Provisional Legislative Council
PLC Paper No. CB(1)1140
(These minutes have been
seen by the Administration)
Ref : CB1/BC/3/97
Bills Committee on
Provident Fund Schemes
Legislation (Amendment) Bill 1997
Minutes of the meeting held on Saturday, 17 January 1998, at 8:30 am in the Chamber of the Legislative Council Building
Members present :
Hon Ronald ARCULLI, JP (Chairman)
Hon WONG Siu-yee
Hon LEE Kai-ming
Hon Mrs Peggy LAM, JP
Hon Henry WU
Hon CHAN Yuen-han
Hon CHAN Kam-lam
Hon YEUNG Yiu-chung
Members absent :
Dr Hon LAW Cheung-kwok (Deputy Chairman)
Hon James TIEN Pei-chun, JP
Hon HO Sai-chu, JP
Hon MA Fung-kwok
Dr Hon Mrs TSO WONG Man-yin
Hon Ambrose LAU Hon-chuen, JP
Hon Paul CHENG Ming-fun, JP
Dr Hon TANG Siu-tong, JP
Hon NGAN Kam-chuen
Hon CHOY So-yuk
Public officers attending :
- Mrs Pamela TAN
- Mandatory Provident Fund Office
- Ms Maisie CHENG
- Assistant Director
- Scheme Operations
- Mr Raymond TAM
- Assistant Director
- Regulatory Standards
Clerk in attendance:
- Miss Polly YEUNG
- Chief Assistant Secretary (1)3
Staff in attendance :
- Mr LEE Yu-sung
- Senior Assistant Legal Adviser
- Miss Connie FUNG
- Assistant Legal Adviser 3
- Mr Daniel HUI
- Senior Assistant Secretary (1)5
I. Meeting with the Administration
1 Members continued scrutiny of the draft Mandatory Provident Fund Schemes (General) Regulation (the draft Regulation) and deliberated on the following proposed sections.
Proposed section 189
2 Members considered that there should be a system of warning and records in respect of approved trustees who had repeatedly failed to comply with requirements on payment or transfer of funds in handling withdrawal and portability cases even though such contraventions were rectified subsequently by the trustees. In this regard, the Assistant Director/Scheme Operations (AD/SO) explained that under proposed section 189(4), the service provider of a MPF scheme could issue written notice to the trustee requesting an explanation on non-compliances. Such correspondences could form a record on the trustees non-compliances. Moreover, the Mandatory Provident Fund Schemes Authority (MPFA) would in future issue guidelines to its own staff and service providers on implementation of proposed section 189(4).
|3 In response to the Chairmans request, the Administration would consider deleting "Before reporting a matter to the Authority in accordance with subsection
(1)" from proposed section 189(4) in order to reflect clearly that even though a service provider had no intention to report a matter to the MPFA, the service provider might still issue a written notice to and seek explanation from the approved trustee of the MPF scheme on matters as stipulated in proposed subsection (1).
|4 Members considered that the MPFA should be allowed the flexibility under proposed section 189(7) to appoint an auditor, other than the schemes auditor, to report on whether the trustee had rectified a matter in accordance with the MPFA direction given under proposed subsection (6). In response, the Administration would examine whether the word "must" in proposed subsection (7) should be replaced by "may" to provide greater flexibility to the MPFA in this regard.
|5 AD/SO advised that the reference to "service provider" in proposed subsection (7)(a) would be replaced by "auditor" to rectify a drafting error. Moreover, a penalty provision would also be added to deal with a trustees failure to rectify a matter in accordance with the direction given by the MPFA.
Proposed Schedule 1
6 In response to members enquiry, AD/SO explained that the fees to be charged by the MPFA would be computed on a cost recovery basis. The proposed fees could only be finalized after all the relevant subsidiary legislation for implementation of the MPF System were approved. She added that the proposed fees would be subject to the approval of the legislature.
7 As regards the proposed fee structure, AD/SO clarified that the Administration had accepted the proposal of the former LegCo Subcommittee on MPF System that the MPFAs fees should be a fixed percentage of the value of the scheme assets. The Administration estimated that the fees received by the MPFA in the initial few years would not be able to cover the operating expenses and the shortfall would have to be covered by the seed money of $5 billion provided by the Government.
Proposed Schedule 2
|8 The Chairman considered that the investment manager of a MPF scheme should be allowed to acquire securities through pre-initial public offer placement as a means to increase investment return. In response to the Chairman, the Administration would examine whether the wordings of proposed item (2)(k) of the investment management contract at proposed Schedule 2 were sufficiently embracive to allow the investment manager to acquire securities through pre-initial public offer placement.
Proposed Schedule 3
Proposed section 2
|9 Noting that proposed section 2 of Schedule 3 stipulated that not more than 10% of the total funds of a MPF constituent fund could be invested in securities issued by one person or in a particular class of securities issued by one person, members pointed out that there could be technical breaches of the requirement due to changes in value of different classes of securities after their acquisition. They suggested that some flexibilities should be provided in the proposed section to cater for possible technical breach of the requirement. In response, the Administration clarified that best market practice was in place to cater for portfolio adjustment to meet the 10% rule. At members request, the Administration would provide further information in writing on the prevailing market practice for portfolio adjustment. It would also examine whether the proposed section would need to be revised.
Proposed section 3
|10 At the Chairmans request, the Administration would examine whether the wordings of proposed section 3(1) would give rise to anomaly since the situation of short-selling should not arise if securities were being held.
Proposed section 7
|11 The Assistant Director/Regulatory Standards (AD/RS) advised that proposed section 7(2) would be amended by adding "only" after "may" to rectify a drafting error.
|12 In reply to a member, AD/RS confirmed that bonds issued by China were permissible investments under the proposed section provided that they satisfied the credit rating requirements. As requested by the member, the Administration would try to obtain data on the yields of bonds in China for members information.
Proposed section 9
13 In reply to the Chairmans enquiry on the need for proposed section 9(b), AD/RS explained that the proposed requirement on minimum credit rating of a convertible security was needed in order to ensure that funds of a MPF scheme were to be invested in high-quality and high-liquidity convertible securities.
Proposed section 10
|14 Noting that under proposed section 10(1)(b), a MPF fund could acquire a warrant only if the underlying securities to which the warrant might be converted were listed on a recognized stock exchange, the Chairman pointed out that a MPF fund acquiring newly issued shares and warrants might have technically breached the proposed requirement because at the time of purchasing the warrants, the shares to which the warrant might be converted were not yet listed. In response, the Administration would examine whether the wordings of the proposed section 10(1)(b) would need to be revised.
Proposed section 11
15 Members considered it too risky to allow a constituent fund of a MPF scheme to deposit up to 25% of the total market value of the fund with a group of associated authorized financial institutions or eligible overseas banks as stipulated under proposed section 11(4). In response, AD/RS explained that a safeguard was provided in proposed subsection (2) requiring the total amount deposited by a constituent fund with an authorized financial institution or an eligible overseas bank to be not more than 10% of the issued capital and reserves of the institution or the overseas bank.
16 As regards the monitoring of compliance of the proposed requirements on deposits with financial institutions, AD/RS advised that the approved trustee would be responsible for the day-to-day monitoring of investments held by constituent funds of the registered scheme. In addition, the MPFA inspectors would also conduct regular field inspections to check on compliance by trustees and investment managers.
II Any other business
17 The Chairman reminded members that the next meeting would be held at 10:45 am on the same day.
18 The meeting ended at 10:30 am.
Provisional Legislative Council Secretariat
16 March 1998