Haitong International's asset management business development head in Hong Kong has recommended a cap on MPF custodian and administration charges, in a bid to let asset managers share fees more equitably.
It comes amid continuing debate over a fee cap to be imposed on providers of Hong Kong’s mandatory pension system, which has led to warnings of consolidation in the industry.
While Young Zhao, managing director, asset management at Haitong International, affirmed the company’s commitment to the MPF market “for the moment,” he has made it clear that Haitong struggles with the idea of delivering an acceptable product and service for the fees mandated by the government.
“It’s a real issue for us,” Zhao told AsianInvestor, referring to the 0.75% cap on fees to be introduced under the new "default" fund proposals. “It will be hard for asset managers to make any money.” He says the fee cap actually threatens the sustainability of the retirement savings market: “You have to ask the question who will stay in the long run?”
In March, the Hong Kong government and the Mandatory Provident Fund Schemes Authority (MPFA) introduced new rules requiring a reduction in fees and the introduction of a new low-cost default fund. Local and smaller fund providers are expected to be worst hit by rules imposing a fee cap of 0.75%.
Zhao suggests that if this is the way the industry is going then a 50% cap should be placed on the amount custodians and fund administrators can charge. “If they say 75bps is the whole fee, then the custodian fees should be no more than half of that. That is at least one way of addressing the fee pressure on asset managers”.
Industry observers have speculated there will be consolidation among MPF providers and that naturally the smaller players will be the first to go. Zhao says Haitong, as one of the smaller providers, remains committed.
“At the moment we don’t have any intention of exiting the market. We are one of the few Chinese companies offering an MPF service and we want to continue serving the Hong Kong retirement community. But in order for the industry to be sustainable in the long term, the rules need to allow providers to make money.”
The local regulator takes an unsympathetic view of this idea. Darren McShane, executive director for regulation and policy at the Mandatory Provident Fund Schemes Authority, told AsianInvestor that the 50/50 fee split idea “would add an extra layer of complication” to the situation, adding that “it would suit some people and not others” (for example, fund managers who are part of a bank).
“We don’t care how they get to the 75 basis points," said McShane. "It’s up to the asset managers and service providers to work that out.”
Haitong’s situation is even more complicated because it has a policy of waiving management fees on its products. The fee waiver operates from 2013 until 2016. “We don’t take a penny until 2016,” says Zhao.
However, the trustee fees and other expenses, which amount to roughly 50bps, were not waived.
Having decided to operate its MPF products as a loss-leader for this period, Haitong now faces the prospect of not making any money on them even after 2016.
Zhao suggests the fall-out from the fee cap “might hurt investors in the long run,” if there is less competition and only a few passive funds to choose from.
Asked what Haitong is likely to do, given this unsustainable fee gap, Zhao says, “It depends on how the market evolves from a cost point of view.” If the rules are imposed as drafted, “some providers will think about getting out. Consolidation is inevitable. It’s just a question of who is going to link up with whom.”
He would not confirm if Haitong had considered merging: “It’s not a decision we are making yet. We are looking at the options.”
The government is preparing to introduce the new MPF legislation “in the summer,” said McShane, with implementation by the end of 2016 as the goal.