On 4 April 2019 the Hong Kong government published the long-awaited Occupational Retirement Schemes (Amendment) Bill 2019. This Bill is designed to:
- ensure that retirement schemes which are registered or exempted under ORSO are "employment-based" (thereby outlawing certain purely investment-based products which have sprung up since ORSO commenced in the mid 90s)
- grant the MPF Authority (MPFA) increased powers and discretion to investigate, approve or reject applications for registration, and
- limit the circumstances in which retirement schemes can, in the future, apply for exemption under ORSO
These anticipated changes have been previously considered in our earlier alerts of:
Hong Kong's Mandatory Provident Fund Schemes Authority proposed new changes to the Occupational Retirement Schemes Ordinance, 19 June 2018
MPFA Launches Consultation to Overhaul Hong Kong Retirement Schemes Regime, 14 December 2017
This alert is not a review of the minutiae of the draft legislation (that would be staggeringly dull). Instead it is intended to give a flavour of the more important consequences of the legislation, and some of the concerns arising from the changes.
- Requiring all registered or exempted ORSO schemes to be "employment-related"
This is the most fundamental, and intrusive, change to the Hong Kong retirement schemes regulatory regime. It will require the employer of every single one of the over-4,000 ORSO registered or exempted schemes to confirm annually that each scheme satisfies the "employment-related criterion".
A scheme satisfies the "employment-related criterion" if, in simple terms:
- the only persons who are members of the scheme are employees (or former employees) of the employer, or employees of a former employer in respect of which a transfer has been made to the scheme, and
- no other types of person (i.e., non-employees) are permitted to become members of the scheme
The current draft of the Bill contains unusual provisions deeming "full-time" independent contractors to be "employees". Precisely how this is intended to work (or, indeed, why it is even in the legislation) will no doubt be explained in due course.
An unexpected consequence of the proposed legislative changes is a material narrowing of the definition of "occupational retirement scheme" in ORSO by excluding from such definition any scheme or arrangement which does not limit membership to, in essence, "employees". Whilst this means that any scheme or arrangement which is open to any non-"employee" cannot be registered or exempted under ORSO, it also means that it will not be unlawful under section 3 of ORSO to contribute to or administer such a scheme. It is unclear whether this was the intention of the government. If it was, and so if this drafting is adopted, then it is possible that this may give rise to a new class of arrangement which is non-registered, non-exempt retirement schemes which cannot provide tax efficient benefits, but which are broadly unregulated.
Comment: The essence of this change is well intentioned and should be relatively easy for employers to embrace (other than, of course, the schemes which are not employment-related!). It will require each of the 4,000 schemes in existence to be considered in order to ensure that the membership rule is sufficiently tight so as to exclude "non-employees". We do have a slight concern that there may be overseas schemes that are currently exempt under ORSO and may have standard membership clauses which do not expressly exclude non-employees. If this is the case then this could result in major restructuring arrangements for such schemes, their employers and the impacted employees.
- Increasing the investigation powers of the MPFA
The Authority is seeking powers of investigation which are broadly aligned with those provided to other regulatory authorities in Hong Kong.
Comment: This change should not be a cause of any particular concern.
- Limiting the circumstances in which a future retirement scheme can be exempted under ORSO
This change has been the subject of substantial discussion over the last year or so. It is also the primary topic of the two previous alerts from us referred to above.
This change will materially narrow the circumstances in which a retirement scheme can obtain an ORSO exemption certificate in the future. The principal concern is that it is not at all uncommon for an international business looking to set up in Hong Kong (or send globally mobile international executives to Hong Kong) to wish to employ executives in Hong Kong who are members of an overseas retirement scheme (a "Home Country Scheme"). In order to avoid committing an offence under ORSO the employer must obtain an exemption certificate for the Home Country Scheme.
Currently there is a clear and obvious route to enable the Home Country Scheme to obtain an exemption certificate (the "no more than 10 percent or 50 members being Hong Kong permanent identity cardholders" route). The proposed changes will result in this clear and obvious route being removed in its entirety. This will mean that the ONLY way in which the Home Country Scheme can obtain an exemption certificate is by applying under the (very rarely used) section 7(4)(a) ORSO. This section enables the MPFA to grant an exemption certificate where the applicant scheme is "registered or approved by a regulatory authority outside Hong Kong performing functions which are generally analogous to those of the [MPFA]" (the "analogous authority exemption").
Comment: The MPFA has historically failed to provide any guidance as to which "regulatory authorities outside Hong Kong" satisfy the criteria of providing analogous functions.
Notwithstanding numerous requests and despite the hugely increased importance of this analogous authority exemption, the MPFA continues to refuse even to commit to providing information to the retirement scheme industry of which overseas authorities it considers satisfy the condition of "performing functions which are generally analogous" to those of the MPFA.
This refusal to provide such information is a cause of concern. Either the MPFA is refusing to explain its position due to a desire to keep this exemption option very narrow (which would be a material issue for employers, and lawmakers, to consider when debating the impact of this legislation on Hong Kong) or the MPFA is unaware of the powers and functions being undertaken by its fellow regulators generally, which raises a separate set of concerns!
In any case, we would strongly encourage the MPFA to clarify this important issue, and for lawmakers to insist on a disclosure by the MPFA of the manner in which it intends to apply the analogous authority exemption.
When it gets to the stage of commenting on the drafting of the Bill then much of the "devil" will almost inevitably be in the "detail". Certainly most of the changes set out in the Bill were expected. That does not, however, mean that the implementation of the changes or, indeed, the impact of the changes is going to be seamless or painless. There will be pain and there will be disruption. The amount of pain and the amount of disruption can be minimised by transparency from the regulators who will oversee these changes, and by continued constructive dialogue with the industry as a whole. Many of these changes will be felt hardest by global employers who have operations in Hong Kong. If the new legislation is introduced in a clumsy or heavy-handed manner then this will impact Hong Kong's reputation globally.