The Mandatory Provident Fund Scheme Authority (the "Authority") is pushing ahead with a relatively radical (and controversial) restructuring of the retirement scheme regulatory environment in Hong Kong. This update considers the main changes proposed by the Authority and examines the consequences of such changes.
What are the changes?
The proposed changes are set out in a recent paper to the relevant Legislative Council panel titled Proposed Amendments to the Occupational Retirement Schemes Ordinance (the "ORSO"). The paper details the following changes:
(a) Confirmation that each ORSO scheme satisfies the "employment-based criterion":
The employer of all existing ORSO schemes will be required annually to file a statement confirming that the benefits provided for scheme members derives from an employment relationship (the precise wording the paper uses is that "employment-based criterion" is satisfied). Every application for new registration of a retirement scheme under ORSO will need to include:
a statement from the employer confirming "employment-based criterion" is satisfied;
a solicitor's statement that the scheme rules provide that the scheme requires satisfaction of the "employment-based criterion"; and
an auditor's statement that the membership actually satisfies such requirement.
(b) An absolute ban on new exemption applications under ORSO:
The Authority will not entertain any new application for an ORSO exemption certificate for any retirement scheme.
(c) The imposition of a new restriction on transfers to ORSO schemes:
ORSO schemes can only accept transfers from other retirement schemes that satisfy certain conditions.
(d) Increased powers for the Authority:
Increased powers for the Authority of inspection, investigation and enforcement and for the cancellation of registration or withdrawal of exemption of existing schemes.
Why is the Authority making these changes?
The Legislative Council paper sets out what the Authority describes as the "Problem". In essence the Authority is concerned about certain products, which are being marketed as investment products but which have managed to obtain registration or exemption under ORSO. The Authority (rightly in our view) states that such investment schemes "do not fall into the ambit of [ORSO]" and therefore such "misuse of registered and exempt" schemes would compromise the integrity of the regulation of investment products in Hong Kong.
There is little doubt that in the 23 years since the arrival of ORSO certain "entrepreneurial" businesses have used the relatively relaxed ORSO regime to establish registered or exempted "retirement schemes" and then use such schemes as vehicles for non-employment related investment products.
It is correct that such schemes are not occupational retirement schemes and they should not have been registered or exempted under ORSO. The fact that they have managed to obtain registration or exemption status is unfortunate, therefore the Authority should find a way of flushing them out and removing them from ORSO (thereby requiring themselves to become regulated by the Securities and Futures Commission, or a similarly appropriate regulator).
Are the proposed changes the most appropriate way of solving the "Problem"?
In order to solve the Problem, which has been identified, the Authority needs the ability to:
identify offending schemes; and
exclude them from the ORSO environment.
That is all that the Authority needs. Instead, they have gone much further. They are proposing the ban on any schemes in the future being granted exemption certificates. This is regardless of whether the schemes are bona fide schemes or not. The Authority is, in effect refusing even to contemplate considering whether an applicant for exemption is bona fide.
This is unfortunate and, in our opinion, both damaging for Hong Kong and could be interpreted as the Authority avoiding its responsibility to regulate schemes simply by banning an entire type of scheme from Hong Kong.
Instead, the Authority could maintain exempt status, but increase the standards necessary for an exemption certificate to be granted. For example, it could easily have imposed the "employment-related criterion" on exempt schemes as well as registered schemes.
Will the proposed changes have any negative impact on Hong Kong?
Yes they will. The banning of exempt schemes will impact the attractiveness of Hong Kong as a regional hub for global business. This is a point that we have previously explained in our Legal Update of 14 December 2017 MPFA Launches Consultation to Overhaul Hong Kong Retirement Schemes Regime.
There are many schemes, which are set up by multinational businesses for their most senior internationally mobile executives. These schemes are not capable of being registered under ORSO and, therefore, when a member of such schemes is sent to Hong Kong these schemes have historically applied for (and been granted) exemption on the basis that less than 10% or 50 members are Hong Kong permanent residents. Such exemption permits the internationally mobile executive to remain in the overseas scheme whilst the executive works in Hong Kong.
If ORSO exemption is no longer available for such schemes then either the executive will need to cease membership of the scheme whilst in Hong Kong (a deeply unattractive proposition) or the executive will refuse to come to work in Hong Kong and instead will likely work in Singapore, or elsewhere.
The Authority has failed to take this issue on board. Indeed, there is a section in the Legislative Council paper dealing with "Implications". This section states that "we [the Authority] are mindful that the improvements will not inadvertently exclude bone fide employment-based retirement schemes set up by employers". Unfortunately, this statement is wrong. The changes will achieve precisely this result (how could it not, it is excluding ALL schemes!).
This change is unnecessary and damaging. If they are made as proposed then they will throw the "global-employer-wanting-to-move-internationally-mobile-executive-to-Hong-Kong" baby out with the "offending-investment-structure-entrepreneur" bathwater.
The Legislative Council Paper is available at: https://www.legco.gov.hk/yr17-18/english/panels/fa/papers/fa20180604cb1-1027-4-e.pdf