Massive funds market needs better protection

Hong Kong's regulators need to step up their game to protect people's savings as the world has changed since the Mandatory Provident Fund was launched two decades ago.

In the 20 years since the MPF's launch in December 2000, the pot has grown exponentially - from just a few billions back in 2001 into hundreds of billions by 2010 and a massive HK$1.17 trillion this year.

Along with this, the world's investment environment has changed and the stakes have risen amid geopolitical risks, trade wars, investment bans and regulatory crackdowns.

Millions of Hongkongers now have considerable sums placed with the MPF as well as in retail funds, and there should be greater transparency and accountability for these investments, market watchers say.

Investors should know exactly where their money is being placed, where the funds are domiciled and the types of risks they face.

Also, regulators should go on a blitz to teach the man on the street the basics of investing and the challenges they face in a world fraught with risk, they add.

The Mandatory Provident Funds Authority and the Securities and Futures Commission have traditionally adopted a laissez-faire approach towards money managers, giving them a free hand to invest in assets across the world.

However, some names of these funds and retail funds could mislead an unwary investor who can't understand the fine print or all the financial jargon presented to them in reams of product literature.

And while they may believe they are buying stocks listed in the region they are familiar with, for instance, they could actually be buying stocks listed halfway across the world, putting themselves at market and regulatory risk, amid the barrage of investment blacklists from both the US and China, as The Standard reported on Monday.

Invesco has responded to The Standard's article, saying it "dramatically misrepresents Invesco as a fiduciary provider of MPF services in Hong Kong."

"This article conflates potentially valid criticism of MPF regulation with deliberate misinformation and mischaracterization of Invesco's transparency and compliance standards, which always meet or exceed relevant regulatory standards and industry best practice."

It also states that "nearly all market participants invest in Chinese companies that are listed in stock exchanges around the world, and that this is fully in line with regulatory requirements."

It highlights its 88-page brochure for the Invesco Strategic MPF scheme which states the Hong Kong and China Equity Fund can "invest up to 100 percent of its net asset value in Hong Kong and China-related securities, which are listed on Hong Kong or other stock exchanges" on page 8, and a section titled "Risk factors," which details all major risks associated with investing in the constituent funds across 10 pages.

Labor lawmaker Luk Chung-hung from the Hong Kong Federation of Trade Unions admits that while funds managers must have enough room to operate, "too much flexibility may be a problem." He says regulators should set upper limits for any fund that invest in assets which do not match the fund's name.

So, what falls within the MPFA's remit?

In addition to regulating pension fund schemes, it supervises MPF trustees and encourages the adoption of a high standards of conduct and sound prudent business practices by trustees and other service providers. But the MPFA hasn't updated the Code on Disclosure for MPF Investment Funds since December 2019. It may not be a long time ago, but a lot has happened since then.

In January 2021, America banned investments in certain Chinese stocks, including blue chips such as CNOOC, China Mobile and China Unicom which are traded in Hong Kong. Major fund managers like BlackRock and Vanguard had to offload Chinese stocks worth billions to comply with the ban, and many others are still working out how these bans affect exchange traded funds and other retail funds.

And while fund managers have legal minds to fight for them in case disputes arise, the retail investor has nobody in their corner.

The US-based State Street Global Advisors Asia, the manager of the Tracker Fund of Hong Kong, the city's most popular ETF, has warned that US citizens and firms will not be able to trade any units after June 3, 2022. Meanwhile, American citizens who work in Hong Kong may fall into the net of justice in the US if they have invested in banned Chinese shares through an MPF fund. And if they continue to hold any shares after June 3 next year, US law may prevent them from disposing of or otherwise dealing in these shares.

Lawmaker Paul Tse Wai-chun, who also works as a barrister and solicitor, says Americans may be violating the prohibition technically if they have invested in banned Chinese shares through MPF schemes.

But he believes the US may not punish MPF members who indirectly invest in banned stocks.

Barrister Albert Luk Wai-hung says if an American unwittingly invests in banned shares, they can't be held responsible especially if the fund manager does not disclose the constituent or issue a risk warning.

And while recommending that Americans in Hong Kong seek advice from US lawyers, barrister Issac Chan Chi-kong places the responsibility squarely on the provider's shoulders.

Over the last three years, the MPFA has taken action against intermediaries and employers for various misdemeanors.

But the SFC and MPFA both have the responsibility to remind MPF providers to make sure their products' constituents are aligned with their themes in their fund fact sheets - and the funds' investment strategy has to be more clearly stated, as well as disclose the latest market risks, market watchers say.

As of end-March, there were 407 funds under 27 schemes worth a total of HK$1.17 trillion, generated from 307,000 employers, 2.7 million employees and 230,000 self-employed persons.

The Insurance Authority and the Hong Kong Monetary Authority are also tasked with regulating the industry, and whenever the MPFA wants to propose new guidelines, it must first consult the Insurance Authority, the HKMA and the SFC.

The MPFA says its supervision is without blemish. "MPFA requires approved trustees of MPF schemes to implement control procedures to ensure that the investments of an MPF constituent fund are compliant with applicable regulations and its investment objectives. MPFA also conducts continuous monitoring activities to review an MPF constituent fund's compliance with applicable regulations and its investment objectives."

The SFC had no comment.

An industry watcher says the lack of transparency extends across all funds.

"The same happens to retail funds and the name of a fund doesn't tell all," she says. "People should read the fund's objectives - though this is a hard lesson to teach. MPF China funds also do not invest solely in mainland markets and in fact that's not feasible because of capital controls. I think a more serious problem facing the MPFA is how it should protect the money invested in all these funds when most fund houses are based in the US or Europe and will probably be caught in US-Sino rivalry."

Others say the MPFA should not only to educate the population about saving for retirement but also to keep them up to date on the latest developments in the world of investments and not leave it solely in the hands of fund managers, so that Hong Kong's 2.7 million workers can make informed decisions on their life's savings.