Confusion as MPF switch put on hold
Dennis Eng and Enoch Yiu
The government has abruptly postponed the introduction of a long-awaited provision allowing employees to choose their own mandatory provident fund trustees.
Having spent months preparing the public for the switch, yesterday it said more time would be needed to introduce legislation. Undersecretary for Financial Services and the Treasury Julia Leung Fung-yee cited as the main reason the need to better protect MPF contributors from mis-selling such as occurred in the Lehman Brothers minibonds fiasco.
Without being able to give a precise time frame, Leung hoped the new law could be ready before the end of next year.
'We need to spell out details such as the penalty for malpractice,' she said. 'We have to clarify the powers and responsibilities of several regulatory bodies.'
The surprise announcement caused confusion among union leaders and in the fund management industry, since the concerns the government has now raised would have been known to officials and had long ago been raised by critics.
The 'employee choice arrangement' was scheduled to go into effect in April next year. It would have allowed 2.3 million employees in the city to choose which MPF provider managed their share of pension contributions. Employees contribute 5 per cent of their salary, capped at HK$1,000 a month, to a retirement account. This is matched by their employer.
The arrangement aimed to make the MPF system fairer to employees. Since the retirement scheme's introduction 10 years ago, critics have pointed to the unfairness of allowing only bosses to choose the trustee whose funds employees may invest in, which enables fund trustees to maintain high fees and charges because of the lack of competition. The arrangement would have allowed employees to change the service provider managing their retirement benefits once a year without charges.
Given the number of employees involved, the government and the Mandatory Provident Fund Schemes Authority said it would be prudent to regulate intermediaries under the new law.
Unionist lawmaker Leung Yiu-chung was disappointed by the delay. 'I can't understand why the government intends to draft legislation now,' he said.
Rex Auyeung Pak-kuen, Asia president of Principal Financial Group, said: 'This is obviously a surprise to me as I thought the different regulators have been evaluating how best to regulate the intermediaries for some time.'
With the fallout from the Lehman minibonds affair, which cost investors billions amid allegations of mis-selling, there have been calls for a single code of conduct for financial intermediaries.
The Mandatory Provident Fund Schemes Authority justified the delay by citing the need to further safeguard employee interests with legislation. 'In the process, we would listen to the views of the industry and we aim to consult the public at the end of this year or early next year,' a spokesman for the authority said.
Mark Konyn, chief executive of RCM Asia Pacific, part of global financial services provider Allianz, said: 'The industry is very surprised by this potential delay and that the issue of having salespeople correctly trained has been added at a late hour in the process.
'One would have thought that this potential obstacle would have been known much earlier in the process. Nevertheless, the issue is very important as we learned with the minibonds issue. Any mis-selling by an insurance agent or bank employee would be significantly more damaging given the mandatory nature of the MPF.'
The delay is seen as benefiting service providers, which would have faced pressure to lower fees, expand their fund offerings and introduce other incentives to attract or retain clients under the new arrangement.
Investors in MPF funds may be charged trustee and administrator fees, management fees and other operating expenses related to a fund's operation. Fund data compiled by the pension fund authority show annual fees ranging from 0.13 per cent to about 4 per cent of assets.
Hong Kong Investment Funds Association chief executive Sally Wong Chi-ming believes the authority needs more time to review changes in the regulatory landscape governing intermediaries in the aftermath of the minibonds debacle.
'It is pertinent that the Mandatory Provident Fund Schemes Authority explain as soon as possible to the community, in particular the industry, the objective, direction, focus and scope of the proposed changes.
'For example, are the changes in relation to licensing requirements, code of conduct, sales practice, or what? In terms of outcome, what we wish to see is consistency in standards across the sectors. Also, we want greater clarity on the roles of the regulators, assuming that different regulators will continue to be involved in this process,' she said.
Currently, an employer gets to pick the service provider, such as a bank, insurance company or fund house, while the employees decide how the contributions are invested. However, banks are regulated by the Hong Kong Monetary Authority, fund houses are policed by the Securities and Futures Commission and insurers are monitored by the trade.
Pick and mix
The number of employees who would have been able to choose their own funds under the new arrangement: 2.3m