Funds industry figures have welcomed last week’s move by Hong Kong’s Legislative Council to pass amendments to the city’s Mandatory Provident Fund scheme, but concerns remain over the potential impact.
The bill clears the way for Employee Choice Arrangement (ECA) to be introduced on November 1 this year, empowering the city’s 2.3 million employees and 300,000 self-employed to have a greater say over their MPF savings.
In general, ECA's introduction is expected to put downward pressure on fees and lead to a reduction in the number of trustees over time, with some of the smaller players retreating. (AsianInvestor and the Hong Kong Retirement Schemes Association are organising a seminar on the likely impact of ECA on September 7.)
“The ECA will probably lead to more focus on efficiency and hopefully because people will have a choice to decide where their money goes there will be a bit more focus on performance,” says Kerry Ching, Hong Kong head of FIL Investment Management and chairwoman of the Hong Kong Investment Funds Association.
“I think there will definitely be downward pressure on fees once members have the opportunity to switch. The issue is how much, and how soon,” she adds.
Ching notes that the onus will be on education with the fear that if employees focus on short-term performance and therefore switch schemes quite regularly, they are exposed to out-of-market risk – let alone the increase in administration work from a trustee and administration point of view.
She agrees that ECA will likely lead to a reduction in the number of MPF trustees in Hong Kong, which presently stands at 16, but an increase in the number of schemes being run -- which could be confusing for members.
“What you will probably see over the next few months is a lot of marketing and advertising efforts from MPF scheme providers," Ching adds. “I think it will be quite intense, and you can expect to get some cold-calls."
She believes some of the smaller MPF scheme providers may opt to retreat and to refocus on core business. "I think it is likely that there will be talk of mergers and acquisitions. The processing of defined contribution schemes really is a scale business,” she says.
Jeremy Gadbury, principal of consultancy Gadbury Group, which provides research into MPF and publishes MPF and market share statistics, agrees there will likely be a reduction in MPF trustees.
He makes the point that while authorities are chiefly concerned about regulating the selling process of intermediaries, what appears to have been overlooked is what employees are entitled to in terms of information.
“You can tighten the regulatory regime in terms of who can give you information, but there does not seem to be much about what information you are going to get,” puzzles Gadbury.
He notes that intermediaries will likely be incentivised to sell certain products, without obligation to provide information on fees or whether similar and cheaper products are available.
ECA will allow employees to transfer once per calendar year (from January 1 to December 31) accrued benefits derived from their own mandatory contributions made during current employment to a trustee and a scheme of their choice.
Upon implementation of ECA, it is estimated that the size of transferable MPF assets will increase from 41% to more than 67% of total MPF assets.
Together with passage of the bill, a statutory regulatory regime for MPF intermediaries will also be set up with an implementation date of November 1.
This is designed to enhance regulation of sales and marketing of MPF schemes, which is expected to become more intensive after the launch of ECA. As at May 31, there were 30,406 MPF intermediaries registered with the MPF schemes authority (MPFA).
Under the incoming regulatory regime, the MPFA will register MPF intermediaries and issue guidelines on compliance with statutory conduct requirements. It will handle complaints on MPF sales and marketing and in misconduct cases will impose disciplinary sanctions.
After the bill comes into effect on November 1, it will be an offence for anyone who is not a registered MPF intermediary to engage in the sale or marketing of MPF schemes.
Intermediaries will be required to follow prescribed conduct requirements, which include acting honestly, fairly and in the best interests of their clients, disclosing sufficient information and making efforts to avoid conflicts of interest. Intermediaries will be subject to disciplinary sanction for non-compliance, including reprimand, fines and revocation or suspension of registration.
Gadbudy is hopeful that the MPFA will clarify the information that people are entitled to before ECA implementation. "They need to know what fees they're paying; if the product they are in appears elsewhere in the system; what the investment policies are and what the likely outcome is of being in those investment policies," he says. "And they need to have some idea whether the product or scheme is appropriate for them over the long term.”
He expects to see greater emphasis from trustees on improving their own websites and sources of information to make sure existing members feel comfortable with the service they are receiving. “The more they understand about the products, the less likely they are to succumb to a cold-call insurance agent,” he adds.
He suggests the regulator should make it more difficult to sell products in terms of information flow. “But the more difficult they make it to sell them, the less interested anyone is in selling," he concedes. "When dealing with individuals whose balances are not very high, the result could be that nothing happens.”