Mandatory Provident Fund Schemes Authority - …

1 DRAFT ATTACHMENT 1 Mandatory Provident fund Schemes AuthorityCODE ON DISCLOSURE FOR MPFINVESTMENT FUNDSF irst Edition 2004 Hong KongConsultation Paper on the DraftCode on Disclosure for MPFI nvestment Funds2 February 2004 Hong KongTable of ContentsPageINTRODUCTION .. 1 BACKGROUND .. 2 DEVELOPMENT OF THE DRAFT 2 ABOUT THE DRAFT CODE .. 3 PART B: DISCLOSURE 4 PART C: DECISION POINT DISCLOSURE OF FEES AND CHARGES OF A REGISTERED 5 PART D: fund FACT 5 PART E: fund EXPENSE 6 PART F: ON-GOING DISCLOSURE AT MEMBER 6 PART G: IMPLEMENTATION AND TRANSITIONAL 6 FURTHER 7 COMMENTS SOUGHT ON THIS CONSULTATION .. 7I. GENERAL 8II. TECHNICAL 9 ATTACHMENT 1: DRAFT CODE ON DISCLOSURE FOR MPF INVESTMENT FUNDSATTACHMENT 2: PERSONAL INFORMATION COLLECTION STATEMENTPage 1 INTRODUCTION1. This consultation paper invites comments on the draft Code on Disclosure forMPF Investment Funds.

2 The draft Code provides guidance to approved trustees of MPFschemes and other service providers about the disclosure of information about MPF schemesand constituent funds. The draft Code focuses on information about fees, charges and The Mandatory Provident fund Schemes Authority (the Authority ) invitesinterested parties to submit written comments on the proposals discussed in this consultationpaper and draft Code no later than Monday 15 March Any comments received from interested parties will be carefully considered bythe Authority before the draft Code is Any person wishing to comment on the draft Code should provide details of anyorganization whose views they represent. Please note that the names of the commentators andthe content of their submissions may be published by the Authority in connection with anyfurther discussion or consideration of the draft Code.

3 In this connection, please read the Personal Information Collection Statement at Attachment 2 to this consultation If you wish to make a submission but do not wish your name to be published bythe Authority , please state that you wish your name to be withheld from publication when youmake the Written comments may be sent:By mail to:Investment Regulation DivisionMandatory Provident fund Schemes Authority21/F., One International Finance Centre1 Harbour View Street, CentralHong Kong orBy fax to:(852) 2259 8828 orBy email For further information, please contact the External Affairs Division of theAuthority at (852) 2292 Additional copies of the Consultation Paper may be obtained from the aboveaddress or from the Authority s web site at 2 CONSULTATION PAPER ON THE DRAFTCODE ON DISCLOSURE FOR MPF INVESTMENT FUNDSBACKGROUND1. The draft Code on Disclosure for MPF Investment Funds has been developedby the Authority to improve the disclosure of information about MPF Schemes and in particularinformation about fees, charges and performance.

4 It is expected that better disclosure of thisinformation will help scheme members to make more effective MPF investment The need for improvements in the way that information about fees, charges andperformance is disclosed was identified by reviews conducted internally by the Authority andby external experts retained by the Authority . The conclusion of those reviews, that there is aneed to improve the disclosure of information about fees and charges of MPF funds, is alsostrongly supported by the outcomes of the study conducted by the Consumer Council on thedisclosure of information on MPF funds which was released on Friday, 14 November The various reviews identified the need to provide scheme members withclearer and easier to understand information to enable them to make more effective MPFdecisions. The proposals contained within the draft Code seek to achieve those outcomesthrough the use of mechanism such as simplified language, improving the consistency ofpresentation and language and by proposing a variety of tools that will assist members inunderstanding the information.

5 In addition to providing guidance in relation to specificdocuments such as offering documents and fund fact sheets, the draft Code provides a set ofgood disclosure principles which are intended to guide approved trustees and their delegates inpreparing any information for disclosure to scheme members whether in the documentsspecified in the draft Code or in more generalized disclosure material such as of the draft Code4. The first step in developing the draft Code was to review existing disclosurepractices to identify weaknesses and areas for possible improvement. In this respect theAuthority enlisted the assistance of an international panel and separately conducted its ownreview of a wide range of existing disclosure documentation. Those reviews identified anumber of weaknesses and areas for possible improvement summarized as follows: information about fees and charges for MPF funds is difficult for members to understandbecause of the use of technical terms, the inconsistent use of language and the variation inpresentation order and format;Page 3 even if members can understand the information, it is extremely difficult for them to workout the effect of the totality of fees and charges and the effect this might have on investmentreturns; performance information about constituent funds is not provided regularly by all serviceproviders and where it is, there is inconsistency in reporting against time periods.

6 The performance calculation basis used between different product providers is notconsistent and information about performance of different classes within funds isinconsistent; the practice of deducting units from members accounts for the payment of fees andexpenses distorts performance calculation and comparability; and the approach to reporting performance against benchmarks and the use of riskclassifications varies across funds and The second step in developing the draft Code was to review how otherjurisdictions have approached the weaknesses and areas for possible improvement identifiedabove. In this respect, the Authority closely considered the disclosure regimes and recentreforms in relation to long term savings products in countries such as the United States, theUnited Kingdom, Australia, Canada, Singapore and New Zealand.

7 The Authority has thusbeen able to choose from a range of existing methodologies and adapt them to local needs The third step in developing the draft Code was to develop a set of coreproposals and discuss these with representative industry bodies under the umbrella of theRetirement Schemes Industry Group (which is comprised of representatives from the HongKong Investment Funds Association, Hong Kong Trustees Association and the Hong KongFederation of Insurers). The Authority recognizes the contribution that the industry bodieshave made to the development of the proposals and particularly in relation to resolving a largenumber of preliminary technical issues associated with their Based on the above three steps the Authority has developed the draft Codewhich is now released for comments by interested THE DRAFT CODE8.

8 The Code will be issued pursuant to section 6H of the Mandatory ProvidentFund Schemes Ordinance and will have the same status as a guideline issued under that 49. Chapter B1 of the draft Code sets out some background material about thedecisions required of scheme members and the corresponding information needs of thosemembers. The principal, although not sole, focus of the guidance in the draft Code relates to theprovision of information about fees and charges. Information about fees and charges isparticularly important for members in making comparative investment decisions because: fees and charges represent the cost of a financial product such as a constituent fund ; fees and charges represent a material impact on net return that will be generated on longterm savings products such as MPF funds; and information about fees and charges has some forward looking reliability compared to otherinformation such as likely returns for The focus that the Code places on the disclosure of fees and charges is not tosuggest that information about fees and charges should be considered by members in isolationfrom other information when making investment decisions.

9 The Code focuses on informationabout fees and charges because that is an area where there has been some expressed need forbetter information and the Authority considers that significant improvements can be made inthis area. In the future, the Code may be supplemented to provide guidance on other importantinformation The draft Code is separated in seven parts. The substantive proposals arecontained within Parts B to G, which are summarized B: Disclosure Principles12. In addition to providing some background information about the provision ofinformation to scheme members and prospective scheme members and the range of investmentdecisions available to members, this part contains seven good disclosure principles that havebeen applied in the development of the draft Code. The draft Code proposes that these gooddisclosure principles should also guide approved trustees in preparing any information fordisclosure to scheme members.

10 The good disclosure principles set out in the draft Code are asfollows:i) Information should facilitate decision making;ii) Information should be timely;iii) Disclosure should promote comparability;iv) Disclosure should be consistent;Page 5v) Disclosure should be clear and concise;vi) Disclosure should not encourage the focus on past performance; andvii) Disclosure should encourage the consideration of fees and C: Decision Point Disclosure of Fees and Charges of a Registered Scheme13. This part of the draft Code seeks to clarify the disclosure obligations thatcurrently apply to approved trustees and how those obligations should best be met. This partalso proposes the use of a standardized fee table for all registered MPF Schemes . The purposeof the standardized fee table is to ensure that all fees and charges are brought together at onepoint in a manner that is consistent across funds so that comparison is facilitated, to minimizethe use of disparate terminology and to facilitate an at a glance understanding of fees This part also proposes the use of on-going cost illustrations.