PLC Sub-Committee on Subsidiary Legislation of the 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
- general requirements (paragraph 2 below);
- objects of the company (paragraph 3 below);
- business of the company (paragraph 4 below);
- composition of the board of directors (paragraph 5 below);
- fit and proper criteria (paragraph 6 below); and
- capital adequacy and financial soundness of the company (paragraphs 7 and 8 below).
Additional Criteria for Offshore Corporate Trustees
- international standing (paragraph 9 below);
- organisation and regulation under acceptable offshore regulatory regime (paragraph 10 below);
- regulated by Hong Kong law (paragraph 11 below); and
- presence and control in Hong Kong (paragraph 12 below).
Criteria for Individual Trustees
- number of trustees (paragraph 13 below);
- membership status and fit and proper criteria (paragraph 14 below);
- independent trustee (paragraph 15 below); and
- performance guarantee (paragraph 16 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 :
- the controller (i.e. 15% shareholding controllers), directors and chief executive of the company must be fit and proper persons with good reputation and character;
- the chief executive and a majority of directors, including independent director, should possess suitable knowledge, qualifications and experience; and
- the controller, directors and chief executive should undergo positive vetting procedures by the Mandatory Provident Fund Authority (MPFA).
Capital Adequacy and Financial Soundness of the Company
7.We propose that the applicant company :
- should have a minimum paid-up capital of HK$150 million and net assets of HK$150 million; and
- should own assets held in Hong Kong to the value of at least HK$15 million.
8.If the applicant company does not have the above required capital, it would still be eligible if it satisfies the following requirements :
- it is an associate of a company which is a substantial financial institution (an authorised bank, authorised insurer or registered trust company with minimum capital and net assets of HK$150 million) or a holding company of a substantial financial institution and provides continuous financial support to the applicant; and
- it has a paid up share capital of at least HK$30 million and net assets of at least the same amount; and
- it owns assets held in Hong Kong to the value of at least HK$15 million.
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 -
- properly organised as a trust company in a country where there are comprehensive laws governing companies and trusts; and
- 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 the applicant company should enter into a written undertaking with the Authority that it, and all transactions relating to the administration by the applicant in Hong Kong of MPF schemes and all disputes arising out of those transactions, will be governed by the law 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 -
- having a resident chief executive and relevant qualified management and staff; and
- appropriate facilities in Hong Kong such as office tenure, installing equipment and systems.
Criteria for Individual Trustees
Number of Trustees
13.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
14.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
15.We propose that in selecting independent trustee(s), the employer should ensure that the chosen trustee meets the following requirements :
- has no conflict of interest in accepting the role;
- is not employed by the employer or its associates and is not a scheme member;
- is independent of the employer and any of its associates;
- is not the auditor or actuary for the scheme;
- is ordinarily resident in Hong Kong;
- has no interest in the assets of the employer or the scheme;
- is knowledgeable and experienced in trustee and retirement scheme matters; and
- 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
16.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
17.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
18.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
19.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
20.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.
21.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
22.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 and Financial Soundness of the Company
23.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.
24.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.
25.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.
26.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.
27.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.
28.The financial soundness of the corporate trustee and its associate is crucial to ensure that they can meet their obligations, particularly in the event of a financial crisis. The proposal of having an associate 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 associates of authorised banks or authorised insurers, our proposal would create little difficulty for them to comply with.
Additional Criteria for Offshore Corporate Trustees
International Standing
29.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.
30.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
31.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
32.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.
Presence and Control in Hong Kong
33.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.
Criteria for Individual Trustees
Number of Trustees
34.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
35.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
36.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
37.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 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. The proposed amount of 10% of the scheme asset up to HK$10 million is adequate as an extra cushion to the indemnity insurance for the protection of interests of scheme members.
Mandatory Provident Fund Office
Financial Services Bureau
10 November 1997
>Annex
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
|
