Mandatory Provident Fund Quiz 08

Correct: According to the Guidelines on Conduct for Registered Intermediaries, when an intermediary invites, induces, or advises a client regarding transfers under the Employee Choice Arrangement (ECA), they are mandated to provide a copy of the “Guide to Transfer Benefits under Employee Choice Arrangement” to the client. Crucially, the intermediary must also duly explain the contents of this Guide, which includes information on the transfer process and the expected timeframe, to ensure the client is fully informed before proceeding.

**Incorrect:** Simply informing a client that the Guide is available on the MPFA website or providing a link is insufficient, as the guidelines require the intermediary to proactively provide the document and explain it. Requiring a client to sign a declaration of independent reading does not fulfill the intermediary’s duty to explain the contents themselves. Furthermore, the obligation to provide and explain the Guide is a standard procedural requirement for all ECA-related advice or invitations, not a conditional action based on whether the client asks about specific risks like the out-of-market time lag.

**Takeaway:** For all Employee Choice Arrangement (ECA) transfers, registered intermediaries must provide the official MPFA Guide to the client and provide a proper explanation of its contents to facilitate a transparent transfer process.

Correct: A Class G insurance policy is a specific type of investment vehicle within the MPF framework that offers guarantees on capital or returns. According to regulatory requirements, such a policy must be backed by a guarantor to ensure the promised security. This guarantor can either be the insurance company that issued the policy itself or a third-party financial institution that has been authorized by the Monetary Authority (MA). This structure provides scheme members with a level of certainty regarding their investment outcomes.

**Incorrect:** It is incorrect to suggest that the issuing insurance company is prohibited from managing the underlying fund, as regulations allow the fund to be managed by either the insurer or an appointed professional investment manager. Describing the policy as an aggressive growth vehicle focused on global equities is also inaccurate, as Class G policies are characterized by their guarantees rather than high-risk capital appreciation. Furthermore, while capital preservation is a feature, a Class G policy is a distinct insurance-based product and should not be confused with a standard Money Market Fund, which typically invests in short-term interest-bearing securities like treasury bills without a formal guarantee from an MA-authorized third party.

**Takeaway:** Class G insurance policies provide MPF members with guaranteed capital or returns and must be supported by a guarantor, which can be the insurer or a financial institution authorized by the Monetary Authority.

Correct: Under the Guidelines on Conduct Requirements for Registered Intermediaries, all four elements are core pillars of professional conduct. Intermediaries must act with integrity and in the client’s best interests (I), manage and disclose any potential conflicts of interest (II), ensure clients have all necessary information to make informed decisions (III), and perform their duties with the expected level of professional care and skill (IV).

**Incorrect:** Options that exclude any of these components fail to capture the full scope of the regulatory expectations. These requirements are cumulative and mandatory for all registered intermediaries when carrying out regulated activities, such as advising on MPF schemes or constituent funds.

**Takeaway:** The MPFA’s conduct guidelines establish a comprehensive framework requiring honesty, transparency, and professional diligence to protect the interests of scheme members. I, II, III & IV. Therefore, I, II, III & IV is correct.

Correct: Under the Mandatory Provident Fund Schemes (General) Regulation, while the standard financial requirement for a registered trust company acting as a custodian is a paid-up share capital and net assets of at least $150 million each, there is a provision for a lower threshold. A company may satisfy the requirements with a paid-up share capital and net assets of not less than $50 million each, provided it complies with other specific requirements set out under the Mandatory Provident Fund Schemes Ordinance (MPFSO).

**Incorrect:** The suggestion that $150 million is an absolute requirement with no exceptions is inaccurate because the regulations explicitly provide the $50 million alternative. The status of being an authorized institution under the Banking Ordinance is an alternative qualification route (e.g., for banks), but it does not negate the specific capital requirements for registered trust companies. There is no regulatory provision that allows a custodian to bypass its own financial requirements based solely on the asset levels of an associated trustee company.

**Takeaway:** A registered trust company acting as an MPF custodian generally requires $150 million in capital and net assets, but may qualify with $50 million if it meets additional regulatory criteria under the MPFSO.

Correct: Offering non-monetary benefits such as electronic devices to encourage a client to transfer benefits is a breach of the guidelines. Registered intermediaries are prohibited from offering gifts or incentives to induce clients to join a scheme or transfer benefits, unless the incentive falls under specific exemptions like fee discounts credited to the MPF account or approved membership programs.

**Incorrect:** Discounts on the intermediary’s own fees, bonus units credited directly to the MPF account, and non-monetary benefits associated with a membership privilege program approved by the trustee are all permitted exceptions under the regulatory framework. These are designed to ensure that any benefits are directly related to the MPF product or the intermediary’s professional service rather than being external inducements.

**Takeaway:** To maintain professional integrity and protect client interests, incentives in the MPF industry are strictly regulated; only specific forms of fee rebates or approved membership privileges are allowed, while external gifts are prohibited.

Correct: Statement I correctly identifies the nature of a “Top-up” ORSO scheme, where the employer maintains an MPF scheme for mandatory requirements while using the ORSO scheme to provide additional, supplementary benefits. Statement III is also accurate because “existing members” (those who were members of the ORSO scheme before the MPF system was implemented) who chose to remain in an MPF exempted ORSO scheme are generally not bound by the preservation and portability rules that apply to “minimum MPF benefits” (MMB), providing them more flexibility upon leaving employment.

**Incorrect:** Statement II is incorrect because the Occupational Retirement Schemes Ordinance requires the employer to notify the Registrar and the members within 14 days of the commencement of winding up, not 30 days. Statement IV is incorrect because when an ORSO scheme is terminated and benefits are paid out, the portion attributable to employer contributions is typically subject to salaries tax unless the payout is triggered by specific prescribed circumstances such as retirement, death, or total incapacity.

**Takeaway:** Employers transitioning or maintaining ORSO schemes alongside the MPF system must distinguish between different scheme structures and be mindful of the specific 14-day notification window for liquidations, as well as the differing tax and preservation treatments for existing versus new members. Therefore, statements I and III are correct.

Correct: Under the Mandatory Provident Fund Schemes Ordinance (MPFSO), specifically Section 34W, for an individual to be approved as a responsible officer (RO) of a principal intermediary (PI), they must already be a subsidiary intermediary attached to that PI. Additionally, the individual must possess sufficient authority within the PI’s corporate structure and be provided with adequate resources and support to effectively discharge their specified supervisory responsibilities.

**Incorrect:** The statutory period during which a previous revocation of RO approval would bar a new application is one year immediately preceding the application date, not three or five years. Furthermore, while the individual must be a Type B regulatee, their specific industry regulator must match the frontline regulator assigned to the principal intermediary they are joining, rather than being a fixed requirement for a specific regulator like the Insurance Authority in all instances.

**Takeaway:** Approval for a Responsible Officer requires the individual to be an attached subsidiary intermediary with sufficient internal seniority and resources, provided they have not had an RO approval revoked by the MPFA within the past 12 months.

Correct: Under the Mandatory Provident Fund Schemes Ordinance, all mandatory contributions made by both the employer and the employee, along with any investment returns derived from them, are vested fully and immediately in the scheme member. In contrast, while an employee’s voluntary contributions also vest immediately, any voluntary contributions made by an employer are subject to the specific governing rules of the MPF scheme, which typically employ a vesting scale based on the length of service.

**Incorrect:** The assertion that all contributions, including voluntary ones from the employer, must vest immediately is incorrect because the law provides employers with the flexibility to define vesting terms for non-mandatory portions. The idea that mandatory contributions are subject to a minimum service period or a vesting scale is also false, as these benefits are legally required to be non-forfeitable from the moment they are paid to the trustee. Furthermore, investment profits arising from mandatory contributions cannot be withheld or subjected to a vesting scale; they must vest at the same time as the underlying principal.

**Takeaway:** A fundamental distinction in the MPF system is that mandatory benefits (and their returns) vest immediately by law, whereas the vesting of employer voluntary benefits is determined by the contractual governing rules of the specific scheme.

Correct: Employer mandatory contributions (ERMC) must be calculated from the first day of employment, which is September 2 in this scenario. The statutory deadline for the first remittance of these employer contributions is the 10th day of the month following the month in which the 60th day of employment falls. Given that the 60th day of employment is October 31, the employer must remit the contributions for the periods of September and October by November 10.

**Incorrect:** The suggestion that employee mandatory contributions (EEMC) begin on October 2 is incorrect because the law provides a contribution holiday for the first 30 days of employment plus the first incomplete contribution period; since the 30th day falls on October 1, the entire October payroll cycle is exempt for the employee, making November 1 the start date. The assertion that enrolment must be completed within 30 days is wrong, as the legal requirement for an employer to enroll a relevant employee into an MPF scheme is within 60 days. Lastly, the first EEMC payment cannot be remitted by November 10 because the employee’s contribution obligation only begins in November, meaning the first deduction and remittance occur in the December 10 cycle.

**Takeaway:** While employer contributions start immediately upon employment, employees are entitled to a contribution holiday for the first 30 days and the remaining portion of the payroll period in which that 30th day falls; the first remittance deadline for the employer is determined by the 60-day enrolment window.

Correct: Under the Mandatory Provident Fund Schemes Ordinance (MPFSO), if a person carries on regulated activities for another person as an employee or agent without the necessary registration and is convicted on indictment, they are liable to a maximum fine of $1,000,000 and imprisonment for 2 years. Additionally, for a continuing offence, a further fine of $20,000 per day may be imposed.

**Incorrect:** The penalty of a $100,000 fine and 6 months of imprisonment applies specifically to summary convictions for the same offence, rather than convictions on indictment. The penalty involving a $100,000 fine and a $2,000 daily fine without a term of imprisonment is the sanction for the unauthorized use of titles such as “principal intermediary” or “subsidiary intermediary.” Other variations of fines and imprisonment terms are not consistent with the statutory provisions of the MPFSO.

**Takeaway:** Candidates must distinguish between the two levels of prosecution for unauthorized regulated activities: conviction on indictment carries significantly higher penalties ($1,000,000 / 2 years) compared to summary conviction ($100,000 / 6 months).

Correct: Statement I is accurate as principal intermediaries are statutorily required to notify the MPFA within 7 working days of ceasing regulated activities. Statement II correctly identifies that a 10% surcharge is applied to any unpaid annual fees not settled within one month of the start of the chargeable period. Statement III is also correct, reflecting the MPFA’s power to revoke a registration if an intermediary fails to rectify a missing annual return within 30 days following a suspension for that same reason.

**Incorrect:** Statement IV is incorrect because the notification period for a change in address or contact details for a subsidiary intermediary is 7 working days, not 30 days. Timely reporting is a core conduct requirement to ensure the MPFA’s register remains accurate.

**Takeaway:** Registered intermediaries must be diligent with administrative deadlines; changes in particulars must generally be reported within 7 working days, while annual fees and returns are due within one month, with failure to comply potentially leading to financial penalties, suspension, and eventual revocation of registration. Therefore, statements I, II and III are correct.

Correct: Statements I, II, and IV accurately reflect the regulatory requirements for self-employed persons (SEPs) under the Mandatory Provident Fund (MPF) system. If an SEP cannot provide evidence of income and the trustee is not satisfied with the explanation, the law stipulates that the relevant income is deemed to be the maximum level ($360,000 per annum). Additionally, if the most recent notice of assessment is more than two years old, the SEP must declare an amount equal to the previous year’s assessable profits. Furthermore, SEPs who suffer a net business loss are permitted to discontinue mandatory contributions by lodging a statement of loss with the trustee until their income exceeds the minimum threshold ($85,200 per annum).

**Incorrect:** Statement III is incorrect because the permitted period for a self-employed person to enroll in an MPF scheme is 60 days, not 90 days. This statutory timeframe is the period within which an SEP must become a member of a registered MPF scheme after commencing self-employment.

**Takeaway:** Self-employed persons must navigate specific rules for income assessment and enrollment, including a 60-day permitted period and specific protocols for handling outdated tax assessments or business losses to ensure they meet their mandatory contribution obligations. I, II & IV only. Therefore, statements I, II and IV are correct.

Correct: Statement II is correct because for self-employed persons (SEPs) who do not need to submit a remittance statement, the contribution is considered paid on the date the trustee issues the direct debit instruction. Statement III is accurate as direct credit payments are only deemed paid once the funds are actually credited to the MPF scheme’s bank account. Statement IV is correct because when a remittance statement is sent via electronic means (such as fax or online portals), the receipt date is the actual date of transmission.

**Incorrect:** Statement I is incorrect because the regulations specify that for contributions sent by post, the payment is considered made on the date the cheque would normally be delivered by the postal service, rather than the date of the postmark. Relying on the postmark date is a common misconception that can lead to late payment surcharges if the mail is delayed.

**Takeaway:** Understanding the specific ‘deemed paid’ dates for different payment channels is critical for MPF compliance; employers and SEPs must account for delivery times for mail and clearing times for direct credits to avoid penalties. Therefore, statements II, III and IV are correct.

Correct: The scheme described is a Defined Benefit (DB) scheme. In a DB scheme, the retirement benefit is calculated using a predetermined formula—typically involving the employee’s final salary and years of service—rather than being based solely on the accumulated contributions and investment returns. Because the benefit is promised, the employer’s contribution level is not fixed and must be adjusted periodically based on the recommendations of an actuary to ensure the scheme remains sufficiently funded.

**Incorrect:** Defined Contribution (DC) schemes are characterized by fixed contribution rates where the final benefit is simply the sum of contributions plus investment gains or losses. MPF exemption is not an automatic status based on the age of a scheme; it requires a specific application and the issuance of an MPF Exemption Certificate by the Mandatory Provident Fund Schemes Authority (MPFA). ORSO registration is the standard requirement for most retirement schemes operated in Hong Kong; ORSO exemption is a specific category reserved for certain offshore schemes or those with a very limited number of local members.

**Takeaway:** The fundamental difference between ORSO Defined Benefit and Defined Contribution schemes is that DB schemes define the output (the benefit formula) and require actuarial valuation to determine the input (employer contributions), whereas DC schemes define the input (contribution rates) and the output depends on investment performance.

Correct: Under the Mandatory Provident Fund Schemes (General) Regulation, an MPF Conservative Fund is subject to specific fee restrictions to protect members’ interests. Administrative expenses can only be deducted from such a fund if the investment return for the relevant month exceeds the prescribed savings rate published by the MPFA. In this scenario, since the fund’s return of 0.45% is lower than the prescribed savings rate of 0.60%, the trustee is prohibited from deducting administrative expenses for that specific period.

**Incorrect:** The suggestion that fees can be deducted as long as the return is positive is incorrect because the regulatory benchmark is specifically the prescribed savings rate, not a zero-percent return. There is no regulatory provision that allows for the deduction of fees with a subsequent refund based on future performance; the rule applies on a month-by-month basis. Furthermore, while it is true that the MPFA generally allows market forces to determine fee levels for most constituent funds, the MPF Conservative Fund is a notable exception where the timing and permissibility of fee deductions are strictly regulated.

**Takeaway:** For MPF Conservative Funds, administrative expenses are contingent upon performance; they may only be charged if the fund’s return outperforms the MPFA’s prescribed savings rate for the corresponding period.

Correct: Statements I, III, and IV are accurate according to the MPFA Guidelines. Statement I correctly identifies a “vulnerable client” as someone with a low education level (primary or below) making a “key decision,” such as transferring out of a guaranteed fund. Statement III accurately reflects the requirement that documentation regarding the support offered to vulnerable clients must be retained by the principal intermediary for at least seven years. Statement IV correctly identifies the procedural requirements for post-sale calls, which must be audio recorded and completed within seven working days.

**Incorrect:** Statement II is incorrect because the Guidelines specify that a post-sale call must be conducted by an authorized person of the principal intermediary other than the subsidiary intermediary who performed the regulated activity. This separation of duties is intended to provide an independent check on the sales process and the client’s understanding.

**Takeaway:** When dealing with vulnerable clients making key MPF decisions, registered intermediaries must provide extra care, such as offering a witness or conducting an independent post-sale call, while ensuring all relevant records and instructions are preserved for a minimum of seven years. Therefore, statements I, III and IV are correct.

Correct: The Net Asset Value (NAV) per unit is determined by taking the total market value of the fund’s underlying investments plus any cash holdings, and then subtracting all accrued liabilities, such as management and administrative fees that have been incurred but not yet paid. This net figure represents the total value of the fund belonging to the unit holders, which is then divided by the total number of units currently issued. In this specific scenario, the total assets are HK$900 million (HK$850 million in investments + HK$50 million in cash). After deducting the HK$10 million in accrued expenses (HK$8 million management fees + HK$2 million administrative fees), the net assets total HK$890 million. Dividing HK$890 million by 40 million units results in an NAV per unit of HK$22.25.

**Incorrect:** The value of HK$22.50 is incorrect because it only considers the total assets (HK$900 million) divided by the units, failing to deduct the accrued expenses as required by MPF valuation regulations. The value of HK$21.25 is incorrect as it likely omits the cash holdings from the calculation, which are a necessary component of the fund’s total asset value. The value of HK$22.75 is incorrect because it erroneously adds the accrued expenses to the total assets instead of subtracting them, which misrepresents the fund’s liabilities.

**Takeaway:** For MPF constituent funds, the NAV per unit must reflect the net position of the fund; therefore, all administrative and management fees accrued to date must be deducted from the sum of market investments and cash before dividing by the number of units issued.

Correct: According to the MPFA Guidelines, a principal intermediary is required to have procedures and controls to identify any failure to comply with the Mandatory Provident Fund Schemes Ordinance (MPFSO) or the Guidelines. Once a failure is identified, the principal intermediary must report it to both the frontline regulator and the industry regulator (if they are different) within 14 working days. Additionally, the guidelines specify that records relating to the conduct of regulated activities, including audio and written records, must be retained for a minimum period of seven years to ensure a proper audit trail and regulatory oversight.

**Incorrect:** Timelines such as 30 calendar days or reporting only during quarterly summaries are inconsistent with the specific 14-working-day reporting requirement for identified failures. Furthermore, record retention periods of five years do not meet the statutory minimum of seven years required under the MPF regulatory framework. Reporting only upon the receipt of a formal client complaint is also incorrect, as the obligation to report a failure arises upon the principal intermediary’s identification of the non-compliance, regardless of whether a client has complained.

**Takeaway:** Principal intermediaries must report regulatory failures to the relevant regulators within 14 working days of identification and maintain all relevant business and conduct records for at least seven years.

Correct: All four statements are accurate descriptions of the MPF regulatory framework. Statement I correctly identifies that the Fees Regulation covers costs for trustee approval and intermediary registration. Statement II accurately attributes the operational rules for portability and withdrawal of benefits to the General Regulation. Statement III correctly states that the Exemption Regulation manages the relationship between ORSO schemes and MPF requirements. Statement IV correctly identifies that the MPFA Guidelines (specifically Part III) provide detailed instructions on investment matters to supplement the primary legislation.

**Incorrect:** None of the statements are incorrect. Each statement precisely maps a specific regulatory instrument (General Regulation, Exemption Regulation, Fees Regulation, or Guidelines) to its intended purpose as defined under the Mandatory Provident Fund Schemes Ordinance framework.

**Takeaway:** Understanding the distinction between the various Regulations and Guidelines is crucial; the General Regulation focuses on scheme operations, the Exemption Regulation on ORSO interfaces, the Fees Regulation on statutory costs, and Guidelines on practical compliance standards. Therefore, I, II, III & IV is correct.

Correct: Successor schemes represent a specific exception to the general deadline of May 3, 2000, for MPF exemption applications. When a new scheme is established as a result of a genuine business transaction, such as a corporate restructuring or merger, it can apply for MPF exemption. A key benefit of this arrangement is that employees who were classified as “existing members” (those who joined the original scheme on or before December 1, 2000) are permitted to retain this status in the successor scheme. This means they remain exempt from the “minimum MPF benefits” preservation and portability requirements that typically apply to members who joined after the MPF system was implemented.

**Incorrect:** The assertion that no MPF exemptions can be granted after the May 2000 deadline is inaccurate because it fails to account for the successor scheme provision. The idea that all transferred members must immediately comply with “minimum MPF benefits” rules is incorrect because the law allows for the portability of the “existing member” status to ensure continuity for long-term employees. Additionally, while MPF schemes must be defined contribution, ORSO schemes (including successor schemes) are permitted to operate as either defined contribution or defined benefit schemes.

**Takeaway:** Under the Mandatory Provident Fund Schemes (Exemption) Regulation, successor schemes allow for the continuation of an ORSO scheme’s MPF-exempted status and the preservation of “existing member” rights during genuine business restructurings.

Correct: Statements I, II, and IV are correct. Under MPF regulations and fund structures, guarantors of guaranteed funds possess the discretionary authority to retain investment earnings, which can be used either as profit or as a buffer to offset fund under-performance in different periods. To manage the risk associated with providing such a guarantee, a reserve charge is typically deducted from the fund’s assets. Furthermore, to protect scheme members, all guarantors are legally required to maintain adequate assets as reserves or provisions to ensure they can meet their financial obligations.

**Incorrect:** Statement III is incorrect because it reverses the standard objectives of a bond fund. According to the MPF framework, bond funds primarily aim to provide a stable level of income through interest payments generated by debt securities. While bond funds may engage in trading to take advantage of market movements, capital appreciation is considered a secondary objective rather than the primary one.

**Takeaway:** Understanding the fee structures and risk mitigation requirements of guaranteed funds, as well as the primary income-focused nature of bond funds, is essential for intermediaries when advising clients on fund selection. I, II & IV only. Therefore, statements I, II and IV are correct.

Correct: Statements I, II, and III are correct. Minimum MPF Benefits (MMB) are the portion of a member’s benefits in an MPF-exempted ORSO scheme that must be preserved and are subject to the same withdrawal restrictions as MPF mandatory contributions (e.g., reaching age 65, permanent departure, etc.). For ‘existing members’ who were already in the scheme before the MPF system began, the MMB calculation only considers the years of service from 1 December 2000 onwards. Furthermore, the ‘Final Average Monthly Income’ used in the MMB formula is capped at the maximum relevant income level applicable to MPF contributions, which is currently HK$30,000.

**Incorrect:** Statement IV is incorrect because MMB, by definition, is subject to preservation requirements. When MMB is transferred from an ORSO scheme to an MPF scheme, it retains its preserved status and cannot be withdrawn at any time; it must follow the same strict withdrawal rules as mandatory contributions within the MPF framework.

**Takeaway:** For members of MPF-exempted ORSO schemes, the MMB serves to ensure a level of benefit preservation equivalent to the MPF system for service periods occurring after the MPF’s inception, using standardized calculation parameters including a salary cap. Therefore, statements I, II and III are correct.