Retirement Schemes Regulatory Update January 2017
1. Update on automatic exchange of financial account information
Starting 1 January 2017, financial institutions in Hong Kong are required to comply with the recently enacted rules of automatic exchange of financial account information in tax matters (AEOI). The AEOI requirements include due diligence procedures to identify reportable account holders and controlling persons and report them to the IRD. On 13 January 2017, the Mandatory Provident Fund Schemes Authority (MPFA) published a letter that provided an update on the latest developments and highlighted the implications for Occupational Retirement Schemes Ordinance (ORSO) schemes.
Which schemes are exempted?
The AEOI rules exempt a few categories of non-reporting financial institutions. Non-reporting financial institutions include, amongst others, Mandatory Provident Fund (MPF) schemes registered under the Mandatory Provident Fund Schemes Ordinance (registered MPF schemes), occupational retirement schemes registered under the ORSO (ORSO registered schemes), pooling agreements with participants confined to the ORSO registered schemes, and approved pooled investment funds (APIF) with participants confined to the registered MPF schemes and/or ORSO registered schemes.
Other relevant categories of non-reporting financial institutions also include broad participation retirement fund, narrow participation retirement fund, and exempt collective investment vehicle. The Inland Revenue Ordinance, Schedule 17C, provides detailed definitions for each of these categories.
Which schemes are not exempted?
Any ORSO scheme that is not an ORSO registered scheme and does not fall within any of the other categories of non-reporting financial institutions must comply with the AEOI rules. Similarly, any pooling agreements and APIF with participants not confined to the registered MPF schemes and/or ORSO registered schemes, which do not fall within any of the other categories of non-reporting financial institutions, must comply with the AEOI rules.
What should ORSO exempt schemes, pooling agreements and APIFs do now?
ORSO scheme employers and ORSO scheme administrators should ascertain whether their ORSO exempted schemes, pooling agreements and APIFs can fall under other categories of non-reporting financial institutions (e.g. broad participation retirement fund, narrow participation retirement fund, and exempt collective investment vehicle.
If an ORSO scheme, pooling agreement or APIF is not a non-reporting financial institution, the ORSO scheme employers and administrators must take immediate steps to ensure compliance with the AEOI requirements which are already in effect. In particular, it is important for the scheme employers and administrators to consider the following
(a) critically assess the potential implications of AEOI on your ORSO schemes, pooling agreements and APIFs;
(b) consider whether the documentation governing the ORSO schemes, pooling agreements and APIFs and administrative forms (e.g. participation, enrolment, change of investment forms) will require changes to facilitate compliance with AEOI and ensure compliance with the Personal Data (Privacy) Ordinance;
(c) consider the need to implement any necessary process and controls to ensure compliance with the AEOI requirements;
(d) communicate with investors in the ORSO schemes, pooling agreements and APIFs if AEOI might affect their interests as investors.
2. Anti-money laundering regulations on trustees
On 6 January 2017, the Financial Services and Treasury Bureau (FSTB) published a consultation paper on its proposal aiming to enhance anti-money laundering and counter-financing of terrorism (AML/CFT) regulation of designated non-financial businesses and professions. The target parties cover, in particular, trust or company service providers (TCSPs).
In line with its aim, the FSTB proposed two broad amendments to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance:
(a) Extension of the obligation to conduct customer due diligence (CDD) and to keep relevant records for 6 years to TCSPs:
The FSTB suggested a risk-based approach in applying CDD measures and to allow TCSPs flexibility in applying simplified CDD on low-risk cases. However, the FSTB suggested that enhanced CDD measures should be adopted when dealing with customers presenting a high risk of money laundering/terrorist financing.
(b) Introduction of a licensing regime for TCSPs to oversee TCSPs' compliance with AML/CFT requirements:
TCSPs will be required to apply for a licence from the Registrar of Companies (Registrar) by satisfying a fit-and-proper test. Providing trust services to the public without a licence will be a criminal offence and the Registrar will be empowered to appoint authorised persons to conduct searches and seizures on the premises of TCSPs.
Impact on TCSPs and issues to be raised
For TCSPs who have adopted self-regulation measures, the practical impact of imposing statutory CDD and record-keeping requirements may not be too burdensome. While the impact of the licensing regime is likely to be more onerous, the actual extent of enforcement and regulation by the Registrar remains to be seen.
What is more problematic is the lack of clarity in the consultation paper on how the requirements are to apply to different classes of trustees. For example, who are the “customers” in the context of ORSO schemes, MPF schemes and retail trusts? Further, bearing in mind that the greater aim is to combat money laundering and terrorist financing, should trustees of private trusts not be subject to a higher standard of supervision than trustees of regulated schemes (e.g. MPF/ORSO)? Also, what does the proposal mean for a trust with multiple trustees? Can it nominate a representative trustee to carry out the CDD? Will an individual trustee be subject to the same standards as those of a corporate trustee?
The FSTB has invited written comments to be sent by 5 March 2017 with an aim to introduce a bill in the second quarter of 2017 and implement legislation in 2018.
3. Proposed abolishment of the MPF offsetting mechanism
In an effort to enhance the retirement protection system in Hong Kong, the Chief Executive, Mr C Y Leung, announced plans on 18 January 2017 to progressively abolish the offsetting of severance payments (SP) or long service payments (LSP) with employers' MPF contribution elements.
The abolishment plan
This plan would stop employers from using the money they put into staff retirement funds to offset SP and LSP. To alleviate the potential financial burden on employers arising from the plan, employers’ MPF contributions prior to the implementation date of the proposal will not be affected. In addition, the Government will provide subsidy totaling HK$6 billion spread out over a period of 10 years after the mechanism is scrapped.
The Government has also proposed to adjust the amount of SP or LSP payable from the implementation date downwards from the existing entitlement of two-thirds of a month's wages to half a month's wages for each year of service.
Implications for employers
Employers should be prepared to revise their calculation mechanisms for LSP or SP accordingly and amend all employee handbooks and employment contracts where necessary. Retirement scheme service providers should also revisit the trust deeds, offering documents and member booklets of the schemes they operate to see if additional changes will need to be made to these documents as a result of the proposal.
The Government has no plan to launch a public consultation but will consult the business and labour sector over the forthcoming three months and target to table a proposal to the Executive Council in June 2017.