LegCo Subcommittee on MPF System
Information Note
Approval Criteria for Trustees

Purpose

This paper describes the proposed criteria for trustees (local corporate, offshore corporate, or individual trustees) seeking approval to undertake MPF business as approved trustees, comprising -

General Criteria for Local or Offshore Corporate Trustees

  1. general requirements (paragraph 2 below);
  2. objects of the company (paragraph 3 below);
  3. business of the company (paragraph 4 below);
  4. composition of the board of directors (paragraph 5 below);
  5. fit and proper criteria (paragraph 6 below);
  6. capital adequacy of the company (paragraph 7 below); and
  7. financial soundness of the company (paragraph 8 below).

Additional Criteria for Offshore Corporate Trustees

  1. international standing (paragraph 9 below);
  2. organisation and regulation under acceptable offshore regulatory regime (paragraph 10 below);
  3. regulated by Hong Kong law (paragraph 11 below);
  4. presence and control in Hong Kong (paragraph 12 below); and
  5. administration and processing in Hong Kong (paragraph 13 below).

Criteria for Individual Trustees

  1. number of trustees (paragraph 14 below);
  2. membership status and fit and proper criteria (paragraph 15 below);
  3. independent trustee (paragraph 16 below); and
  4. performance guarantee (paragraph 17 below).

Proposal

General Criteria for Local or Offshore Corporate Trustees

General Requirements

2. The applicant company must be a trust company registered under the Companies Ordinance (Cap. 32) and the Trustee Ordinance (Cap. 29).

Objects of the Company

3. The applicant company should have its company objects limited to the provisions contained in section 81 of the Trustee Ordinance.

Business of the Company

4. The applicant company should restrict its business to trust business which is not contrary to the interest of members of MPF schemes.

Composition of the Company’s Board of Directors

5. The board of directors of the applicant company should consist of at least 5 directors, at least one of whom must be an independent director.

Fit and Proper Criteria

6. We propose that :

  1. the controller (a person who, alone or with any associate or through a nominee, is entitled to exercise, or control the exercise of, 15% or more of the voting power at any general meeting of the company or its parent companies), directors and chief executive of the company must be fit and proper persons with good reputation and character;
  2. the directors and chief executive should possess suitable knowledge, qualifications and experience; and
  3. the controller, directors and chief executive should undergo positive vetting procedures by the Mandatory Provident Fund Authority (MPFA).

Capital Adequacy of the Company

7. We propose that the applicant company :

  1. should have a minimum paid-up capital of HK$30 million and net assets of HK$30 million; and
  2. HK$15 million of the paid-up capital should be assets maintained in Hong Kong (Annex A).

Financial Soundness of the Company

8. We propose that the applicant company should be a subsidiary of a substantial financial institution (a bank, insurer or trust company with minimum capital and net assets of HK$150 million) which will provide continuous financial support to the applicant company unless the applicant company itself is a substantial financial institution.

Additional Criteria for Offshore Corporate Trustees

International Standing

9. We propose that only well established overseas trust companies with international experience, undoubted financial standing and good track record be considered for approval as MPF trustees.

Organisation and Regulation under Acceptable Offshore Regulatory Regime

10. We propose that the applicant company must be -

  1. properly organised as a trust company in a country where there are comprehensive laws governing companies and trusts; and
  2. under effective supervision by the overseas authority or authorities responsible for the proper conduct of trust companies.

Regulated by Hong Kong Law

11. We propose that -

  1. the applicant company should prove that both the laws of its country and its own constitution allow it to undertake MPF scheme trust business and contracts to be bound by Hong Kong law;
  2. the applicant company should demonstrate that it is prepared to, and capable of, adopting the following arrangements in respect of the application of Hong Kong law -
    1. including in its MPF scheme contracts an undertaking that it will be bound by Hong Kong law in exclusion; and
    2. providing an undertaking that its scheme trust instruments will state that the law of Hong Kong shall extend to the administration of the trust; and
    3. the applicant company will submit to the jurisdiction of the courts of Hong Kong.

Presence and Control in Hong Kong

12. We propose that the applicant company should demonstrate and guarantee sufficient presence in Hong Kong by -

  1. having a resident chief executive and relevant qualified management and staff; and
  2. appropriate facilities in Hong Kong such as office tenure, installing equipment and systems.

Administration and Processing in Hong Kong

13. We propose that the applicant company should -

  1. be able to service the requirements of schemes and membership exclusively in Hong Kong in respect of personal member enquiries, dealing with employers, service providers and the MPFA;
  2. maintain records of schemes in Hong Kong; and
  3. provide ready access to trustee records, processes and data, which will be required to satisfy MPFA regulatory requirements as well as default investigations.

Criteria for Individual Trustees

Number of Trustees

14. We propose that an employer sponsored scheme not having a corporate trustee should have a minimum of two trustees, at least one of whom must be an independent trustee.

Membership Status and Fit and Proper Criteria

15. We propose that individual trustees, other than independent trustees, should be appointed only from employees who are members of the employer sponsored scheme. All individual trustees must be fit and proper persons.

Independent Trustee

16. We propose that in selecting independent trustee(s), the employer should ensure that the chosen trustee meets the following requirements :

  1. has no conflict of interest in accepting the role;
  2. is not employed by the employer or its associates and is not a scheme member;
  3. is independent of the employer and any of its associates;
  4. is not the auditor or actuary for the scheme;
  5. is ordinarily resident in Hong Kong;
  6. has no interest in the assets of the employer or the scheme;
  7. is knowledgeable and experienced in trustee and retirement scheme matters; and
  8. is expected to be present at all trustee meetings; if he is unable to be present, decisions of the meetings will require his endorsement in writing.

Performance Guarantee

17. We propose that each individual or independent trustee should 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 HK$10 million.

Justification

General Criteria for Local or Offshore Corporate Trustees

General Requirements

18. The proposal in paragraph 2 above is to protect the basic interest of the public. The Occupational Retirement Schemes Ordinance (ORSO) requires a trust company registered under the Trustee Ordinance to administer retirement schemes in the form of pooling agreement. The master trust scheme under MPF is a kind of pooled fund arrangement, which should therefore be run by trust company registered under the Trustee Ordinance. Although only local trust companies can be registered under the Trustee Ordinance, a review of the Trustee Ordinance is under way to allow registration of overseas trust companies.

Objects of the Company

19. The proposal in paragraph 3 above is a prerequisite for a company registered as a trust company under the Trustee Ordinance. The objects limit the business scope of the company to trust business and other business ancillary to the administration of trusts.

Business of the Company

20. Being a trust company registered in Hong Kong with trust business not contrary to the interest of members of MPF schemes will protect the security of scheme assets and boost the confidence of scheme members.

Composition of the Company’s Board of Directors

21. The Companies Ordinance requirement for a minimum of two directors is based on the need to regulate for very small as well as large companies. Corporate trustees approved for MPF business are required to be companies of substance, whose board of directors should therefore number more than the minimum requirement under the Companies Ordinance. The minimum number proposed is five directors, at least one of whom must be an independent director.

22. Inclusion of at least one independent director is intended to strengthen and broaden the board’s objectivity, knowledge and strategic capability. An independent director brings broader and objective perspectives to the decision making process enhancing the corporate governance of the trust company.

Fit and Proper Criteria

23. The proposal in paragraph 6 above is intended to ensure that the applicants are experienced and fiduciarily responsible. It also ensures that they will be subject to the positive vetting by the MPFA.

Capital Adequacy of the Company

24. Section 20(6)(b) of the MPF Ordinance recognises capital adequacy as a criterion in respect of trustee suitability. Minimum capital requirements are set for other financial institutions in Hong Kong. Relevant overseas retirement plan legislation also requires trustee to demonstrate appropriate capital adequacy, although each country’s specific requirements are largely shaped by the design of their retirement system (including social security) and other relevant legislation governing service providers. The capital requirements on trust companies of retirement schemes in some overseas countries are listed at Annex B.

25. Our proposal is to have the MPF scheme safely and effectively administered by trustees of substance. A substantial capital base is a "statement" of a corporate trustee’s resources capability and commitment to the MPF business.

26. The existing HK$3 million capital requirement for registered trust companies under the Trustee Ordinance is quite modest and is under review for an appropriate increase. It should be noted that the existing trust business of most trust companies is of limited scale. However, MPF operates on a different level. The funds to be involved in the MPF trust business will be huge, estimated at around HK$30 to HK$40 billion per year. A much higher capital requirement is needed to instil public confidence towards the MPF system as the amount of accrued benefits kept by trustees will be substantial.

27. We have set our capital requirement comparable to that in Australia, where there is similar requirement for mandatory retirement schemes administered by the private sector. Our proposed capital requirement is lower than that in Canada but the trust companies there also engage in deposit taking. Back up by our proposed requirements on financial soundness, we regard HK$30 million as adequate.

28. Our proposal requiring HK$15 million of the capital to be maintained in Hong Kong is to safeguard the interests of scheme members as in the event of significant trustee default, it may be necessary to use the capital assets as a security, particularly in respect of offshore trustee. The proportion of capital to be maintained in Hong Kong is determined by reference to the Trustee Ordinance which stipulates that a registered trust company must deposit a sum not less than HK$1.5 million in Hong Kong from the required share capital of HK$3 million.

Financial Soundness of the Company

29. The financial soundness of the corporate trustee and its corporate parent is crucial to ensure that they can meet their obligations, particularly in the event of a financial crisis. The proposal of having a parent company being a bank, insurer or trust company with HK$150 million in paid-up capital and net assets is in line with SFC requirement for corporate trustee of unit trusts. Since most of the trust companies in Hong Kong are subsidiaries of banks or insurers, our proposal would create little difficulty for them to comply with.

Additional Criteria for Offshore Corporate Trustees

International Standing

30. In the event of breach in trustee duties, scheme members or the MPFA may need to take legal proceedings against the trust company. Where the trust company is incorporated offshore, legal proceedings may also be required in the offshore jurisdiction with the associated legal costs. This may prove to be a difficult exercise for the MPFA and the replacement trustee to gain control of the scheme and scheme assets to protect the interests of scheme members. The MPFA may not be able to take prompt actions to prevent further deterioration in the financial position of the scheme.

31. The proposal in paragraph 9 above is intended to ensure that only well established overseas trust companies of international standing can operate MPF business through their local branches. Offshore trust companies not going down the branch route can still enjoy the option of establishing a local Hong Kong trust subsidiary. This provides a level playing field for the offshore and local trustees.

Organisation and Regulation under Acceptable Offshore Regulatory Regime

32. The proposal in paragraph 10 above is intended to provide comfort to the MPFA and scheme members that the offshore corporate trustee’s business is subject to acceptable regulatory regime.

Regulated by Hong Kong Law

33. Section 21(4)(a) of the MPF Ordinance provides that, in the case of every registered scheme, the governing law in respect of the trust is to be the law of Hong Kong. Therefore, the law of Hong Kong shall determine all issues concerning the validity, interpretation, effect and administration of scheme trusts. That will include such questions as the powers and duties of trustees and their liability for breach of trust. Nevertheless, there is a degree of uncertainty, under the principles of international law, whether a general declaration as to the proper law of a trust will, if the trustees are not resident of the country of the proper law, extend to the administration of the trust. That should therefore be expressly stated in all scheme trust instruments.

Presence and Control in Hong Kong

34. As confirmation of its commitment to Hong Kong and MPF business, the offshore trustee will need to demonstrate and guarantee sufficient presence in Hong Kong. The resident chief executive should have the primary control of the local trust business in respect to its on-going management and sufficient authority to oversee the company’s MPF trustee business. This is to ensure that the major decision making process of the offshore trustee is local. The provision of adequate office tenure, equipment and systems is to ensure that adequacy of service standards and quality will be provided to scheme members.

Administration and Processing in Hong Kong

35. The schemes and membership for whom the offshore trustee will be acting are exclusively in Hong Kong. The trustee, therefore, must be able to service their requirements in Hong Kong, which means providing a local physical interface in respect of personal member inquiries, dealing with employers, other service providers and the MPFA, etc. Administration and processing in Hong Kong are also necessary to facilitate periodic auditing and field inspections or investigations, if needed, carried out by the MPFA.

Criteria for Individual Trustees

Number of Trustees

36. The size of an employer’s workforce and number of worksites will in practice influence the number of trustees selected by the employer. Regulating for only the minimum number of two allows employer latitude and flexibility.

Membership Status and Fit and Proper Criteria

37. Allowing employee representatives to serve as trustees is a strong feature of trustee boards of retirement schemes. The concept is reflected in the retirement scheme legislation of a number of countries, e.g. Australia, Canada, UK, and USA. Scheme members are the persons who have the greatest "non-profit" vested interest in the scheme’s success, i.e. their own eventual retirement security. Again, the individual trustees have to be fit and proper persons subject to the positive vetting by the MPFA.

Independent Trustee

38. The concept of independent trustee has been borrowed from ORSO and the Pensions Act of the UK. It is based on the perceived advantages of an independent person(s)’ objectivity, expertise, trust-related knowledge and experience, and his professionalism.

Performance Guarantee

39. Instead of capital adequacy and financial soundness, the Ordinance has provisions for prescribing requirement for performance guarantees in the case of individual trustees. When there is loss to scheme assets which is covered by professional indemnity insurance, the scheme will be indemnified for loss in excess of the deductible by the insurer. The trustees are still required to absorb the loss up to the deductible. The existence of performance guarantees will provide the financial means for individual trustees to indemnify the scheme. It is only after exhausting other means that the MPFA will apply to the court for invoking the compensation fund. The proposed amount of 10% of scheme assets up to HK$10 million is adequate as an extra cushion to the professional indemnity insurance and the compensation fund for the protection of interests of scheme members.

Mandatory Provident Fund Office
Financial Services Branch
13 November 1996
[Ref. : Paper/MPF/SC-2]

Annex A

Assets which qualify as Assets in Hong Kong

The following qualify as assets in Hong Kong -

  1. real property, including a leasehold interest therein, located in Hong Kong;
  2. computer equipment , office machinery, furniture, motor vehicles and other equipment located in Hong Kong;
  3. money, in any currency or monetary unit, deposited at an authorized institution, as defined in the Banking Ordinance (Cap. 155);
  4. bonds or other securities issued in Hong Kong provided that they are transferable and registrable at a register in Hong Kong and, in the case of bonds or other securities which are evidenced by certificates, the certificates for them are for the time being kept in Hong Kong;
  5. bonds or other securities issued outside Hong Kong, the certificates for which are for the time being kept in Hong Kong and which are transferrable by delivery, with or without endorsement;
  6. negotiable bills of exchange, within the meaning of the Bills of Exchange Ordinance (Cap. 19), or other negotiable instruments which are for the time being kept in Hong Kong;
  7. shares in respect of a company, which shares are -
    1. transferable and registrable only at a register in Hong Kong; or
    2. in the ordinary course of business, transferred and registered at a register in Hong Kong and the certificates for which (if any) are for the time being kept in Hong Kong;

  8. debts that may be enforced only be legal proceedings in a Hong Kong court, other than amounts recoverable in respect of claims outstanding under reinsurance contracts ceded;
  9. an interest in a "unit trust", as defined in the Securities Ordinance (Cap. 333), which is realizable in Hong Kong and in respect of which the governing law of the trust is expressly stated to be that of Hong kong to the exclusion of all others.".

Annex B

Capital Requirement on Trust Companies in Overseas Countries

Country

Capital Requirement

Mandatory Retirement Scheme (M)
/Voluntary Retirement Schemes (V)

Australia

A$5 million
(~HK$31 million)

M

Canada

C$10 million
(~HK$58 million)

V

Chile

20,400 Unidades de Fomento
(~HK$4.5 million (Max.))

M

U.K.

GBP 250,000
(~HK$3 million (Max.))

V

U. S. A.

US$500,000
(~HK$3.9 million (Max.))

V

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