should contain the similar information as is listed in paragraph 8.

Rescinding a Sanction

11. We propose that the MPFA may rescind a sanction of an approved trustee at any time and the sanction will cease to have effect at such time as the MPFA may determine and as specified in a written notice to the approved trustee.

Application of Sanctions

12. We propose that the MPFA should be able to suspend, remove or revoke an approved trustee notwithstanding the prior sanction or notice of sanction of the approved trustee.

Duties of the Suspended or Removed Trustee to Continue

13. We propose that notwithstanding the suspension or removal of an approved trustee that the duties imposed on an approved trustee under the Ordinance, the regulations and rules, and the governing rules should continue.

Justification

Review of Trustees' Reports and Audits by MPFA

14. The MPFA will in practice not enjoy immediate access to information relating to trustee performance. Nor will it have access to fund positions and related investment information. Therefore its routine monitoring role will be mainly one of review of published reports. The proposal in paragraph 2 above is intended to provide the MPFA with the essential information to assess and judge the compliance and performance of the trustees before making sanction decisions.

15. Because it will be difficult for the MPFA to detect problems on a proactive basis, relevant information supplied by auditors and other service providers is crucial. The MPFA will need the assistance of the auditors and other service providers to report any problems that will significantly threaten the interest of scheme members. There are many precedents for such requirements in Hong Kong, for example, in the Banking Ordinance, Securities Ordinance and Insurance Companies Ordinance. Such requirements also exist in other jurisdictions.

Investigation of Trustees by MPFA

16. Prior notice of an investigation may be given, but in serious circumstances, immediate action will be taken to protect scheme members' interests.

Corrective and Remedial Action by Trustees Prior to Suspension or Removal

17. Within the financial services sector, it is a market practice that the trustee corrects errors he may find within his own operations and, where relevant, assists service providers to remedy their defaults. This self-remedy concept should also hold for situations where the MPFA's investigation identifies breaches or other defaults. Generally, a trustee should have the opportunity to correct his default, unless guilty of misfeasance, gross negligence or incompetence. Furthermore, trustee self-remedy is usually more cost-effective and avoids the disruption (e.g. disruption and interruption of service during suspensions raises practical problems of its own) from replacement trustee appointment or other intervention. It is also an integral aspect of the continuous improvement process for the administration of all schemes.

18. The proposals in paragraphs 4, 5 and 6 above are intended to give trustees an opportunity to take pro-active measures to correct cases of non-compliance or mistakes so that sanctions may be avoided.

Causes for Suspension or Removal of Trustees

19. It is necessary to provide the MPFA with the power to suspend or remove a trustee during its investigation in case the trustee's wrongdoing jeopardizes scheme members' interests. The proposal in paragraph 7 above sets out the situations where the MPFA may consider suspending or removing a trustee.

20. Removal from one, or more than one scheme, does not prevent the trustee from continuing to act in his capacity for any other registered schemes for which he may be the approved trustee. On the other hand, suspension will have the effect of suspending the approval of the trustee, i.e. temporary revocation. Therefore, the implication would be different. Suspension may or may not lead to eventual removal. The MPFA would need to take into consideration the practical difference between these two sanctions before deciding whether to suspend or remove a trustee.

Notice by MPFA of Suspension or Removal

21. The proposal in paragraph 8 above is intended to set out the details to be included in the notice of sanction to a trustee. The power of the MPFA to impose immediate suspension on the trustees is to protect scheme members' interests from suffering further losses in cases of emergency. This is in line with the practices of other regulators such as the Hong Kong Monetary Authority and the Securities and Futures Commission.

Causes for Revocation of Approval of Trustees

22. The application of the sanctions of revocation and removal is a matter of scope. Removal implies that the trustee's authority to act with respect to a particular scheme is denied. Revocation is the total denial of a trustee's ability to act for any scheme authorized under the MPF.

23. Our proposal on revocation of approval is that it will occur when the trustee fails to meet the approval criteria/condition or under conditions of continued and uncorrected breaches of a serious nature. The trustee's approval will be revoked where the safety of a number of scheme assets may be at risk.

Notice by MPFA of revocation

24. The proposal in paragraph 10 is similar to our proposal in paragraph 8.

Rescinding a Sanction

25. The MPFA should be able to rescind a sanction of an approved trustee at any time. This will allow an approved trustee to resume its duties if its default has been remedied and it will also provide flexibility for the MPFA in regulating trustees.

Application of Sanctions

26. The MPFA should be able to suspend or remove an approved trustee in any combination of sanctions and without restricting other required actions.

Duties of the Suspended or Removed Trustee to Continue

27. An approved trustee should continue to have responsibility for carrying out the duties imposed on an approved trustee under the Ordinance, the regulations and rules, and the governing rules. Although suspended or removed, an approved trustee must continue to be subject to regulation by the MPFA even though its trusteeship with respect to a registered scheme have been suspended or removed.

Mandatory Provident Fund Office
Financial Services Branch
13 March 1997

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