1
Speech
LC: Mandatory Provident Fund Schemes (General)
(Amendment) Regulation 2000
Thursday, 22 June 2000
Madam President,
I move that the first motion under the Mandatory Provident Fund Schemes Ordinance and the Interpretation and General Clauses Ordinance as set out in the paper circulated to Members, be passed by this Council.
The Mandatory Provident Fund Schemes (General) (Amendment) Regulation 2000 (the Amendment Regulation) aims at the followings:
(i)to enhance the protection of the interests of employers and employees;
(ii)to facilitate the work of the Mandatory Provident Fund Schemes Authority (MPFA);
(iii)to clarify certain anomalies in the provisions of the Regulation; and
(iv)to resolve some of the operational difficulties encountered by the members of the Mandatory Provident Fund (MPF) industry.
The Amendment Regulation has been scrutinized by the "Subcommittee on subsidiary legislation relating to the Mandatory Provident Fund Schemes" (the Subcommittee). Members of the Subcommittee have raised a number of concerns, and have consulted the custodian industry on the Amendment Regulation. In response to the views of the members of the Subcommittee, we have made a number of technical amendments. I will briefly introduce the Amendment Regulation and our new amendments.
Protection of the interests of employees and employers
On protection of employees and employers, item 6 of the Amendment Regulation proposes to prohibit a trustee from refusing an application by an employer or a preserved account holder to participate in a scheme provided that such persons comply with the statutory requirements, and to prohibit a trustee from unilaterally terminating the participation of an employer or a scheme member.
The Regulation does not require the payment of interest when funds of a scheme are placed on deposit. Section 13 of the Amendment Regulation proposes to stipulate that where scheme funds are placed on deposit, the trustee must ensure that a reasonable rate of interest is received. It is a criminal offence if the trustee fails to do so. In response to the views of the members of the Subcommittee, we now propose to delete the proposal on making it a criminal offence for contravention of this provision.
To amend anomalies in the Regulation
In the course of implementing the Regulation, the MPFA identified some anomalies in the Regulation and clarifications are required. For example, under the MPF Ordinance, an employer must enroll his employees into a registered scheme within the "permitted period". In this connection, the MPFA has specified a period of 60 days as the "permitted period". However, as a result of the construction of the relevant provisions in the Regulation, employers would be required to start making contributions before the end of the permitted period, i.e., even before he is required to get his employees enrolled in a scheme. This in not in line with our original legislative intent of providing for a permitted period. Clause 18 of the Amendment Regulation aims at clarifying that neither the employer nor the employee would be required to make any contributions within the permitted period
According to the Banking Ordinance and the Insurance Companies Ordinance, in ascertaining the net assets of banks and insurance companies, subordinated debts may be excluded from a company's liabilities under certain circumstances. However, such arrangement is not included in the Regulation. To unify the arrangement, section 2 of the Amendment Regulation proposes to adopt the arrangement in the Banking Ordinance so that subordinated debts of “substantial financial institutions” in the Regulation (i.e. banks, insurance companies and trust companies) can be treated in the same way. To enhance the clarity of the provision, I now propose to amend the new section 7(2) to specify that in determining the "net assets" of the "substantial financial institutions", subordinated debts can be excluded from a company's liability under certain circumstances.
Concerns raised by the MPF industry
Members of the MPF industry, in particular the trustees and custodians, have expressed concerns that some requirements in the Regulation do not reflect modern business practices and that they would have practical difficulties in complying with the relevant provisions.
Contents of custodial agreement
Under the Regulation, a trustee of a registered MPF scheme must ensure that the contract for the appointment of a custodian incorporates a custodial agreement which complies with the provisions of Schedule 3 of the Regulation. Similarly, an agreement between a custodian and his delegate must also comply with the relevant provisions. The industry is of the view that the relevant requirements in respect of custodial agreement are not consistent with modern global custodial practice, and as custodians and their delegates, they cannot indeed fully implement the requirements in the agreement as stipulated in the provisions.
To address the problem, we propose to give the MPFA the discretion to waive or modify three specific sections concerning treatment of scheme assets, indemnity for losses and records of customers' assets. However, the MPFA can only use such discretionary power under specific circumstances, as follows:
(1) in the opinion of the MPFA, compliance of the relevant sections would cause undue hardship for the proposed custodian or delegate of the custodian;
(2) be impossible by virtue of a law in a foreign jurisdiction; or
(3) compliance of the relevant sections would not be in the interests of relevant scheme members.
During the discussion in the Subcommittee, the custodian industry indicated that the existing provisions of section 1(b) of Schedule 3 concerning the treatment of scheme assets has uncertainties. Instead of giving the MPFA the discretion on individual cases, they proposed to clarify the relevant provision. The Subcommittee agrees to the proposal and we accept the view. I now propose to stipulate in the agreements that scheme assets are to be entrusted to custodian for safe keeping, and that they should be properly held, and segregated from the assets of custodians and its delegates. (section (d)(i) of the amendments). The discretionary power originally proposed for the MPFA in this respect will be deleted.
Besides, according to section 5 of schedule 3, custodian (or subcustodian) is required to indemnify the scheme for any losses incurred directly or indirectly that are attributable to custodian or its employees. The wording of the existing provision covers all indirect losses (for example, due to not investing in an appreciating bond and therefore not reaping the profits). The trustees/custodians are concerned that the coverage of indirect losses would subject the custodians and their delegates to unlimited liability. Such requirements are contrary to prevailing practices in the major overseas financial markets. To address the concerns of the Subcommittee and the industry, we agree to remove the reference to indirect loss in the provision.
Other contents of the custodial agreement
The custodian industry has also indicated to the Subcommittee that they might encounter practical difficulties in complying with the technical provisions of sections 6(1)(a), 6(2) and 7(a) of Schedule 3 concerning the eligibility of the delegates of custodians and the regular submission of report on material events.....etc. In view of this, I now propose to introduce amendments to give the MPFA the discretion to waive or amend the requirements of these provisions in respect of subcustodial agreements in the special circumstances mentioned above.
Encumbrance of scheme assets
Except under very limited circumstances, section 65 of the Regulation and section 3 of Schedule 3 stipulate that scheme assets shall not be subject to encumbrance. However, the existing restrictions will pose operational difficulties to trustees and custodians. It is a common practice for many central securities depositories (CSDs) and delegates of custodians to take a charge or lien over the assets and this creates a de facto encumbrance over the scheme assets and hence contravenes the Regulation. Inability to relax the above restriction will significantly reduce the ability to invest scheme assets in securities markets, and prevent the use of financial futures or currency forward contracts even for hedging.
We therefore propose to amend the Regulation to permit encumbrance on scheme assets in the form of liens placed/charged on assets by CSDs or delegates of custodians, and to permit encumbrances to enable the use of margin accounts. The proposed amendments would not erode the protection rendered to scheme assets. Leveraging is still strictly prohibited.
In addition, except under the "prescribed exception" as specified in the existing section 65, the scheme assets are not subject to encumbrance. The "prescribed exception" aims at restricting borrowing to circumstances where it is needed temporarily to enable accrued benefits to be paid or to complete the acquisition of scheme assets. The periods of borrowing for these two purposes are limited to 90 days and 7 working days respectively. The Subcommittee and the industry were concerned that the wording of existing section 65 could not reflect the practical situation that such borrowing periods might be extended for reasons beyond the control of the trustees. Our policy intent is that when the trustee creates the encumbrance, he has the responsibility to ensure that it is unlikely that that the period of the borrowing would exceed the limit. However, it is impossible to predict at the time of the borrowing whether the actual borrowing period would exceed the limit. Therefore, I propose to amend section 65 to improve the wording of the existing provision. The same amendments will also be made to section 3 of Schedule 3 with the same provision.
Apart from the above, a series of technical amendments have been included in the Amendment Regulation to clarify the provisions and reflect our original legislative intent.
Conclusion
The proposed amendments to the Regulation are mainly technical, and are supported by the Subcommittee. Early implementation of the relevant amendments can help to clarify the uncertainties in the Regulation and enhance the protection of the interests of employers and employees, and will contribute to the smooth implementation of the MPF schemes.
Mandatory Provident Fund Schemes (General) (Amendment) Regulation 2000 as amended. Thank you.