After 77 years, a Change is Gonna Come

The Hong Kong Government has finished with a public consultation on its 1934 Trustee Ordinance ("TO"): http://www.fstb.gov.hk/fsb/ppr/consult/to_review.htm

Most of it is rather technical and the salient points are in the Consultation Conclusions paper:

(a) To 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 (Question 1);

(b) To amend the Second Schedule to the TO and the authorized
investments it contains to keep up with market needs, pending further
study on the detailed amendments (Question 2);

(c) To retain the trustee’s power of delegation under section 27 of the TO
with amendments, so that there should be at least one attorney and one
trustee or alternatively a trust corporation administering the trust
(Question 3);

(d) To provide trustees with a general power of appointing agents with
specified safeguards (Question 4);

(e) To provide trustees with a general power of employing nominees and
custodians in relation to trust assets subject to specified safeguards
(Question 5);

(f) To amend section 21 of the TO, giving trustees wider powers to insure
any trust property against risks of loss or damage by any event, and
pay the premium out of the trust funds (Question 6);

(g) To 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 they are acting for
charitable trust or non-charitable trusts (Question 7);

(h) To amend sections 8, 11, 12 and 34 of the TO with a view to
improving the administrative powers of trustees (Question 8);

(i) To subject certain trustee exemption clauses to statutory control if the
clauses seek to exempt professional trustees, who are remunerated for
their service, from liability for breach of trust due to fraud, wilful
misconduct or gross negligence (Question 9);

(j) Not to provide any basic rules governing beneficiaries’ right to
information, and will further study the subject keeping in view the
evolution of the relevant law in other common law jurisdictions
(Question 10);

(k) To legislate for beneficiaries’ right to remove a trustee (including a
trustee who is incapable by reason of mental disorder) if the
beneficiaries are all of full age and legal capacity and are absolutely
entitled to the trust property (Question 11);

(l) To amend the Perpetuity and Accumulations Ordinance (Cap. 257)
(“PAO”) by repealing the existing rules against perpetuity in respect
of new trusts to be set up (Question 12);

(m) To amend the PAO by repealing the rules against excessive
accumulations of income in respect of new trusts to be set up, except
that charitable trusts will be allowed to accumulate its income up to 21
years (Question 13);

(n) Not to introduce legislation providing for the definition of protectors
nor for their roles (Question 14);

(o) To provide in the law that a reservation of settlors’ powers to
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 (Question 15);

(p) Not to codify the common law principle of the governing law of trusts
and continue to rely on the current law (Question 16);

(q) To introduce legislation to the effect that forced heirship rule will not
affect the validity of trusts by following the Singapore approach
(Question 17); and

(r) Due to the complexity and controversy of the issue, need to study the
issues on non-charitable purpose trusts in greater detail before taking a
final view on the subject (Questions 18).

Before we break out the champagne, there will still be laws to draft, amended and passed (or killed). With godspeed, look at another 2 years before we have something tangible. Even then, there are still a myriad of trust and trust-related issues spanning family law, tax and wealth management that are still "lacking".

All of us owe a great deal to Grace Kwok (who probably regrets ever stepping into the arena) who has been a great trooper and did a great job in synthesizing matters for her superiors.

For those unfamiliar with the Hong Kong trust industry, it is like no other in the world and largely due in part to the legislative framework, including the TO. The TO is painfully outdated, but governs virtually every HK trustee. In the modern world, we have all types of trusts, broadly personal and commercial, and the countless splinter sub-species, most of which did not exist in 1934. The TO obviously left a great deal of uncertainty in many matters that trust providers and users sought. Down right scary uncertainty. As a result, almost all trusts, save testamentary, charitable, pension trusts or certain investment/corporate trusts, were created using a foreign law where there was greater if not exact certainty. And it follows that the trustee appointed was from the same foreign jurisdiction. It meant that few cared about the TO because the market made it irrelevant. Who knew what post-97 HK would be like? Why bother with the red tape of changing local law when you can use a foreign one? The Chinese are very pragmatic.

Whereas people in most other trust jurisdictions, say Jersey, or the Caribbean are usually setting up or administering trusts created under local laws with locally licensed trustees, most people in Hong Kong are setting up or selling or administering a "foreign" trust. Need a fund? Let's set it up under Cayman law! Need a family discretionary trust? Let's do it under Jersey law!

There are only some 50-odd local trustees in HK yet it is one of the largest trust centres in the world. And unless you were in the pension/provident fund or estate administration business, you really didn't need to be one. Hundred of players with trust people in HK are not technically "local". UBS doesn't have a HK trust license, neither does BNP or JP Morgan or Credit Suisse but how many people do they have on the ground dealing with trusts? There are more foreign trustees "operating" in HK than HK trustees!

Singapore was like that until the 90's. But Singapore used concerted tax and law changes to reverse the situation and started building an onshore trust business. Does it matter?

An useful analogy is the Hong Kong stock exchange. The majority of listed companies on the SEHK are not incorporated in Hong Kong! You list in HK because you have need to list (ie cash grab) and whether you use a HK company or Bermudian company as the legal vehicle has negligible affect on where your people are or how you actually run your business in HK. Whether you are selling a HK trust or a BVI trust, whether you are administering a HK-law trust or IOM-law trust doesn't really matter. The assets are still booked with the same banks or asset managers, you do the same transactions, you still have the same number of sales or administrators, you pay profit tax on your trust fee revenue, you pay sky-high rent on the office space in Central, etc.. Would making a HK company as better listing vehicle change the market?

Will these changes create a greater demand for HK trustees and hiring of thousands of staff? Should Singapore or other trust centres be worried about losing business? As I alluded to, it will be years before the entire infrastructure will make choosing a HK trust a truly viable option. There are more considerations than just statute. Still, it's a step in the right direction. The playing field will be a little more level but when you can pick and choose among several legally similar jurisdictions, the final decision will be based upon something else, like pricing, service, etc.

The BVI never created a zillion jobs because HK sent a lot of trust business its way. Instead, the administration and "real work" stayed in Hong Kong (or anywhere but the BVI). Of course some of the money that used to go to these foreign centres can be retained in HK but that isn't where the real money is. And I doubt we will see the same kind of impact as did the changes in Singapore. That was more of a perfect storm situation which is unlikely to repeat itself.

The people with the most to gain initially will be locally qualified lawyers, at the expense of foreign lawyers whose services will no longer be required should people start choosing HK law and HK trustees over, say a Cayman or Singapore offering.

I would say the the cost of doing business in HK is such that back office functions such as much of trust administration will eventually move on to low-cost centers and it has nothing to do with outdated law or even tax on trustees. We are starting to see Singapore outsource to Mubai and elsewhere.