PLC Sub-Committee on Subsidiary Legislation of the 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, termination and revocation) in the event of breach on the part of trustees, comprising:

    field audit by MPFA (paragraph 2 below);

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

  2. corrective and remedial actions by trustees prior to suspension or termination of trustee's administration (paragraphs 4, 5 and 6 below);

  3. causes for suspension or termination of administration of trustees (paragraph 7 below);

  4. causes for suspension or revocation of approval of trustees (paragraph 8 below);

  5. appointment of replacement trustee (paragraph 9 below); and

  6. appointment of temporary administrator (paragraph 10 below).

Proposal

Field Audit by MPFA

2.In addition to the reporting requirements described in the paper " Accounting and Reporting Requirements', the MPFA will conduct regular field inspections and request access to the information relating to the performance of approved trustees to ensure that they complied with the provisions of the Ordinance. The information would include administration details of a scheme such as records of contributions, transfer and withdrawal of benefits, provision of enquiry facilities, security of scheme assets such as custodial arrangements, provision of performance guarantees and indemnity insurance, as well as investment aspects of a scheme such as transaction records.

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.

Corrective and Remedial Action by Trustees Prior to Suspension or Termination of Trustee's Administration

4.Generally, we propose that a trustee be given an opportunity to be heard prior to the MPFA suspending or terminating trustee's administration. 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 Termination of Trustee's Administration

7.The MPFA will consider suspending or terminating a trustee's administration from his duties with respect to a registered scheme if the MPFA reasonably believes that the trustee:

  1. 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 soundness of the registered scheme or the interests of the scheme members; or

  2. is engaging, or has engaged in a forbidden investment practice specified by the MPFA.

Causes for Suspension or Revocation of Approval of Trustees

8.The MPFA will consider suspending or 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.

Appointment of Replacement Trustee

9.If suspension or termination of approved trustee's administration results in remaining trustee(s), if any, not able to meet trusteeship requirements, the Authority must take all reasonable steps to appoint another approved trustee to replace the trustee whose administration of the scheme was suspended or terminated. The person appointed must be an approved trustee.

Appointment of Temporary Administrator

10.If the Authority is having difficulties or unable to find an approved trustee who is willing to act as a replacement trustee of the registered scheme concerned, the Authority may, as soon as practicable after the suspension or termination of trustee's administration, appoint a temporary administrator who is not an approved trustee to administer the scheme until the suspension ends or the vacancy resulting from the termination is filled.

Justification

Field Audit by MPFA

11.To detect problems on a proactive basis, the MPFA will conduct regular field audit with or without notice to the approved trustees.

Investigation of Trustees by MPFA

12.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 Termination of Trustee's Administration

13.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.

14.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 Termination of Administration of Trustees

15.It is necessary to provide the MPFA with the power to suspend or terminate the administration of a trustee 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 terminating a trustee.

16.Suspension or termination of administration 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. Furthermore, suspension may or may not lead to eventual termination of administration.

Causes for Suspension or Revocation of Approval of Trustees

17.The application of the sanctions of revocation and termination is a matter of scope. Termination of administration 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.

18.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.

Appointment of Replacement Trustee

19.The appointment of replacement trustee immediately after the suspension or termination of approved trustee's administration is to safeguard scheme member's interest. This arrangement ensures another approved trustee will assume responsibility for the administration of the scheme and any disruption to the scheme is kept to the minimum.

Appointment of Temporary Administrator

20.There are situations where the replacement trustee cannot be arranged within a limited time. When such situations arise, the Authority will need to appoint a temporary administrator who may not be an approved trustee so that the scheme management will not stall.


Mandatory Provident Fund Office
Financial Services Bureau
12 November 1997