Mandatory Provident Fund Quiz 11

Correct: According to the MPF Guidelines and the Mandatory Provident Fund Schemes Ordinance, registered intermediaries are strictly prohibited from accepting cash payments from clients. When handling cheques, they must ensure the cheques are crossed and made payable only to the approved trustee of the registered scheme or the scheme itself. Additionally, all records of regulated activities, including the rationale for advice provided and client acknowledgments, must be retained by the principal intermediary for a minimum period of seven years.

**Incorrect:** Accepting cash is a violation of the conduct requirements, even if a receipt is provided or if it is deposited quickly. Cheques cannot be made payable to the intermediary or the brokerage firm, as this fails to ensure the proper segregation of client assets. Furthermore, record-keeping durations of three, five, or six years are insufficient, as the regulatory requirement specifically mandates a seven-year retention period to facilitate supervision and inspection by frontline regulators.

**Takeaway:** To maintain regulatory compliance, intermediaries must never handle cash, must ensure cheques are correctly crossed and addressed to the trustee, and must preserve all transaction and advice records for at least seven years.

Correct: Statements I, II, and III are accurate reflections of the MPF regulatory framework. Under the Inland Revenue Ordinance, an employer’s total contributions (both mandatory and voluntary) are tax-deductible up to a limit of 15% of the employee’s total annual emoluments. Regarding penalties, the law distinguishes between a simple failure to pay and the more serious offense of deducting wages from an employee but failing to remit them to the trustee; the latter carries a higher maximum penalty of a $450,000 fine and 4 years’ imprisonment. Additionally, the Compensation Fund provides the same level of protection for accrued benefits derived from voluntary contributions as it does for mandatory contributions.

**Incorrect:** Statement IV is incorrect because the statutory reporting requirement for an approved trustee is much stricter than 21 days. According to the Mandatory Provident Fund Schemes (General) Regulation, if an employer fails to pay mandatory contributions by the contribution day, the trustee must report the default to the MPFA within 10 days after the contribution day, unless specific exceptions for industry schemes apply.

**Takeaway:** Compliance in the MPF system involves understanding the interplay between tax benefits, strict reporting timelines for trustees (10 days for defaults), and the severe criminal liabilities faced by employers who fail to remit deducted employee contributions. Therefore, statements I, II and III are correct.

Correct: The Mandatory Provident Fund (MPF) system is classified under Pillar Two of the World Bank’s retirement protection framework. This specific pillar is defined as a mandatory, privately-managed, and fully-funded contribution scheme. In the context of Hong Kong, it is employment-based, meaning both employers and employees are required to contribute to individual accounts managed by approved private trustees, ensuring that the benefits are directly linked to the contributions and investment performance within those accounts.

**Incorrect:** Pillar Zero refers to non-contributory, publicly-financed social safety nets that provide basic protection, such as the Old Age Allowance or CSSA in Hong Kong. Pillar One describes publicly-managed, often tax-financed systems that provide a basic pension. Pillar Three represents voluntary personal savings, which, while encouraged, are distinct from the mandatory nature of the core MPF requirements.

**Takeaway:** The MPF system serves as the second pillar in the World Bank’s multi-pillar model, focusing on a privately-managed and fully-funded approach to supplement other forms of retirement support and personal savings.

Correct: The MPF safety net is designed to protect scheme members from specific operational and integrity risks rather than market risks. Professional indemnity insurance covers losses resulting from fraud, negligence, or misfeasance by the trustee or service providers, but it explicitly excludes losses attributable to the ordinary course of investment business. Similarly, the Compensation Fund serves as a fund of last resort for losses due to illegal conduct or misfeasance, not for poor investment performance or economic downturns.

**Incorrect:** The Compensation Fund is not a performance guarantee and does not trigger based on the percentage of investment loss. Professional indemnity insurance is specifically restricted and does not cover all losses of scheme assets, particularly those arising from market fluctuations. While trustees must maintain a minimum paid-up share capital and net assets of $150 million to demonstrate financial capability and commitment, these funds are not intended to be used as a direct compensation pool for members’ investment losses.

**Takeaway:** While the MPF system provides a robust safety net through stringent authorization, insurance, and a compensation fund, these mechanisms only protect against ‘non-investment’ risks like fraud or negligence; members continue to bear the market risk associated with their investment choices.

Correct: Under the Employee Choice Arrangement (ECA), employees are entitled to transfer the accrued benefits (which include both the accumulated contributions and the investment returns) derived from their own mandatory contributions made during their current employment. This transfer can be made to an MPF scheme of their choice on a lump sum basis once every calendar year. This provides members with greater control over the investment of their retirement savings while they are still employed.

**Incorrect:** The employer’s portion of mandatory contributions in the current contribution account is not transferable under the ECA and must remain in the scheme selected by the employer. There is no requirement for a minimum number of years of service (such as five years) to exercise ECA rights. Additionally, the transfer involves the entire accrued benefit from the employee’s portion, not just the investment returns or the principal.

**Takeaway:** The Employee Choice Arrangement (ECA) allows for the annual lump-sum transfer of a member’s own mandatory contributions from their current employment account to a preferred MPF scheme.

Format your explanation in THREE separate paragraphs with an empty line between each:

**Correct:** Statements I and II are correct because the Mandatory Provident Fund Schemes Ordinance (MPFSO) stipulates that all mandatory contributions (both employer and employee portions) and any investment returns derived from them vest fully and immediately in the scheme member. Statement IV is also correct as section 12A of the MPFSO allows employers to use the accrued benefits attributable to their contributions to offset statutory severance payments (SP) or long service payments (LSP).

**Incorrect:** Statement III is incorrect because the vesting of voluntary contributions made by an employer is not mandated to be immediate by law; instead, it is governed by the specific rules of the individual MPF scheme, which often utilize a vesting scale based on the employee’s length of service. Only the employee’s own voluntary contributions must vest fully and immediately upon payment to the trustee.

**Takeaway:** While mandatory contributions and their investment earnings are always fully and immediately vested in the employee, employer voluntary contributions follow the scheme’s governing rules, and employer-funded accrued benefits remain subject to statutory offsetting for severance or long service payments. Therefore, statements I, II and IV are correct.

Correct: When a client insists on selecting a constituent fund with a risk level higher than their assessed risk profile, the registered intermediary must inform the client of the mismatch and explain the specific risks and features of the chosen fund. The intermediary is required to document that the choice was the client’s own decision, record the client’s reasons for the choice, and obtain the client’s signature on this documentation. Furthermore, the conversation regarding the mismatch must be audio-recorded if a system is available; otherwise, a post-sale call or confirmation must be performed. The original signed document must be retained for at least seven years.

**Incorrect:** It is incorrect to suggest that the intermediary must refuse the transaction, as the client has the right to make their own investment decisions provided they are fully informed of the risks. The requirement for record-keeping is seven years, not three years, making any option suggesting a shorter duration inaccurate. Additionally, there is no regulatory requirement to obtain prior approval from the MPFA for individual fund selection mismatches; the responsibility lies with the intermediary to follow the disclosure and documentation protocols.

**Takeaway:** In cases of risk mismatch where a client chooses a higher-risk MPF fund than recommended, the intermediary’s primary duties are clear disclosure of the mismatch, documentation of the client’s rationale, obtaining a signed acknowledgment, and ensuring an audit trail through audio recording or post-sale confirmation.

Correct: Statements I, II, III, and IV are all accurate reflections of the Mandatory Provident Fund (MPF) regulatory framework. While mandatory contributions are strictly governed by the MPF Ordinance regarding vesting, preservation, and withdrawal, voluntary contributions are governed by the specific governing rules of the individual MPF scheme, allowing for more flexibility. Despite this difference, voluntary contributions are subject to the same rigorous management standards, meaning they must be handled by the same approved trustees and investment managers as mandatory contributions and are protected by the same indemnity insurance. Additionally, under current regulations, employees earning less than the minimum relevant income level (currently $7,100 per month) are not required to contribute, but their employers must still make the 5% mandatory contribution.

**Incorrect:** Any suggestion that voluntary contributions are exempt from indemnity insurance or can be managed by unapproved entities is incorrect. It is also a common misconception that if an employee is exempt from contributions due to low income, the employer is also exempt; in reality, the employer’s obligation to contribute 5% remains regardless of whether the employee’s income falls below the minimum threshold (as long as the employee is a relevant employee).

**Takeaway:** Voluntary contributions provide flexibility through scheme-specific rules for vesting and withdrawal, yet they remain protected by the same institutional safeguards and professional management requirements as mandatory contributions. Therefore, all of the above statements are correct.

Correct: According to the MPFA Guidelines, when a registered intermediary identifies a client as vulnerable—such as an individual with a primary level of education or below—they must provide extra care during key decision-making processes, including the selection of a constituent fund. This extra care includes offering the client the opportunity to be accompanied by a companion or to have an additional staff member witness the sales and selection process. The intermediary is required to document that these choices were offered, record the client’s selection, and have the client sign the document to acknowledge their choice. The original document must be retained by the principal intermediary for at least seven years.

**Incorrect:** While a post-sale call is a valid alternative for providing extra care, the guidelines specify that it must be conducted within seven working days, not fifteen. Furthermore, the call must be performed by an authorized person of the principal intermediary who was not the subsidiary intermediary involved in the original transaction; having the same intermediary conduct the follow-up call does not meet the requirement for independent verification. There is no regulatory requirement for a client to provide a certificate of mental fitness based solely on their education level.

**Takeaway:** Registered intermediaries must implement specific safeguards for vulnerable clients, such as witnessing or independent post-sale calls, to ensure that significant MPF decisions are understood and documented properly, with records maintained for a minimum of seven years.

Correct: Statements I, II, and IV are correct. Hong Kong is experiencing a significant demographic shift where the population aged 65 and over is projected to rise to approximately 36% by 2064. This trend, combined with the transition away from traditional family support structures where children provide for aged parents, increases the risk of old-age poverty. Consequently, the working population must support a larger number of retirees for a longer duration, necessitating a formal system like the MPF to accumulate retirement savings during an individual’s working life.

**Incorrect:** Statement III is incorrect because the MPF system is not intended to be the sole source of retirement income. According to the multi-pillar framework advocated by international bodies like the World Bank, the MPF serves as a mandatory, privately managed contributory pillar. It is designed to complement other pillars, such as government-funded social safety nets and voluntary personal savings, rather than eliminating the need for them.

**Takeaway:** The implementation of the MPF system was driven by the dual challenges of an ageing population and the declining efficacy of traditional family-based support, aiming to provide a structured, employment-based savings mechanism to ensure basic retirement protection for the workforce. Therefore, statements I, II and IV are correct.

Correct: Relevant income for MPF purposes is defined as all monetary payments made by an employer to an employee, including wages, salary, leave pay, fees, commissions, bonuses, and allowances (such as cash housing allowances). In this scenario, the base salary (HK$40,000), the cash housing allowance (HK$5,000), and the performance bonus (HK$10,000) are all classified as relevant income, resulting in a total of HK$55,000.

**Incorrect:** A total of HK$57,000 is incorrect because it mistakenly includes the HK$2,000 travel reimbursement; reimbursements for actual business expenses are not considered part of an employee’s income. A total of HK$50,000 is incorrect because it fails to include the cash housing allowance, which is a monetary allowance and thus part of relevant income. A total of HK$45,000 is incorrect because it excludes the performance bonus, which is explicitly defined as relevant income under the MPF Ordinance.

**Takeaway:** While most monetary components of a remuneration package—including bonuses and cash allowances—constitute relevant income for MPF contribution calculations, reimbursements for specific business expenses incurred by the employee are excluded.

Correct: Statements I, II, III, and IV are all mandatory procedures under the MPFA Guidelines (specifically sections III.29 and III.30) when a risk mismatch occurs. The intermediary is required to inform the client of the mismatch and explain the fund’s risks (I), confirm the client’s autonomy and document their specific reasons for the choice (II), obtain a signature on the mismatch acknowledgment and provide a copy to the client (III), and ensure an audit trail is created via audio recording or a post-sale confirmation process (IV).

**Incorrect:** Any combination that excludes one or more of these steps is incorrect because the guidelines prescribe a comprehensive set of actions to handle risk mismatches. For instance, simply explaining the risk without documenting the client’s specific reasons, or failing to provide a post-sale confirmation when audio recording is unavailable, would result in non-compliance with the conduct requirements for registered intermediaries.

**Takeaway:** In the MPF sales process, a risk mismatch triggers specific disclosure, documentation, and verification requirements designed to ensure the client is fully aware of the risks and that their decision is clearly recorded for regulatory and audit purposes. I, II, III & IV. Therefore, I, II, III & IV is correct.

Correct: Statements I, III, and IV accurately reflect the regulatory framework of the MPF system. Employees of the European Union Office of the European Commission in Hong Kong are specifically categorized as exempt persons. Employers are mandated to enrol regular (non-casual) employees within the 60-day permitted period. Furthermore, self-employed persons must enrol in an MPF scheme within 60 days of starting their business, even if their income falls below the minimum threshold for making mandatory contributions.

**Incorrect:** Statement II is incorrect because MPF exemptions are generally specific to the nature of the employment or the specific scheme. According to the MPFSO, if an exempt person (such as a member of an MPF exempted ORSO scheme or an EU Office employee) earns income from a separate employment or self-employment that is not itself exempt, they are required to comply with MPF provisions for that specific additional income.

**Takeaway:** MPF exemption is not a blanket status for an individual; it applies to specific roles or schemes, meaning individuals with multiple income streams may be exempt in one capacity but required to participate in another. Therefore, statements I, III and IV are correct.

Correct: The Mandatory Provident Fund Schemes (Fees) Regulation is the specific legislative instrument that dictates the various charges imposed by the MPFA. This includes the costs associated with applying for registration as principal or subsidiary intermediaries, the approval of responsible officers, and the annual registration fees required to maintain intermediary status.

**Incorrect:** The Mandatory Provident Fund Schemes (General) Regulation focuses on the operational framework of schemes, such as investment standards and contribution processes, rather than the fee schedule. The Mandatory Provident Fund Schemes (Exemption) Regulation is limited to the rules surrounding ORSO schemes and their exemption from MPF requirements. While the MPF Guidelines on Licensing provide procedural instructions for applicants, they do not serve as the legal basis for prescribing the actual fee amounts.

**Takeaway:** Practitioners must refer to the Fees Regulation to identify the specific financial requirements for regulatory applications, as this regulation centralizes all statutory fees related to trustees, schemes, and intermediaries.

Correct: According to the regulations governing MPF-exempted ORSO registered schemes, existing members (those who were already members of the scheme when the MPF exemption was granted in 2000) are treated differently than new members. For these existing members, their accrued benefits—including those accumulated after the introduction of the MPF system—are not classified as “minimum MPF benefits.” Consequently, these benefits are not subject to the preservation, portability, and withdrawal requirements that typically restrict access to funds until retirement. This allows the member to receive their benefits in cash upon leaving employment, provided the scheme’s own governing rules allow for such a payout.

**Incorrect:** The requirement to preserve benefits until age 65 or to transfer them to an MPF scheme specifically applies to mandatory contributions within the MPF system or to the “minimum MPF benefits” of new members in an ORSO scheme, but not to the benefits of existing members who opted to stay in an exempted ORSO scheme. Furthermore, there is no statutory requirement that mandates the automatic transfer of an ORSO balance to a new employer’s MPF scheme within 30 days; such transfers are generally subject to the governing rules of the ORSO scheme and the member’s election. Finally, the claim that all employer contributions must be preserved until retirement age ignores the specific exemption granted to existing ORSO members regarding preservation rules.

**Takeaway:** The primary distinction for existing members who remain in an MPF-exempted ORSO scheme is that their benefits are not subject to the strict preservation rules associated with “minimum MPF benefits,” providing them with greater liquidity upon termination of service compared to new members.

Correct: Under the Employee Choice Arrangement (ECA), a relevant employee who is currently employed is permitted to transfer the accrued benefits derived from their own employee mandatory contributions made during their current employment to an MPF scheme of their choice. This transfer can generally be exercised once every calendar year. This mechanism provides employees with greater autonomy over how their portion of mandatory retirement savings is invested without needing to change jobs.

**Incorrect:** It is incorrect to suggest that employer mandatory contributions can be transferred while the employee is still in that specific employment; these must remain in the scheme chosen by the employer until the employment relationship ends. Furthermore, while benefits from previous employments (preserved in personal accounts) can be transferred at any time and are not limited to once a year, the specific rule for current employment mandatory contributions is restricted to the employee’s portion only. There is also no statutory requirement for a minimum years-of-service vesting period (such as two years) before an employee can exercise their rights under the ECA.

**Takeaway:** The Employee Choice Arrangement allows active employees to transfer their own mandatory contribution portion from their current employment to a different scheme once per calendar year, whereas employer mandatory contributions must stay in the original scheme until employment ceases.

Correct: Statements I, II, and III accurately reflect the procedural requirements and rights established under the Mandatory Provident Fund Schemes Ordinance (MPFSO). The MPFA is legally required to provide a regulated person with a written notice of its preliminary view and the reasons for it, as well as the proposed sanction. The person must then be given the opportunity to make representations, which can be either oral or written. Furthermore, the statutory timeframe for lodging an appeal with the Mandatory Provident Fund Schemes Appeal Board is exactly two months from the date of the notice.

**Incorrect:** Statement IV is incorrect because it misrepresents the division of labor between regulatory bodies. While Frontline Regulators (FRs) such as the HKMA, SFC, or IA are responsible for conducting investigations into the conduct of intermediaries, the MPFA remains the sole authority empowered to determine and impose disciplinary sanctions based on the investigation results and any representations made.

**Takeaway:** The MPF disciplinary framework balances regulatory oversight with procedural fairness, ensuring that intermediaries have the right to be heard and the right to appeal to an independent board within a specific two-month window, while centralizing sanctioning power within the MPFA. Therefore, statements I, II and III are correct.

Correct: To ensure the security and traceability of funds, the regulatory framework for the Mandatory Provident Fund (MPF) system specifies that employers and self-employed persons should avoid paying contributions in cash or through intermediaries. Instead, payments must be made directly to the approved trustee or through their designated bank branches and service counters. If an employer fails to meet the contribution deadline, they are legally required to pay a contribution surcharge (typically 5% of the arrears) to the MPFA for the benefit of the employees, and they may also face financial penalties or criminal prosecution.

Correct: Under the Mandatory Provident Fund Schemes Ordinance (MPFSO), if a person contravenes the prohibition against carrying on regulated activities for another person (such as an employer or principal) without being registered, the penalty upon conviction on indictment is a fine of $1,000,000 and imprisonment for 2 years. Additionally, if the offense is a continuing one, a further fine of $20,000 per day may be imposed for each day the contravention persists.

**Incorrect:** The penalty consisting of a $100,000 fine and 6 months of imprisonment is the maximum for a summary conviction, which is a less serious legal proceeding than a conviction on indictment. The penalty involving a $100,000 fine and a $2,000 daily fine without imprisonment specifically applies to the unauthorized use of titles such as ‘principal intermediary’ or ‘subsidiary intermediary.’ The option suggesting a $500,000 fine and 1 year of imprisonment is an incorrect figure not supported by the MPFSO for this specific violation.

**Takeaway:** The MPFSO distinguishes between the severity of penalties based on the mode of conviction (indictment vs. summary) and the nature of the offense (carrying on activities vs. unauthorized use of titles), with unauthorized regulated activities on indictment carrying the heaviest sanctions.

Correct: Statements I, II, and IV accurately reflect the regulatory and operational framework of MPF investment options. Class G insurance policies are characterized by their capital or return guarantees and must be supported by a guarantor, which can be the insurer or a third-party financial institution authorized by the Monetary Authority. Money market funds are conservative options focusing on capital preservation through short-term interest-bearing securities. Furthermore, insurance funds within the MPF structure can be managed either internally by the issuing insurer or externally by an appointed professional investment manager.

**Incorrect:** Statement III is incorrect because it describes the primary objective and investment strategy of an Equity Fund (also known as an Aggressive or Growth Fund). A Balanced Fund (or Mixed Asset Fund) typically aims to beat inflation with modest growth by investing in a diversified mix of both shares and bonds, rather than focusing exclusively on shares for high capital growth.

**Takeaway:** MPF constituent funds are categorized by their investment objectives and asset classes; while Equity Funds seek high growth through stocks, Balanced Funds provide a middle ground using mixed assets, and Class G insurance policies offer specific guarantees backed by authorized guarantors. Therefore, statements I, II and IV are correct.

Correct: Statements I, III, and IV accurately reflect the conduct requirements under Guidelines VI.2 and Section 34ZL of the Mandatory Provident Fund Schemes Ordinance. Intermediaries are mandated to explain the risk profiles of constituent funds to ensure the client understands the potential volatility. Furthermore, they must perform risk matching to ensure recommendations align with the client’s risk tolerance and maintain detailed records of the rationale behind any advice provided to demonstrate suitability and compliance.

**Incorrect:** Statement II is incorrect because the Guidelines state that if a client chooses not to provide the necessary information for a suitability assessment, the intermediary should explain that this lack of information will hinder their ability to act in the client’s best interests. In such cases, the intermediary should refrain from making a recommendation rather than suggesting a fund based on historical performance or popularity.

**Takeaway:** A registered intermediary must fulfill the “Know Your Client” (KYC) obligations to perform a proper suitability assessment; if the client’s particulars are insufficient, the intermediary must not provide a recommendation. I, III & IV only. Therefore, statements I, III and IV are correct.

Correct: Under the Mandatory Provident Fund Schemes Ordinance and related regulations, all constituent funds within an MPF scheme must be governed by the laws of Hong Kong and must be denominated in Hong Kong dollars. This ensures that the funds operate within the local legal framework and provides a standardized currency for member contributions and benefit valuations.

**Incorrect:** The Securities and Futures Commission (SFC), rather than the MPFA, is the body responsible for vetting and authorizing the disclosure of information in offering documents, advertisements, and marketing materials. While master trust and industry schemes are required to publish unit prices in leading newspapers, employer-sponsored schemes are permitted to use other means to communicate this information to members. Furthermore, the regulations explicitly require that each constituent fund within a single scheme must have a different investment policy to provide members with a genuine range of investment choices.

**Takeaway:** MPF constituent funds are subject to strict structural requirements, including Hong Kong jurisdiction and currency denomination, while regulatory oversight is a complementary effort between the MPFA (focusing on administration and operations) and the SFC (focusing on disclosure and investment manager licensing).

Correct: Statements I, II, and III are accurate according to the statutory requirements for MPF intermediaries. A subsidiary intermediary must notify the MPFA of changes to their name or contact details within 7 working days. The annual fee must be paid within one month of the start of the chargeable period, and failure to do so results in a 10% surcharge. Additionally, the annual return must be submitted within one month following the end of the reporting period.

**Incorrect:** Statement IV is incorrect because the statutory notification period for a principal intermediary ceasing to carry on regulated activities is 7 working days, not 14 working days. Most administrative changes, including changes in address, contact details, or regulatory status, must be reported to the MPFA within this 7-working-day window to avoid potential fines.

**Takeaway:** Registered intermediaries must strictly observe the 7-working-day notification rule for administrative changes and the one-month deadline for annual fees and returns to maintain their registration status and avoid financial penalties. Therefore, statements I, II and III are correct.