MPF providers fear power grab

Upcoming changes to Hong Kong regulation has sparked fears among service providers that the Mandatory Provident Fund Schemes Authority (MPFA) is extending its power at the expense of the investment management industry – and the market. Leading banks, insurance companies and fund managers have long complained MPFA is deaf to their concerns, and they are trying to find new ways – perhaps even an ultimatum to leave the business – to counter what they see as excessive regulation.

First, the amendment. It has been a long-publicized fact that the rules governing MPF would need a lot of tweaking. The US 401(k) market is so successful because it has been modified over the years in a trial-and-error manner. Wise master trust administrators have processing systems flexible enough to be changed over time. MPF providers had hoped future changes would harmonize and simplify the scheme.

That doesn’t appear to be happening. Instead, providers see MPFA out to tell them how to do their job. According to one provider, a law firm has responded to a review of the amendment as follows: “Of particular concern are proposals of MPFA to have prosecuting authority, extension of the regulatory framework to voluntary contributions and the implication that the Authority wants to control changes in fees, investment policies and the like.”

For example, the new rules would require MPFA approval to any change in fees or investment strategy as outlined in providers’ brochures, according to several angry service providers. Existing MPF-exempt ORSO schemes (these are pre-MPF private corporate pension plans) couldn’t change vesting periods or other features either.

Fumes one provider: “Hong Kong contracted out MPF to private organizations. But these new changes tell us how much we can change and what we can invest in. There’s a general consensus that MPFA is overstepping their regulatory requirements and not addressing the key issues of how the system is addressing the community.” For example, many administrators would like to see the MPF calculation process for employers greatly simplified.

The amendment will also give MPFA new prosecuting powers, which could even see lawbreaking service provider executives go to jail. A lawyer complains: “Even MPFA admits the original legislation is flawed, and have said there’s something like 150 points needing refinement or clarification. But they’ve chosen to expand their powers instead of deal with these issues. In our experience, they’ve been officious and heavy-handed about technical breaches that arise due to these flaws. That they’d have the power to prosecute is therefore worrying.”

Companies have also filed complaints about MPFA exceeding its power under the current law. Lawyers say the amendment will extend the MPFA’s bailiwick so that these previous actions become legal.

Another service provider believes the amendments are ill-timed; he says the government should let MPF get its legs and see what’s working and what’s not before it starts legislating further changes. MPF contributions kicked off on 1 December 2000.

Providers are gloomy about their prospects for blunting this new legislation. The amendment, drafted by the Financial Services Board, was sprung on them last week, and the industry organizations separately representing fund managers, banks and insurance companies have until Friday to submit comments to the Legislative Council. MPFA executives declined to respond to calls and faxes seeking comment.

Industry players feel their trade organizations are not up to the task of pushing service providers’ views. They’re mostly good at training seminars and conferences, which are worthy but insufficient. “FSB has not been interested in our ideas in the past,” says one industry lawyer. “We’re beating our heads against a wall.”

As a result, a number of executives are forming an embryonic lobbying group that crosses industry lines. It’s begun very informally – dinners and phone calls. This group hopes to meet on a more formal basis by the end of March.

But others in the industry are agitating for something more dramatic. They argue if the Hong Kong Trustees Association, Hong Kong Retirement Schemes Association and Hong Kong Investment Funds Association are toothless, this new one will be too. They argue what really needs to happen is for the top MPF trustees – HSBC, AIA, Manulife, Bank of Bermuda and AXA, say – to force a showdown with MPFA. “They should just see Charles Lee [chairman of MPFA] and threaten to pull out of the MPF business unless some changes are made,” says one service provider, Molotov cocktail in hand. “It’s coming down to that.”