In July, 2024, the Mandatory Provident Fund Authority (“MPFA”) took regulatory enforcement action against a bank registered as a principal intermediary, imposing a $24 million fine on the bank and disqualifying the bank’s responsible officer for 18 months. The disciplinary action was premised on the bank’s offer of referral fees to persons not registered with the MPFA to encourage them to introduce Mandatory Provident Fund (“MPF”) business to the bank. If you would like more information about regulations governing MPF activities or MPFA enforcement processes, please contact one of our Financial Services Regulatory lawyers.
The Mandatory Provident Fund Schemes Ordinance (“MPFSO”) establishes a retirement planning scheme by which employers participate in retirement funds (“MPF schemes”). Participating employers and their employees make monthly contributions to these schemes and employees can choose to allocate the amounts contributed in their name to constituent investment funds available under these schemes.
Intermediary Registration under the MPFSO
Unless exempted, the MPFSO requires a person to register with the Mandatory Provident Fund Authority (“MPFA”) to carry on (or to hold themselves out as carrying on) any “regulated activity” in the course of the person’s business or employment or for reward. For this purpose, in broad terms, a “regulated activity” includes inviting or inducing another person to make a decision about:
- whether to join or participate in an MPF scheme,
- whether to invest in a particular constituent fund of an MPF scheme,
- the amount of contribution to be made to an MPF scheme or to be invested in a particular constituent fund of an MPF scheme; and
- whether to transfer accrued benefits from one constituent fund to another constituent fund or from one MPF scheme to another MPF scheme.
Registration under the MPFSO can take the form of registration as a principal intermediary or as a subsidiary intermediary. In broad terms, the former refers to an intermediary that is a firm regulated by the Insurance Authority (“IA”) as an insurance company or an insurance broker or agent, the Hong Kong Monetary Authority (“HKMA”) as an authorized institution registered under the Securities and Futures Ordinance (“SFO”) for Type 1 (dealing in securities) or Type 4 (advising on securities) regulated activity or the Securities and Futures Commission (“SFC”) for Types 1 or 4 regulated activity. The latter refers to a representative of a principal intermediary and is regulated by the IA, HKMA or SFC as such.
MPF Referral Arrangements
In the July 2024 MPFA enforcement action, the bank operated a referral programme by which it offered human resources agencies and recruiters fees for successful referrals of clients to make contributions to MPF schemes offered by the bank or to transfer to MPF schemes offered by the bank. As a result of the referral programme, approximately HK$247.7 million of assets in respect of 2,413 employees were contributed or transferred to the bank’s MPF schemes in exchange for which the bank paid approximately HK$5.6 million in referral fees.
MPFA Findings
Consistent with the dual regulation of MPF intermediaries, the HKMA as the front line regulator of the bank, investigated the bank upon a referral from the MPFA. Under the MPFSO, front line regulators may exercise statutory inspection powers which include access to business records and the power to make inquiries concerning any transaction or activity undertaken in the course of the business of the intermediary. (For more information on HKMA regulatory investigation processes, please see our articles on enforcement action by the HKMA for anti-money laundering (AML/CTF) and for SFC regulated activities).
On the conclusion of the investigation, the MPFA found the bank had breached paras. III.6, III.60, III.61(a) and III.61(c) of the Guidelines on Conduct Requirements for Registered Intermediaries (“MPFA Conduct Guidelines”).
Para. III.6 of the MPFA Conduct Guidelines states:
A registered intermediary should not, directly or indirectly, offer any rebates, gifts or incentives (including, without limitation, commissions or other monetary/non-monetary benefits) to any person for the purpose of encouraging a client to:
(a) become a member of; or
(b) make a contribution to; or
(c) transfer any benefits to;
(d) retain membership until a certain date or expiry of a certain period in one or more registered schemes/constituent funds.
Paras. III.60 and 61.(a) of the MPFA Conduct Guidelines relate to the adequacy of compliance controls. Para. III.61(c) provides that:
The controls and procedures that are appropriate for any given principal intermediary would depend on a range of factors including the scale of its operations, the number of attached subsidiary intermediaries and the range and type of regulated activities undertaken. At a minimum, however, a principal intermediary should:
(c) have in place controls, procedures and arrangements to ensure that only registered intermediaries are used in undertaking regulated activities on its behalf…
In light of these breaches of the MPFA Conduct Guidelines, the MPFA found the bank had breached statutory requirements under the MPFSO to act honestly, fairly in the best interests of the client and to establish and maintain proper controls and procedures for securing compliance.