Mandatory Provident Fund Quiz 18

Correct: According to the regulations governing Mandatory Provident Fund schemes, if a self-employed person fails to produce evidence of their relevant income (such as a notice of assessment) and the trustee is not satisfied with the justification provided for this lack of evidence, the relevant income is automatically deemed to be the maximum level. For a full financial year, this maximum level is currently set at $360,000.

**Incorrect:** The basic allowance under the Inland Revenue Ordinance is only used as the benchmark for relevant income if the trustee is satisfied that the self-employed person genuinely cannot produce the required evidence. The minimum level of relevant income ($85,200 per year) is not used as a default for missing documentation. Furthermore, there is no provision that allows a self-employed person to be exempt from contributions simply because they lack a notice of assessment; the system uses deemed income to ensure participation.

**Takeaway:** To avoid being assessed at the maximum contribution level, self-employed persons must provide income evidence to their trustee; if they cannot, they must provide a reason that the trustee finds acceptable to avoid the default maximum assessment.

Correct: Under the Mandatory Provident Fund Schemes (General) Regulation and Guideline II.6, an approved trustee is required to submit an internal control report annually. The primary objective of this report is to provide a formal assessment of the trustee’s internal control system. This system is designed to ensure that the trustee complies with all relevant statutory requirements and that the assets of the scheme are adequately safeguarded against unauthorized use or disposition. It also ensures that the scheme’s financial records are reliable and that the trustee’s operations are conducted in an orderly and efficient manner.

**Incorrect:** Providing a performance attribution analysis is a function of investment reporting and marketing materials, not the internal control report, which focuses on operational and compliance frameworks rather than market performance. Certifying that no capital losses occurred is impossible in a market-linked retirement system, as internal controls cannot prevent market fluctuations. Listing personal contact details of members for tax auditing is a breach of privacy principles and is not the purpose of a trustee’s internal control report, which focuses on systemic processes rather than individual member data for external agencies.

**Takeaway:** The internal control report is a critical governance tool in the MPF system, requiring trustees to demonstrate that they have robust systems in place to manage risks, ensure regulatory compliance, and protect the interests of scheme members.

Correct: Statements I, II, and IV accurately reflect the regulatory framework under the Mandatory Provident Fund Schemes Ordinance (MPFSO). A Principal Intermediary (PI) applicant must be a Type A regulatee (e.g., an authorized financial institution or licensed corporation) and must not have had its status revoked on disciplinary grounds within the one-year period preceding the application. If an individual performs regulated activities without registration, they face a fine of $100,000 and 6 months’ imprisonment on summary conviction. Additionally, the law stipulates that a PI application must be submitted alongside applications for the attachment and approval of a Responsible Officer (RO).

**Incorrect:** Statement III is incorrect because the penalty for the unauthorized use of protected titles, such as ‘subsidiary intermediary’, is a fine of $100,000 upon conviction. The $1,000,000 fine mentioned in the statement is the maximum penalty for the more severe offence of actually carrying on regulated activities without registration when convicted on indictment, rather than just the misuse of a title.

**Takeaway:** To maintain market integrity, the MPFSO requires intermediaries to meet specific registration criteria, including the simultaneous appointment of a Responsible Officer, while imposing tiered criminal penalties for both the unauthorized conduct of regulated activities and the misleading use of professional titles. Therefore, statements I, II and IV are correct.

Correct: Under the Mandatory Provident Fund Schemes (Fees) Regulation, the Mandatory Provident Fund Schemes Authority (MPFA) is empowered to collect fees for specific administrative and regulatory actions. These include the application for approval of persons as trustees, the registration of MPF schemes, and the application for registration as principal or subsidiary intermediaries. Additionally, fees are required for the approval of responsible officers and the approval of the attachment of a subsidiary intermediary to a principal intermediary. These fees ensure that the costs of processing formal applications and maintaining the registry are covered.

**Incorrect:** Notifying the MPFA about changes in the physical office hours of an intermediary is a compliance notification but is not listed as a fee-bearing application under the Fees Regulation. The submission of monthly investment performance reports is a statutory reporting requirement governed by the MPF Guidelines on Reporting Requirements, not a fee-based service. Similarly, the distribution of annual benefit statements to members is a mandatory operational duty of the trustee under the General Regulation, but it does not involve a fee payable to the MPFA.

**Takeaway:** The Fees Regulation specifically targets formal applications, registrations, and annual renewals related to trustees, schemes, and intermediaries, distinguishing these from routine reporting or operational duties which do not require the payment of a fee to the regulator.

Correct: Under the regulatory requirements for MPF constituent funds, every fund within a scheme must be denominated in Hong Kong dollars and governed by the laws of Hong Kong. This ensures consistency across the MPF system and provides a clear legal framework for the protection of scheme members’ interests within the local jurisdiction.

**Incorrect:** Pricing for unitized constituent funds must be performed on a forward basis, not a historical basis, to ensure that transactions are processed at the net asset value calculated after the dealing instruction is received. The Securities and Futures Commission (SFC), rather than the MPFA, is responsible for vetting and authorizing the disclosure of information in offering documents and marketing materials. Furthermore, all constituent funds within an MPF scheme must be made available to all members of that scheme, meaning they cannot be restricted to specific groups or classes of employees.

**Takeaway:** MPF constituent funds are subject to strict operational rules, including Hong Kong dollar denomination, forward pricing, and universal availability to all scheme members, with regulatory oversight shared between the MPFA (operational/investment) and the SFC (disclosure/authorization).

Correct: Statements I, II, and IV accurately reflect the legal framework and disciplinary powers under the Mandatory Provident Fund Schemes Ordinance (MPFSO). Under the Ordinance, providing false or misleading information with an intent to defraud during an investigation carries a maximum penalty of a $1,000,000 fine and 7 years’ imprisonment on indictment. Furthermore, the MPFA is empowered to impose pecuniary penalties up to the greater of $10,000,000 or three times the profit gained or loss avoided. For instances where a person recklessly provides false information (without a specific finding of intent to defraud), the maximum imprisonment term on indictment is 2 years.

**Incorrect:** Statement III is incorrect because the MPFA has the statutory authority to issue both public and private reprimands. It is not restricted to private reprimands only; the choice between public and private depends on the severity of the non-compliance and the need for public disclosure to maintain market integrity.

**Takeaway:** MPF intermediaries must be aware that the MPFSO distinguishes between different levels of culpability regarding the provision of false information, with ‘intent to defraud’ attracting significantly harsher criminal penalties than ‘recklessness’. Additionally, the MPFA’s disciplinary toolkit is broad, encompassing registration revocation, heavy financial penalties, and public censures. Therefore, statements I, II and IV are correct.

Correct: Under the Mandatory Provident Fund Schemes (Exemption) Regulation, the general deadline for applying for MPF exemption for ORSO schemes was 3 May 2000. However, an exception is made for successor schemes. A successor scheme can obtain MPF exemption after this deadline if it is established as a result of a genuine business transaction, such as a corporate restructuring or merger, and it succeeds a relevant ORSO registered scheme that already held an exemption.

**Incorrect:** The eligibility for a successor scheme exemption is not based on the administrative costs or the financial turnover of the employer. While ORSO schemes can be either Defined Benefit or Defined Contribution, the specific choice of scheme type does not bypass the restructuring requirement for late applications. Additionally, statutory requirements regarding Minimum MPF Benefits for new members cannot be waived simply by employee agreement; they are governed by the Exemption Regulation.

**Takeaway:** The only pathway to obtain a new MPF exemption for an ORSO scheme after the original May 2000 deadline is through the establishment of a successor scheme resulting from a genuine business restructuring or transaction.

Correct: Under the Guidelines on Conduct Requirements for Registered Intermediaries, a Responsible Officer (RO) carries the specific duty of ensuring that the Principal Intermediary (PI) has established and maintains robust internal controls and procedures. These systems must be designed to secure compliance with the conduct requirements set out in Part IVA of the Mandatory Provident Fund Schemes Ordinance (MPFSO) by both the PI itself and all of its registered Subsidiary Intermediaries (SI). This emphasizes the RO’s role in high-level oversight and the maintenance of a compliant corporate culture and infrastructure.

**Incorrect:** It is unrealistic and not a statutory requirement for an RO to personally supervise every single client meeting or transaction; their role is to ensure the system of supervision is effective. While an RO oversees compliance, they are not required to act as the exclusive handler of all client disputes, as firms usually have dedicated complaint-handling procedures. Additionally, while capital adequacy is a regulatory concern for financial institutions, the specific responsibility of an RO under the conduct guidelines focuses on the framework for sales and marketing conduct rather than daily financial resource monitoring.

**Takeaway:** The Responsible Officer is fundamentally responsible for the oversight of a Principal Intermediary’s compliance framework, ensuring that systems are in place to govern the professional conduct of both the firm and its individual representatives.

Correct: The Net Asset Value (NAV) per unit is calculated by taking the total market value of the fund’s underlying investments plus any cash holdings, then subtracting all accrued administrative and management expenses, and finally dividing the result by the total number of units issued. In this scenario, (HK$500 million + HK$20 million – HK$5 million) / 25 million units equals HK$20.60 per unit.

**Incorrect:** Calculations that fail to subtract the accrued expenses result in an overstated NAV, such as HK$20.80. Conversely, adding the expenses to the assets instead of subtracting them leads to an incorrect figure of HK$21.00. Treating cash as a liability to be subtracted rather than an asset to be added results in an undervalued figure of HK$19.00.

**Takeaway:** To determine the unit price of an MPF fund, all liabilities (accrued fees) must be deducted from the total asset value (investments and cash) before dividing by the number of units outstanding.

Correct: Under the Mandatory Provident Fund legislation, the Statement of Investment Policy (SIP) is a critical document designed to ensure transparency for scheme members. It must explicitly state the investment objectives, the types of assets the fund may invest in, the asset allocation balance, the risk profile of the strategy, the expected return, the policy on financial futures and options, and whether the fund will participate in securities lending. Therefore, the expected return, the policy on futures, and the risk strategy are all mandatory components.

**Incorrect:** While the SIP must outline the ‘kinds’ of securities and the ‘balance’ between various markets, it is not required to provide a specific forecast or list of individual stocks to be purchased in the immediate future. The policy focuses on the strategic framework and investment boundaries rather than disclosing short-term tactical trade lists or specific stock names.

**Takeaway:** The Statement of Investment Policy must include the expected return, the risk of the strategy, and the policy on derivatives to maintain high transparency, but it does not require the disclosure of specific upcoming stock acquisitions. The correct combination is I, III, and IV only.

Correct: Under the Mandatory Provident Fund Schemes Ordinance, the definition of “relevant income” for the purpose of calculating mandatory contributions is broad and encompasses most forms of monetary remuneration. This includes basic wages, salaries, leave pay, fees, commissions, bonuses, gratuities, and perquisites. However, the legislation specifically excludes housing allowances or any other housing benefits from the calculation of relevant income.

**Incorrect:** Performance-based bonuses, basic monthly salaries, and commissions (including overtime pay) are all explicitly classified as relevant income. Employers are legally required to include these amounts when determining the 5% mandatory contribution. Excluding these items would lead to an incorrect contribution amount and potential regulatory penalties, as only housing-related benefits are granted an exemption under the definition.

**Takeaway:** While the MPF system captures nearly all cash compensation as relevant income, housing allowances are a unique statutory exclusion that must be deducted before calculating mandatory contribution amounts.

Correct: Statements III and IV are accurate reflections of the MPF regulatory framework. Frontline regulators, including the Insurance Authority, the Monetary Authority, and the Securities and Futures Commission, are explicitly guided by these Guidelines when performing their supervisory and investigatory functions. Additionally, for the purposes of these Guidelines, the term “registered intermediary” is defined to include responsible officers (who are also subsidiary intermediaries).

**Incorrect:** Statement I is false because the Guidelines do not have the force of law and are not intended to override any legislative provisions or statutory requirements. Statement II is false because the Guidelines are not exhaustive; the MPFA may determine that acts or omissions not specifically mentioned in the text still constitute a breach of the performance requirements under the Mandatory Provident Fund Schemes Ordinance.

**Takeaway:** While the Guidelines on Conduct Requirements provide the minimum standards expected of MPF intermediaries and assist regulators in supervision, they are complementary to the law rather than a replacement for it, and they do not cover every possible scenario of misconduct. Therefore, statements III and IV are correct.

Correct: According to the Mandatory Provident Fund Schemes Ordinance (MPFSO), before the MPFA can exercise its power to impose a disciplinary sanction, it must adhere to procedural fairness. This involves issuing a written notice to the regulated person detailing the preliminary view, the reasons behind it, and the specific disciplinary order proposed. Crucially, the MPFA must provide the intermediary with a reasonable opportunity to make representations, either in writing or orally, to ensure their perspective is considered before a final determination is made.

**Incorrect:** The Frontline Regulators (FRs) are responsible for conducting the actual investigations into suspected misconduct, but they do not have the authority to impose MPF-related disciplinary sanctions; that power rests solely with the MPFA. Regarding appeals, an aggrieved intermediary should approach the Mandatory Provident Fund Schemes Appeal Board, not the Court of First Instance, and the statutory timeframe for lodging such an appeal is two months from the date of the notice, not 30 days. Finally, the MPFA is explicitly empowered to disclose disciplinary decisions to the public (with the exception of private reprimands) to ensure transparency and public protection.

**Takeaway:** The disciplinary framework for MPF intermediaries ensures a balance of power where Frontline Regulators investigate, the MPFA adjudicates with a requirement to hear the intermediary’s representations, and an independent Appeal Board provides a mechanism for review within a two-month window.

Correct: According to the regulations governing Mandatory Provident Fund (MPF) schemes for self-employed persons, if an individual cannot produce evidence of their relevant income (such as a Notice of Assessment from the Inland Revenue Department) and the trustee is not satisfied with the reason provided for this failure, the trustee must treat the individual’s relevant income as being equal to the maximum level of relevant income. Currently, this maximum level is set at $360,000 per year (or $30,000 per month).

**Incorrect:** The basic allowance under the Inland Revenue Ordinance is only used as the relevant income figure if the trustee is satisfied with the reason why the self-employed person cannot produce evidence and the person claims to earn less than the maximum level. The minimum level of relevant income ($85,200 per year) is the threshold below which mandatory contributions are not required, but it is not the default figure used when evidence is withheld without a valid reason. Using industry averages or waiting for future assessments are not recognized methods under the MPF legislation for determining relevant income in cases of non-cooperation or insufficient evidence.

**Takeaway:** To ensure compliance and avoid being assessed at the maximum contribution level, self-employed persons must provide valid evidence of their income to their MPF trustee; otherwise, the law defaults to the highest possible relevant income level for mandatory contribution calculations.

Correct: Under the Mandatory Provident Fund Schemes Ordinance, when natural persons are appointed as trustees instead of a corporate entity, there must be a minimum of two individuals to ensure collective oversight and continuity. These individuals are strictly required to be ordinary residents of Hong Kong and must meet high standards of character and reputation. To protect scheme members from potential financial loss due to a trustee’s failure or breach of duty, a performance guarantee (in the form of insurance or a bank guarantee) is mandatory, calculated at 10% of the scheme’s net asset value, up to a maximum of $10 million.

**Incorrect:** Statement IV is incorrect because the requirement for a performance guarantee is a statutory obligation for all individual trustees under the MPF system. The regulations do not provide exemptions based on an individual’s membership in professional bodies or their specific professional qualifications; the guarantee is a fundamental safeguard for the scheme’s assets.

**Takeaway:** The regulatory framework for individual trustees focuses on ensuring local accountability through residency, collective responsibility through a minimum of two appointees, and financial security via a capped performance guarantee. I, II & III only. Therefore, statements I, II and III are correct.

Correct: Registered intermediaries are strictly prohibited from accepting cash payments from clients under any circumstances. When a client provides a cheque for an MPF contribution, the intermediary must ensure it is crossed and made payable only to the approved trustee or the registered scheme itself. Additionally, the principal intermediary is legally required to maintain all records of regulated activities, including the rationale for advice and client acknowledgments, for a minimum period of seven years to facilitate regulatory supervision.

**Incorrect:** Accepting cash payments even with an immediate receipt is a violation of the MPF Guidelines. Cheques should never be made payable to the principal intermediary or a brokerage firm, as this fails to ensure the proper segregation of client assets. Furthermore, a record-keeping duration of three or five years is insufficient, as the statutory requirement specifically mandates a seven-year retention period for these documents and audio recordings.

**Takeaway:** To ensure the protection of client assets and regulatory compliance, intermediaries must refuse cash, ensure cheques are correctly payable to the trustee, and retain all transaction and advice records for at least seven years.

Correct: Statement I is correct as the Employee Choice Arrangement (ECA) allows employees to transfer accrued benefits derived from their own mandatory contributions to a scheme of their choice once per calendar year. Statement III is correct because the Code on Disclosure for MPF Investment Funds requires trustees to issue at least two fund fact sheets per financial year, which must include specific information such as fund performance, market review, and market outlook.

**Incorrect:** Statement II is incorrect because MPF regulations strictly prohibit the charging of fees or financial penalties for switching or transferring accrued benefits, except for necessary transaction costs paid to third parties. Statement IV is incorrect because the Disclosure Code specifically exempts MPF Conservative Funds, certain guaranteed funds, and newly launched funds from the requirement to provide an On-going Cost Illustration (OCI).

**Takeaway:** To protect member interests and ensure transparency, the MPF framework provides for fee-free switching and mandates regular disclosures through Fund Fact Sheets, while applying specific disclosure exemptions for certain fund types like MPF Conservative Funds regarding cost illustrations. Therefore, statements I and III are correct.

Correct: Statements II, III, and IV are accurate according to the MPF Guidelines. If a principal intermediary lacks the necessary audio recording infrastructure, it is permitted to arrange for the approved trustee, sponsor, or promoter to conduct the post-sale call. Furthermore, all relevant records, including audio files and written correspondence regarding contact attempts, must be retained for at least seven years. A suitability assessment is also a mandatory requirement when an intermediary provides an invitation or inducement to a specific client concerning the selection of a specific constituent fund.

**Incorrect:** Statement I is incorrect because the regulatory guidelines explicitly state that the processing of a client’s instruction should not be delayed and does not need to wait for the completion of the post-sale call process. Efficiency in executing client instructions is prioritized alongside the compliance check.

**Takeaway:** MPF intermediaries must balance operational efficiency with consumer protection by processing instructions promptly while ensuring that post-sale call protocols, long-term record retention, and suitability assessments are strictly followed. Therefore, statements II, III and IV are correct.

Correct: Statement I correctly identifies the statutory requirement under the Occupational Retirement Schemes Ordinance for an employer to notify the Registrar and members within 14 days of starting a winding-up process. Statement III accurately reflects Hong Kong tax principles where employer-funded benefits paid out upon scheme termination (rather than retirement, death, or incapacity) are generally taxable. Statement IV correctly defines a ‘Frozen’ ORSO scheme, where the employer stops future ORSO contributions and moves all staff to an MPF scheme while maintaining existing ORSO assets.

**Incorrect:** Statement II is incorrect because existing members of an ORSO scheme who opted to stay in the scheme upon the introduction of the MPF system are specifically exempted from the preservation, portability, and withdrawal requirements concerning ‘minimum MPF benefits’ (MMB). These MMB requirements apply to ‘new members’ who joined the MPF exempted ORSO scheme after the MPF system was launched.

**Takeaway:** When managing or terminating an MPF exempted ORSO scheme, practitioners must distinguish between ‘existing members’ and ‘new members’ regarding benefit preservation rules and adhere to strict 14-day notification windows during a winding-up event. Therefore, statements I, III and IV are correct.

Correct: A Class G insurance policy is specifically characterized by providing guarantees on capital or returns. According to regulatory requirements, such a policy must be supported by a guarantor, which can be the insurance company issuing the policy or a third-party financial institution authorized by the Monetary Authority. This distinguishes it from other conservative options like Money Market Funds, which aim for capital preservation and interest income through short-term securities but do not necessarily involve a formal guarantee structure.

**Incorrect:** The claim that the guarantor must be a government-appointed body is inaccurate, as private insurers or authorized financial institutions are permitted to fulfill this role. Furthermore, the management of an insurance fund is not restricted to independent third parties; the issuing insurance company is legally allowed to manage the fund itself. Finally, Money Market Funds are low-risk and low-volatility investments, making the description of them as high-volatility equity-based vehicles incorrect.

**Takeaway:** Class G insurance policies are defined by their capital or return guarantees and must be backed by a qualified guarantor, while Money Market Funds focus on capital preservation through short-term, interest-bearing instruments.

Correct: When a scheme member elects to transfer their accrued benefits, the original trustee must first redeem the existing fund units into cash before sending the funds to the new trustee for reinvestment. This process creates a time lag during which the member’s assets are not invested in the market. Consequently, if the market value of the funds increases during this interval, the member may end up purchasing fewer units in the new scheme than they previously held, a risk often referred to as ‘selling low and buying high’ due to market fluctuations.

**Incorrect:** The MPF system does not support ‘limit orders’ or specific price targets because it operates on a forward pricing mechanism, where unit prices are determined based on the net asset value at the close of the trading day. While trustees are required to act efficiently, the statutory guideline for completing a transfer is generally within 30 days of notification or the last contribution day, rather than a 7-day window. Furthermore, transferring out of a guaranteed fund typically requires the member to meet specific qualifying conditions (such as a minimum holding period); failure to meet these conditions usually results in the loss of the guaranteed return rather than its automatic preservation.

**Takeaway:** Scheme members should be aware of the ‘out-of-market’ risk and the forward pricing mechanism during the transfer process, as these factors can impact the final value of their accrued benefits regardless of the performance of the chosen funds.

Correct: Statements I, II, and III accurately reflect the mandatory procedures under the MPFA Guidelines when a client insists on a fund that exceeds their assessed risk profile. The intermediary must provide a clear warning about the mismatch, explain the specific risks of the chosen fund, document the client’s own reasons for the decision, and ensure a robust audit trail is maintained through audio recording or post-sale verification.

**Incorrect:** Statement IV is incorrect because the regulatory requirement for the retention of the original signed document regarding a risk mismatch is a minimum of seven years. A five-year retention period would fail to meet the standards set by the MPFA for principal intermediaries.

**Takeaway:** Registered intermediaries must strictly adhere to disclosure and documentation protocols during a risk mismatch, including the specific seven-year retention rule for related documents. I, II & III only. Therefore, statements I, II and III are correct.

Correct: The Mandatory Provident Fund (MPF) system is classified as a Pillar 2 system under the World Bank’s retirement protection framework. This pillar is specifically defined as a mandatory, privately-managed, and fully-funded contribution scheme. In Hong Kong, it is employment-based, meaning both employers and employees are required to contribute to individual accounts managed by private-sector trustees.

**Incorrect:** A non-contributory, publicly-financed social safety net describes Pillar 0, which provides a basic level of protection regardless of previous employment or contributions. Voluntary personal savings and insurance represent Pillar 3, which consists of discretionary assets individuals accumulate for their own retirement. Informal support systems, such as family assistance or access to public healthcare and housing, fall under Pillar 4 of the expanded five-pillar framework.

**Takeaway:** Within the World Bank’s multi-pillar model, the MPF system serves as the second pillar, providing a mandatory and privately-managed foundation for retirement savings that complements public safety nets and voluntary personal investments.

Correct: Under the Mandatory Provident Fund Schemes Ordinance (MPFSO), if a person carries on regulated activities for another person (such as an employee or agent) or holds themselves out as doing so without registration, they face severe penalties. Upon conviction on indictment, the maximum penalty is a fine of $1,000,000 and imprisonment for 2 years. Additionally, if the offence is a continuing one, a further fine of $20,000 for each day the offence continues may be applied.

**Incorrect:** The penalty involving a $100,000 fine and 6 months of imprisonment, with a $2,000 daily fine for continuing offences, is the maximum for a summary conviction, not a conviction on indictment. The penalty of a $100,000 fine and a $2,000 daily fine without a prison sentence applies specifically to the unauthorized use of protected titles like “principal intermediary” or “subsidiary intermediary.” Other combinations of fines and imprisonment terms are not provided for under the current statutory framework for this specific contravention.

**Takeaway:** The MPFSO imposes tiered penalties for unregistered regulated activities based on the method of prosecution, with conviction on indictment carrying the highest possible sanctions to deter unauthorized financial advice and intermediation.