Mandatory Provident Fund Quiz 10

Correct: Statements I, II, and III are accurate. Under the Employee Choice Arrangement (ECA), employees are permitted to transfer accrued benefits derived from their own mandatory contributions made during current employment to an MPF scheme of their choice at least once per calendar year. Furthermore, regulations stipulate that no fees or financial penalties can be imposed for any transfer of benefits, except for actual transaction costs paid to third parties. To ensure transparency, trustees must issue at least two Fund Fact Sheets per financial year, which include essential details such as investment objectives and the top ten asset holdings.

**Incorrect:** Statement IV is incorrect because the Code on Disclosure for MPF Investment Funds specifically exempts certain funds from the On-going Cost Illustration (OCI) requirement. These include MPF Conservative Funds, certain guaranteed funds, and newly launched funds. While MPF Conservative Funds do not require an OCI, they must instead provide a separate illustrative example to members.

**Takeaway:** MPF regulations empower members through the Employee Choice Arrangement and strict fee prohibitions on transfers, while the Disclosure Code ensures members receive standardized information through Fee Tables and Fund Fact Sheets, though specific cost illustration requirements vary by fund type. Therefore, statements I, II and III are correct.

Correct: Statement I is correct because, for regulatory classification, hybrid schemes that contain elements of both defined contribution and defined benefit structures are categorized as defined benefit schemes. Statement III is correct as the hallmark of a defined benefit scheme is that the payout is calculated via a predetermined formula (often involving tenure and salary) rather than just the balance of contributions. Statement IV is correct because the MPF exemption status is available to both ORSO registered and ORSO exempted schemes, provided they meet the specific criteria for exemption from the MPF system.

**Incorrect:** Statement II is incorrect because schemes established by other Hong Kong ordinances, such as MPF schemes established under the Mandatory Provident Fund Schemes Ordinance (MPFSO), are explicitly excluded from the scope of ORSO and are not required to seek ORSO registration or exemption.

**Takeaway:** Intermediaries must distinguish between the different types of ORSO schemes (Defined Benefit vs. Defined Contribution) and understand that while most private schemes require ORSO registration, those established under other specific Hong Kong laws are exempt from this requirement. Therefore, statements I, III and IV are correct.

Correct: Relevant income refers to all wages, salary, leave pay, fees, commissions, bonuses, gratuities, perquisites, or allowances, provided they are expressed in monetary terms and paid in consideration of employment. Consequently, the laundry allowance, year-end bonus, and sales commissions are all subject to MPF contributions.

**Incorrect:** Statutory payments made under the Employment Ordinance, such as long service payments or severance payments, are specifically excluded from the definition of relevant income. Including these in the MPF calculation would be incorrect, as would excluding valid monetary allowances or bonuses.

**Takeaway:** For MPF purposes, most forms of monetary remuneration are included as relevant income, but statutory termination compensations like long service payments are exempt. I, II, and IV only.

Correct: When a client insists on selecting a constituent fund with a risk level higher than their assessed risk profile (a “risk mismatch”), the registered intermediary must inform the client of the mismatch and explain the associated risks. The intermediary is required to document that the choice is the client’s own decision, record the client’s reasons for the choice, and obtain the client’s signature on this documentation. Furthermore, the original signed document must be retained by the principal intermediary for a minimum of seven years, and the conversation should be audio-recorded or followed by a post-sale confirmation.

**Incorrect:** It is incorrect to state that the intermediary should decline the transaction, as the guidelines allow clients to proceed with a mismatch provided the proper disclosure and documentation steps are followed. Suggesting that a verbal warning is sufficient or that records only need to be kept for five years is wrong, as the regulations mandate written acknowledgement and a seven-year retention period. Requiring the client to retake the assessment until it matches their choice is a violation of the integrity of the suitability assessment process.

**Takeaway:** In the event of a risk mismatch where a client chooses a higher-risk MPF fund, the intermediary must perform specific disclosure duties, document the client’s rationale, and maintain these records for seven years to ensure an adequate audit trail.

Correct: According to the Mandatory Provident Fund Schemes Ordinance, a registered subsidiary intermediary is legally obligated to notify the MPFA in writing of any changes to their name, address, or contact details. This notification must be made within 7 working days of the occurrence of the change. Failure to comply with this requirement without a reasonable excuse is a criminal offence that carries a maximum fine of $50,000.

**Incorrect:** Timeframes such as 14 working days or 30 days are incorrect because the law specifically mandates a 7-working-day window for reporting changes to contact information. While 30 days (or one month) is a common timeframe for annual returns or fee payments, it does not apply to reporting changes in intermediary details. Furthermore, fine amounts like $20,000 or $100,000 are incorrect as the statutory fine for this specific contravention is set at $50,000. Using calendar days instead of working days is also inaccurate according to the regulatory requirements.

**Takeaway:** Registered intermediaries must ensure that any changes to their contact details or address are reported to the MPFA within 7 working days to avoid a statutory fine of $50,000.

Correct: Statement I is accurate because under the Inland Revenue Ordinance, an employer’s total contributions (both mandatory and voluntary) to an MPF scheme are tax-deductible up to 15% of the total annual emoluments of the employees. Statement II is correct as the MPF Compensation Fund covers accrued benefits derived from voluntary contributions in the same way it covers mandatory contributions. Statement III correctly identifies the statutory duty of an approved trustee to report a contribution default to the MPFA within 10 days after the contribution day.

**Incorrect:** Statement IV is incorrect because the penalty of a $350,000 fine and 3 years’ imprisonment applies to employers who fail to pay mandatory contributions. A self-employed person who fails to pay mandatory contributions is liable to a lower penalty on the first occasion, specifically a fine of $50,000 and imprisonment for 6 months.

**Takeaway:** Compliance within the MPF system requires a clear understanding of the different penalty tiers for employers versus self-employed persons, the specific reporting timelines for trustees, and the tax-deductibility limits for corporate contributions. Therefore, statements I, II and III are correct.

Correct: Under MPF regulations, a member claiming early withdrawal of accrued benefits on the ground of permanent departure must provide evidence of their right to reside permanently outside Hong Kong and declare that they have no intention of returning for employment or resettlement as a permanent resident. A key restriction for this specific ground is that it can only be utilized once in a person’s lifetime.

**Incorrect:** Reaching the age of 60 is a requirement for early retirement, but it is not necessary for a permanent departure claim. The 12-month waiting period after the last contribution is a requirement for the “Small Balance” withdrawal ground, not for permanent departure. While retirement-based withdrawals allow for instalments, the law stipulates that withdrawals for permanent departure must be made as a lump sum, and the rule regarding the first four free instalments per year applies only to those retiring at 65 or 60.

**Takeaway:** Permanent departure allows for the early withdrawal of MPF benefits in a lump sum provided the member has the right to reside elsewhere and declares no intent to return; however, this right is strictly limited to a single occurrence in the member’s lifetime.

Correct: Under the Mandatory Provident Fund (MPF) legislation, while voluntary contributions are managed with the same level of professional oversight as mandatory contributions, they are exempt from specific statutory requirements. Specifically, the rules regarding vesting, preservation, portability, and withdrawal for voluntary contributions are determined by the governing rules of the individual MPF scheme rather than the rigid provisions of the MPF Ordinance. This allows for greater flexibility in how these specific funds are handled when an employee changes jobs or reaches certain milestones.

**Incorrect:** It is incorrect to assume that voluntary contributions are exempt from the core safety requirements of the MPF system. All assets within an MPF scheme, whether derived from mandatory or voluntary contributions, must be managed by approved trustees, handled by qualified investment managers, and protected by indemnity insurance. These safeguards are universal to ensure the security of all scheme members’ assets, regardless of the contribution type.

**Takeaway:** The regulatory framework for MPF schemes ensures uniform safety and management standards for all contributions, but grants autonomy to individual schemes to define the terms for vesting and withdrawal of voluntary benefits.

Correct: Under the conduct requirements of the Mandatory Provident Fund Schemes Ordinance (MPFSO), a regulated person (such as a registered intermediary) is legally obligated to ensure that any recommendation or invitation made to a client is suitable. This means the intermediary must take reasonable steps to understand the client’s personal circumstances, including their investment objectives, financial situation, and risk tolerance, to ensure the advice aligns with the client’s best interests.

**Incorrect:** Recommending a fund solely based on the lowest Fund Expense Ratio (FER) is insufficient because a low-cost fund may not meet the member’s specific risk profile or investment goals. Prioritizing an employer’s preferences over the member’s needs during an Employee Choice Arrangement (ECA) transfer violates the duty to act in the best interests of the client (the member). Providing a guarantee of future performance is a violation of the requirement to act honestly and fairly, as investment returns in MPF constituent funds are not guaranteed and are subject to market risks.

**Takeaway:** The principle of suitability requires registered intermediaries to perform due diligence on their clients’ needs before making recommendations, ensuring that the proposed MPF products or transfers are appropriate for the individual’s unique situation.

Correct: According to the MPFA Guidelines, when a registered intermediary advises a client on a transfer under the Employee Choice Arrangement (ECA), they must provide the ‘Guide to Transfer Benefits under Employee Choice Arrangement’ and explain its contents. Furthermore, if the transfer involves moving funds out of a guaranteed fund, the intermediary is strictly required to warn the client about the potential loss of the guarantee, document this warning, and obtain the client’s signature to acknowledge the risks. They must also explain the ‘out-of-market’ time lag that occurs during the transfer process.

**Incorrect:** Predicting or forecasting the future performance of a constituent fund is prohibited, even if the intermediary believes the market outlook is favorable. When comparing fees and charges, intermediaries must only compare similar fund types (e.g., comparing an equity fund to another equity fund) rather than comparing different asset classes like equity funds to conservative funds. Additionally, it is inaccurate to suggest there is no investment gap; intermediaries must disclose that there will be a period where the accrued benefits are not invested while being moved between trustees.

**Takeaway:** Registered intermediaries have a duty of care to ensure clients are fully informed of the procedural risks of transfers, particularly regarding the forfeiture of guarantees and the impact of the time lag during the fund redemption and reinvestment process.

Correct: The Securities and Futures Commission (SFC) is the regulatory body responsible for authorizing MPF schemes and their constituent funds. This specific function involves vetting and authorizing the disclosure of information within offering documents and marketing materials to ensure that the information provided to potential and existing scheme members is accurate and meets regulatory standards for transparency.

**Incorrect:** The Mandatory Provident Fund Schemes Authority (MPFA) acts as the primary administrative and supervisory body for the MPF system as a whole, but it delegates the specific task of vetting investment product disclosures to the SFC. The Insurance Authority (IA) focuses on the prudential regulation of insurance companies and the supervision of intermediaries whose core business is insurance. The Monetary Authority (MA) is responsible for the financial soundness of authorized institutions (banks) and the supervision of banking-based intermediaries.

**Takeaway:** In the multi-regulator framework of the MPF system, the SFC is specifically tasked with the authorization of MPF products and the vetting of their marketing and disclosure materials.

Correct: According to the MPFA Guidelines on conduct, registered intermediaries are generally prohibited from offering rebates, gifts, or incentives to encourage a client to join a scheme or transfer benefits. However, an exception is specifically provided for incentives that take the form of a discount on fees and charges, such as bonus units or bonus credits, as long as they are credited directly to the client’s MPF account. This ensures the benefit is reinvested into the client’s retirement savings.

**Incorrect:** Offering physical gifts like electronic tablets, direct cash payments to a client’s personal bank account, or providing unrelated financial services (such as free travel insurance) are all considered prohibited inducements. These types of incentives are seen as potentially distorting the client’s decision-making process and do not fall under the narrow exceptions allowed for fee-related discounts or approved membership programs.

**Takeaway:** To maintain professional integrity and ensure clients make decisions based on fund performance and suitability, intermediaries must avoid offering any personal gifts or cash rebates, limiting incentives only to approved fee discounts credited back to the MPF account.

Correct: According to the Guidelines on Conduct Requirements for Registered Intermediaries and the MPFSO, a Responsible Officer (RO) is specifically charged with the duty of ensuring that the principal intermediary (PI) has established and maintains proper controls and procedures. These systems must be designed to secure compliance with the conduct requirements set out in Part IVA of the MPFSO by both the principal intermediary itself and all subsidiary intermediaries (SIs) who are attached to it.

**Incorrect:** Statement IV is incorrect because the responsibilities of an RO are supervisory and managerial in nature regarding compliance and conduct; they do not include providing personal financial guarantees for client investment losses. The role focuses on the integrity of the sales process and regulatory adherence rather than the underlying market performance of the MPF funds or personal liability for market risk.

**Takeaway:** The Responsible Officer acts as the supervisory lynchpin, ensuring that the firm’s internal compliance framework is robust enough to govern the conduct of both the firm and its individual representatives in accordance with MPF legislation. Therefore, statements I, II and III are correct.

Correct: Statements I, II, and III are accurate reflections of the regulatory requirements for MPF constituent funds and the division of labor between regulators. All constituent funds within a specific MPF scheme must be available to every member of that scheme to ensure equal access to investment choices. Furthermore, to ensure liquidity and regular valuation, each constituent fund must have at least one regular dealing day per month. Regarding the regulatory split, the SFC Code on MPF Products specifically outlines the requirements for the qualifications and professional experience of investment managers who manage these products.

**Incorrect:** Statement IV is incorrect because the vetting and authorization of disclosure in offering documents, advertisements, and marketing materials is the responsibility of the Securities and Futures Commission (SFC), not the Mandatory Provident Fund Schemes Authority (MPFA). While the MPFA is responsible for the overall administration and registration of schemes, the SFC focuses on the disclosure standards and the authorization of the products for public sale.

**Takeaway:** The MPF regulatory framework involves a complementary relationship where the MPFA handles scheme registration and operational compliance, while the SFC oversees product authorization, disclosure quality, and the licensing of investment managers. Therefore, statements I, II and III are correct.

Correct: Under the Mandatory Provident Fund Schemes Ordinance, there is a specific procedure to handle the accrued benefits of employees who cease employment but fail to provide instructions. If the trustee does not receive a transfer election from the former employee within three months of receiving the termination notice, the employee is legally deemed to have elected to transfer their accrued benefits to a personal account within the same scheme. This ensures the funds continue to be managed without requiring further action from the inactive member.

**Incorrect:** The suggestion that funds are moved to a centralized MPFA account is incorrect, as the MPFA does not act as a default commercial trustee for individual personal accounts in this manner. There is no provision that allows a trustee to move funds to a competitor’s scheme or a scheme of their own choosing without the member’s consent. Furthermore, the statutory timeframe for this ‘deemed election’ is specifically three months, not six months, to ensure timely administration of the benefits.

**Takeaway:** If a member fails to make a transfer election within three months of the trustee receiving a termination notice, the law defaults the benefits into a personal account within the same MPF scheme to maintain continuity of investment.

Correct: The MPF system is structured as an employment-based framework where contributions are mandatory for most employees and self-employed persons. It is a fully-funded system, meaning that benefits are paid out from the specific assets accumulated in a member’s account. Additionally, the system is privately-managed, with the Mandatory Provident Fund Schemes Authority (MPFA) overseeing private-sector trustees who handle the administration and investment of the funds. Therefore, the correct features are (i), (ii), and (iii) only.

**Incorrect:** The MPF system is a defined contribution (DC) scheme rather than a defined benefit (DB) scheme. In a defined benefit scheme, the employer guarantees a specific payout regardless of investment performance, whereas in the MPF system, the final benefit is determined by the total contributions and the investment returns or losses. Thus, any combination including (iv) is inaccurate.

**Takeaway:** Understanding that the MPF system is employment-based, fully-funded, and privately-managed is essential for distinguishing it from other types of social security or pension models.

Correct: Statements I, II, and IV are accurate descriptions of the regulatory framework governing MPF Conservative Funds. These funds are intended to be low-risk, liquid options, which is why they are restricted to an average investment maturity of 90 days and are strictly prohibited from investing in volatile assets like equities or commodities. Furthermore, a unique safeguard exists where administrative fees can only be deducted if the fund’s monthly performance outperforms the MPFA’s prescribed savings rate, ensuring the member’s return is comparable to a standard bank savings account before fees are applied.

**Incorrect:** Statement III is incorrect because it describes the characteristics of a “soft” guarantee. In the MPF context, a “hard” guarantee is one that promises a minimum return without imposing any qualifying conditions on the member. Conversely, a “soft” guarantee requires the member to meet specific criteria, such as a minimum investment period or the occurrence of a qualifying event (e.g., reaching age 65), to benefit from the guarantee.

**Takeaway:** MPF Conservative Funds provide a conservative investment choice with specific fee protections and strict asset allocation limits (100% HKD, no equities), while Guaranteed Funds are categorized by whether the protection is unconditional (hard) or conditional (soft). Therefore, statements I, II and IV are correct.

Correct: The MPF system was introduced as a response to the demographic challenge of an ageing population in Hong Kong. Projections from the Census and Statistics Department indicate that the proportion of the population aged 65 and over is expected to rise from 12% in 2001 to 36% by 2064. This shift means that a relatively smaller working population will need to support a much larger group of retirees for longer periods, necessitating a formal, mandatory savings framework to mitigate the risk of old age poverty.

**Incorrect:** It is incorrect to claim that family support has been legally phased out; while its reliability has diminished due to changing social structures, it remains a cultural element, though insufficient as a sole protection mechanism. Projections do not show a decrease in retirees; rather, they show a marked increase. Furthermore, the system was specifically established because not everyone has the inherent awareness or financial ability to make sufficient voluntary savings for their retirement years.

**Takeaway:** The fundamental rationale for the MPF system is to address the socio-economic pressures caused by a tripling of the elderly population proportion between 2001 and 2064, ensuring financial security when traditional family support and voluntary savings may fall short.

Correct: Statements I, II, and IV accurately reflect the conduct requirements set out in the MPFA Guidelines. Intermediaries must disclose the nature of their compensation, including whether it is direct (fees) or indirect (commissions), and whether these benefits vary based on the client’s selection (III.35). While disclosures should ideally be in writing, verbal disclosure is permitted when written delivery is not immediately practicable, provided it is followed by a written document (III.36). Furthermore, the principal intermediary is mandated to retain these disclosure records for at least seven years (III.36). Therefore, the correct combination is I, II & IV only.

**Incorrect:** Statement III is incorrect because Guideline III.41(c) explicitly states that when comparing the performance of constituent funds, intermediaries should, where practicable, use net performance (after fees and charges) rather than gross performance. Net performance provides a more accurate representation of the actual returns an MPF scheme member would experience.

**Takeaway:** To ensure transparency and protect client interests, MPF intermediaries must provide clear disclosures regarding their compensation and affiliations, maintain these records for seven years, and ensure that any investment performance comparisons are fair, long-term, and based on net returns. I, II & IV only. Therefore, statements I, II and IV are correct.

Correct: Statements I and II correctly identify circumstances where MPF coverage remains mandatory. Under the MPF Guidelines, if an employment relationship is established in Hong Kong (evidenced by the contract being governed by Hong Kong law) and the employee is merely posted overseas on a temporary basis by the Hong Kong employer, the employee is still considered a “relevant employee” and must be enrolled in an MPF scheme.

**Incorrect:** Statement III describes a situation that qualifies for an exemption under Section 4(3) of the Mandatory Provident Fund Schemes Ordinance, which applies to persons from overseas who enter Hong Kong for employment for a period of not more than 13 months or who are covered by overseas retirement schemes. Statement IV describes a local hire by a foreign subsidiary; since there is no employment relationship with a Hong Kong-based entity, the MPF Ordinance does not apply.

**Takeaway:** The primary factor for MPF coverage for employees working outside Hong Kong is whether a valid Hong Kong employment relationship exists, typically characterized by a Hong Kong-governed contract and a temporary nature of the overseas assignment. Therefore, statements I and II are correct.

Correct: Statements I, II, and III accurately reflect the regulatory requirements for Mandatory Provident Fund (MPF) principal intermediaries as outlined in the Conduct Guidelines. Principal intermediaries are mandated to retain audio and written records, as well as information regarding the conduct of regulated activities, for a minimum of seven years. Furthermore, any identified non-compliance with the MPFSO or Guidelines must be reported to the regulators within 14 working days. For serious complaints, such as those involving the unauthorized transfer of accrued benefits or criminal activity, the intermediary must notify the frontline and industry regulators immediately.

**Incorrect:** Statement IV is incorrect because the Guidelines explicitly state that a principal intermediary should have arrangements in place to prevent a subsidiary intermediary from receiving cash payments or receiving cheques that are not crossed and not made payable to the approved trustee or the registered scheme. This is a critical control measure intended to minimize the scope for fraud or defalcation of client assets.

**Takeaway:** MPF principal intermediaries must implement rigorous controls including a seven-year record retention policy, a 14-working-day reporting window for general compliance failures, immediate reporting for serious/criminal complaints, and a strict prohibition on subsidiary intermediaries handling cash or uncrossed cheques. Therefore, statements I, II and III are correct.

Correct: Under the Mandatory Provident Fund Schemes Ordinance, while employer mandatory contributions (ERMC) must be paid from the first day of employment, employees are entitled to a “contribution holiday” regarding their own portion (EEMC). This holiday covers the first 30 days of employment plus the remainder of the payroll period in which that 30th day falls. For an employee starting on 2 September with a calendar-month payroll cycle, the 30th day of employment is 1 October. Since 1 October falls within the October payroll cycle, the employee is exempt from contributions for the entire month of October. Therefore, the first EEMC deduction begins with the November payroll period (1 November to 30 November), and the remittance deadline for this contribution is the 10th day of the following month, which is 10 December.

**Incorrect:** Suggestions that deductions should begin on the commencement date of 2 September or during the October payroll period fail to account for the statutory contribution holiday provided to employees. Furthermore, a remittance deadline of 10 November for the first employee contribution is incorrect because the employee’s liability has not yet commenced in September or October, and the remittance for the November period is not due until December.

**Takeaway:** For a relevant employee (other than a casual employee), the employee’s mandatory contributions start only after the first 30 days of employment and the completion of the payroll period in which that 30th day occurs, with the payment due to the trustee by the 10th day of the month following the relevant contribution period.

Correct: Under the Employee Choice Arrangement (ECA), a relevant employee is permitted to transfer the accrued benefits derived from their own mandatory contributions made during their current employment to an MPF scheme of their choice. This transfer can be initiated once per calendar year, providing members with greater control over the management of their retirement savings while still working for the same employer.

**Incorrect:** Employer mandatory contributions are excluded from the ECA transfer right to ensure the employer’s administrative stability and are only transferable upon cessation of employment. Voluntary contributions are subject to the specific trust deed and governing rules of the individual scheme, meaning they do not fall under the statutory transfer rights provided by the ECA for mandatory portions.

**Takeaway:** The ECA provides employees the right to move their own mandatory contribution portion from their current employment account to a personal account once a year, but does not extend this right to the employer’s mandatory contributions.

Correct: According to the MPF Guidelines, when a client selects a fund that does not match their assessed risk profile, a post-sale call must be conducted within seven working days. This call must be performed by an authorized person of the principal intermediary who is not the subsidiary intermediary who originally conducted the regulated activity, ensuring an independent confirmation of the client’s decision.

**Incorrect:** It is incorrect to state that the processing of the client’s instruction must be delayed, as the guidelines explicitly mention that processing need not wait for the completion of the post-sale call. Furthermore, if a principal intermediary lacks an audio recording system, they are required to arrange for the call to be conducted by an authorized person from the trustee, sponsor, or promoter rather than simply sending a document. Finally, the mandatory retention period for audio records and related documentation is seven years, not three.

**Takeaway:** For risk-mismatched MPF transactions, the post-sale call must be audio-recorded, conducted by an independent authorized person within seven working days, and all records must be maintained for a minimum of seven years.

Correct: According to Section 34ZL of the Mandatory Provident Fund Schemes Ordinance (MPFSO), a registered intermediary must have such regard to the client’s particular circumstances as is necessary for ensuring that the regulated activity is appropriate to the client. This involves a suitability assessment where the intermediary considers factors such as the client’s financial situation, investment objectives, and risk tolerance before making a recommendation.

**Incorrect:** Recommending a fund based solely on its historical performance is insufficient because it fails to account for whether the fund’s risk profile matches the client’s current needs. Prioritizing the intermediary’s own operational efficiency or commission structures constitutes a conflict of interest and violates the duty to act in the client’s best interests. Simply providing a list of all available funds without tailored guidance does not satisfy the requirement to ensure the regulated activity is appropriate for the specific client.

**Takeaway:** The statutory conduct requirements for MPF intermediaries emphasize that advice must be personalized; intermediaries are legally obligated to ensure that any recommended MPF product or strategy is suitable for the client’s unique circumstances.