PLC Paper No. CB(1)1141Regulatory Standards
(These minutes have been
seen by the Administration)
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 Schedule 3
Proposed section 12
2 The Chairman expressed concern about the risk involved in allowing a MPF scheme constituent fund to subunderwrite debt securities as in proposed section 12. In response, the Assistant Director/Regulatory Standards (AD/RS) explained that the Administrations policy intent was to allow a constituent fund to subscribe securities from an underwriter or subunderwriter, but not to earn commission through subunderwriting. The Administration would examine whether the wordings of the proposed section could clearly reflect the said policy intent.
Proposed section 14
3 In response to members, AD/RS clarified that the main purpose of allowing a MPF constituent fund to acquire financial future/options contracts was for hedging against risks on investments held by the fund. As a safeguard requirement, proposed section 14(1)(b) stipulated that financial future/options contracts acquired by the fund for purposes other than hedging could not exceed 10% of the market value of the fund as measured by effective exposure.
4 AD/RS advised that provisions under proposed section 14 seeking to regulate financial future/options contracts were more stringent than similar requirements imposed by the Securities and Futures Commission (SFC) on investment funds.
5 Some members considered that there should also be a prescribed quantitative limit on the acquisition of financial future/options contracts by a MPF constituent fund for hedging purpose. In this connection, AD/RS clarified that under proposed subsection (7), the effective exposure of financial future/options contracts acquired by a constituent fund for hedging purpose could not exceed the value of the assets whose risks were being hedged. Moreover, the MPFA would issue guidelines to set out the control requirements in detail.
Proposed section 15
6 Noting that proposed subsection (1) required that at least 30% of a constituent fund had to be held in Hong Kong dollar currency investments, some members considered that the proposed percentage limit should be increased to 50% in order to ensure that the majority of MPF funds would be invested in Hong Kong to boost its economy. In response, the Administration considered that the proposed 30% requirement had struck a reasonable balance between providing flexibilities needed by investment manager to maximize investment return and ensuring a reasonable amount of funds being invested in local investments to reduce currency risk. Moreover, the 30% threshold was closely in line with existing market practice. In this regard, Miss CHAN Yuen-han indicated that the Democratic Alliance for Betterment of Hong Kong might consider raising the percentage to 50%.
7 AD/RS advised that reference to "section 14(2)" in proposed subsection 3(e) would be amended to "section 14(3)" and reference to "section 14(4)" in proposed subsections 3(f) and (g) would be amended to "section 14(5)".
Proposed section 16
8 Members noted that when the funds of a constituent fund of a MPF scheme were invested in an underlying pooled fund managed by the investment manager concerned or its associates, no double charging of fees by both funds was allowed under proposed section 16(2)(j). However, members were concerned about the charging of fees when the funds were invested in another pooled fund not managed by the investment manager concerned or its associates. In response, AD/RS explained that the wordings of the proposed section were adopted from the SFCs code of practice on investment funds. Nevertheless, the Administration would consider tightening the restriction on double charging.
Proposed section 17
9 To facilitate compliance by service providers, AD/RS advised that the MPFA would issue guidelines on investments in unit trusts or mutual funds with reference to the relevant code of practice of the SFC.
Proposed section 18
10 In response to members, AD/RS explained that under proposed section 18(1)(d), a MPF constituent fund would be allowed to invest in an investment linked insurance policy if the policy was fully unitised. The proposed requirement could enhance transparency of the investment return of the insurance policy concerned.
Proposed Schedule 4
11 Noting that the concept of trust was mainly found in common law jurisdictions, the Chairman was concerned whether eligible companies incorporated in other jurisdictions with a different legal system (e.g. civil-code countries in Europe) would be debarred from being a custodian of a registered scheme. To address the Chairmans concern, the Administration would consider necessary amendments to the proposed Schedule.
Proposed section 2
12 AD/RS advised that the proposed section would be amended to stipulate that custodians were required to keep separate accounts to differentiate MPF scheme assets from other assets kept by the custodian.
Proposed section 3
13 The Administration advised that it would add to proposed subsection (b) the requirement that where the scheme assets were made subject to lien or other encumbrance for the purpose of borrowing money for acquisition of assets, the amount of the borrowing could not exceed 10% of the value of the scheme assets at the relevant time.
Proposed section 5
14 The Chairman considered the present drafting of the proposed section on the extent of liability of the custodian for losses of scheme assets was too restrictive. He opined that, for example, losses of scheme assets due to negligence of the custodians employees should also be included under the proposed section. In response, the Administration would re-examine the proposed provisions relating to the liabilities of the custodian.
II Any other business
15 In reply to a member, the Director/MPF Office (D/MPFO) confirmed that the consultant engaged to develop the MPF subsidiary legislation had not submitted a formal report. Instead, the consultants recommendations had been incorporated into the draft subsidiary legislation. The consultant had provided a written document confirming completion of its assignments. In response to some members request, D/MPFO would check whether the terms of the consultancy agreement would permit release of the said written document.
(Post-meeting note: The "Final Report for the Consultancy for Provision of Professional Service to Mandatory Provident Fund Office" provided by the Administration has been circulated to members vide PLC Paper No. CB(1)833 dated 22 January 1998).
16 In reply to the Chairman, D/MPFO confirmed that the Administrations proposal on reconstitution of the MPFA together with the relevant Committee stage amendments (CSAs) could be forwarded to members before the Bills Committee meeting on 22 January 1998. In this regard, the Chairman also requested the Senior Assistant Legal Adviser (SALA) to start preparing draft CSAs on the reconstitution of the MPFA along the lines proposed by members at the Committee meeting held on 10 January 1998.
17 D/MPFO said that assuming that the Bill would be passed on 25 February 1998, the draft subsidiary legislation incorporating, where appropriate, members suggestions and the amendments made to the principal Ordinance would be considered by the Executive Council (ExCo) in early March 1998. After the subsidiary legislation had been made by ExCo, the Administration would move a motion at the PLC meeting on 1 April 1998 for the approval of the subsidiary legislation.
18 In view of the legislative timetable proposed by the Administration, members agreed that the Bills Committee should hold a further meeting on 12 February 1998 to examine whether the revised draft subsidiary legislation had addressed members concerns raised at past meetings. Members also agreed that another meeting would be scheduled for 11 March 1998 to discuss the subsidiary legislation as finalised by the ExCo.
19 The Chairman reminded members that the next meeting would be held on 19 January 1998 at 10:45 am.
20 The meeting ended at 1:00 pm.
Provisional Legislative Council Secretariat
16 March 1998