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Focus: Trust law regime in Hong Kong – a time for change

30 March 2010

In brief: The Hong Kong Financial Services and Treasury Bureau last year launched a public consultation on the review of the Trustee Ordinance. Partner Matthew Barnard and Lawyer Angeline Wong examine the implications of the consultation's conclusions for the review's proposals, and report on the changes to be made to the Trustee Ordinance.

How does it affect you?

  • The proposed changes to the Trustee Ordinance (the TO) are intended to increase the clarity and certainty of Hong Kong trust law, and give trustees the modern powers necessary for the efficient management of trusts in Hong Kong.
  • The modernised trust law in Hong Kong will have features reflecting the evolving market's needs, such as the reservation of settlors' powers of investment or asset management, anti-forced heirship provision and the imposing of a statutory duty of care on trustees in exercising their powers. Also, new Hong Kong trusts that are set up after the changes will not be required to have a perpetuity period and, except for charitable trusts, will be allowed to accumulate income for their duration.
  • Trusts managed by professional trustees are less likely to benefit from the proposed changes. In practice, in most cases a trust deed would be comprehensively drafted to govern the powers and obligations of a professional trustee.

Background

A trust relationship arises whenever a person holds property for, or on behalf of, another person. The Hong Kong trust law follows the English common law and principles of equity. The TO, which was enacted in 1934, supplements and amends the common law and equitable principles relating to trustees. Part VIII of the TO also empowers trustees incorporated in Hong Kong to apply to the Registrar of Companies to be registered as trust companies.

Trust companies have the benefit of being exempted from certain prohibitions in the Banking Ordinance and the Securities and Futures Ordinance, and are therefore allowed, among other things, to take deposits and, to the extent that it is incidental to their duties, manage portfolios of investments and provide investment advice. Generally, the provisions in the TO supplement the provisions in the trust deed and can be set aside by specific provisions in the trust deed.

The Perpetuities and Accumulations Ordinance (the PAO) also applies to trusts in Hong Kong. In a nutshell, it imposes a time limit (currently 80 years) within which trust properties must vest in the beneficiaries and confines the income accumulation period to the limits established against perpetuities. Generally, trusts governed by Hong Kong law would be subject to these trust laws.

On 22 June 2009, the Financial Services and Treasury Bureau (the FTSB) launched a public consultation on the review of the TO and related matters, which ended on 21 September 2009.

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Changes to be made to the TO and the PAO

The FTSB proposes making the following changes to the TO and the PAO:

  • introduce a statutory duty of care for trustees when they are exercising their powers in relation to investment, delegation, appointing nominees and taking out insurance, etc;
  • retain, with amendments, trustees' power of delegation under the TO, so that there should be at least one attorney and one trustee or, alternatively, a trust corporation administering the trust;
  • provide trustees with a general power of appointing agents, with specified safeguards;
  • provide trustees with a general power of employing nominees and custodians in relation to trust assets, subject to specified safeguards;
  • provide trustees with wider powers to insure trust assets against risk of loss or damage by any event, and pay the premium out of the trust funds;
  • provide for a statutory charging clause for professional trustees or trust corporations, to enable them to receive remuneration for their services under different circumstances, whether acting for a charitable trust or a non-charitable trust;
  • amend the TO to improve trustees' administrative power;
  • subject certain trustee exemption clauses to statutory control if the clauses seek to exempt professional trustees, who are remunerated for their services, from liability for breach of trust due to fraud, wilful misconduct or gross negligence;
  • legislate for beneficiaries' rights to remove a trustee through a court-free process if beneficiaries are of full age and legal capacity, and are absolutely entitled to the trust property;
  • amend the PAO by repealing the existing rules against perpetuity in respect of new trusts to be set up;
  • amend the PAO by repealing the rules against excessive accumulation of income in respect of new trusts to be set up, except that charitable trusts will be allowed to accumulate income for up to 21 years;
  • provide in the law that a reservation of a settlor's powers of investment or asset management does not invalidate a trust, and that a trustee should be exempted from liability for acting in accordance with the powers that a settlor has reserved;
  • introduce legislation to the effect that, following the Singapore approach, the forced heirship rule will not affect the validity of trusts; and
  • amend the list of authorised investments in the Second Schedule to the TO to make it less prescriptive, in order to keep up with evolving market needs.

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Likely implications

The TO, which was modelled on the English Trustee Act 1925, has not been substantially reviewed and revised since its enactment and is, therefore, outdated. Also, the rules under the PAO against perpetuities and excessive accumulations of income are complicated and uncertain. For instance, if a fixed perpetuity is not chosen for a trust, knowledge of the relevant case law and the PAO's effect will be required to ascertain whether the relevant disposition would be void because the interest might vest outside the perpetuity period. The proposed changes are expected to improve the clarity and certainty of the law, and provide trustees with modern powers necessary for the efficient management of trusts in Hong Kong.

Singapore and Hong Kong are two asset management hubs for the rest of Asia. Singapore reformed its trust law in recent years. The Hong Kong Government expects the more modernised and user-friendly trust law to benefit settlors, trustees and beneficiaries of trusts, and to encourage more local and overseas settlors to choose Hong Kong law to govern their trusts and to administer their trusts in Hong Kong.

Encouraging the development of Hong Kong as an asset management centre is obviously commendable. However, some commentators have noted that trusts that are managed, created or used by financial institutions and finance industry professionals are less likely to benefit from these changes. In practice, a trust deed would usually be comprehensively drafted to govern a professional trustee's powers and obligations, and the different evolution of the asset management industries in Singapore and Hong Kong may partly be due to contrasting licensing, listing and tax regimes (including concessions offered to market entrants).

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