Further Guidance Concerning Findings of Mystery Shopping Programme on Selling Practices in Respect of Tax-deductible Voluntary Contributions

Following the publications of the findings from a recent mystery shopping program in connection with intermediaries engaged in the sale of Qualifying Deferred Annuity Policies (QDAPs) and Tax-Deductible Voluntary Contributions (TVCs) in December 2022 (please see EventID 19133 in this context for more information), the Mandatory Provident Fund Schemes Authority (MPFA) has now published a follow-up circular in this context. Therein, the MPFA provides guidance relating to some of the key deficiencies observed during the mystery shopping program in connection with TVCs. Specifically, the circular addresses the following issues:
(1) know-your-customer (KYC) procedures including identity verification and the identification of vulnerable clients;
(2) „explanation of product features and disclosure of risks“; and
(3) disclosures made to clients with respect to the remuneration of subsidiary intermediaries (SIs) and / or principal intermediaries (PIs) in relation to the product.
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(1) know-your-customer procedures: In this context, the MPFA once again emphasizes that PIs are obliged to provide a compliance checklist to their SIs as regards the verification of identity of (potential) customers, the identification of vulnerable clients, and the information assessment of customers so as to enable the determination of suitability and make corresponding recommendations. Both PIs and SIs are expected to take all steps necessary to comply with this requirement.
(2) explanation of product features and disclosure of risks: It is expected, so the MPFA, to properly disclose the risks involved in TVCs and the key product features to enable investors to make informed decisions. As far as product features are concerned, the MPFA expects – at a minimum – the disclosure and explanation of
– the tax treatment of TVCs, particularly when a client is / was also engaged in investments in Qualifying Deferred Annuity Policies;
– the transferability of TVCs; and
– the Default Investment Strategy (DIS) which applies when no specific investment options are chosen by the investor.
As far as (investment) risks are concerned, the MPFA particularly emphasizes the need to explain to investors
– the risks involved when exiting a guaranteed investment alternative; and
– the risks associated with the investment performance of a product.
(3) disclosures made to clients with respect to the remuneration of subsidiary intermediaries (SIs) and / or principal intermediaries (PIs): Registered intermediaries, both PIs and SIs, must disclose to their clients the benefits they receive from the sale of a product. This is particularly relevant for assurance that any potential conflicts of interest have been made public. PIs and SIs are expected to disclose such information in a written statement at the point of sale, advice, or otherwise engagement with the client for the purposes of selling a product.
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To conclude, the MPFA also briefly reminds of the obligation to assess the suitability of a TVC for the client and to take into consideration all information on clients‘ needs and financial situation when making corresponding recommendations for a TVC account opening.