HK consultation on regulation of trust business

HK consultation on regulation of trust business, 香港完善信托业务监管的咨询文件

In July 2020, the Hong Kong Monetary Authority (HKMA) launched a consultation paper foreshadowing a Code of Practice for Trust Business. The code will contain general principles and practical standards to govern the conduct of authorised institutions (AIs, being principally banks) and their subsidiaries conducting trust business in Hong Kong.

The consultation concluded in October 2020, but the code is yet to be promulgated. Below are some observations on the draft code, which wealth management industry participants may wish to consider.

Application. The draft code proposed that it will apply to all AIs that conduct trust business in Hong Kong, either themselves or through their subsidiaries. Locally incorporated AIs should ensure their trust company subsidiaries comply with the code. Other entities that conduct trust business in Hong Kong are merely encouraged to adopt the code (the HKMA has no legal authority to regulate non-AIs.)

Trustee companies that voluntarily seek to comply with the code will be named in a list published by the HKMA. Questions arise as to how the HKMA will review the list from time to time, to ensure the “volunteers” – who are not subject to the HKMA’s supervision, given they are not Ais – comply with the code, and whether, and to what extent, these volunteers may later be subjected to other supervisory regimes as suggested by the HKMA in the consultation paper, including but not limited to off-site surveillance and on-site reviews by the HKMA.

Definition of “trust business”. The definitions of “trustee” and “trust business” under the draft code are very broad and are not confined to acting as trustee in the narrow and usual sense of the word. The term trust business covers the provision of management of assets held on trust, administration services for a trust, etc.

If these definitions remain widely drafted in the final code, potentially other industry players may be subject to additional unintended regulatory regimes. For example, investment managers who are licensed or registered to conduct regulated activities under the Securities and Futures Ordinance may be subject to regulatory requirements imposed by both the Securities and Futures Commission and the HKMA.

Definition of “customer”. In the draft code, a “customer” is defined as the settlor and beneficiaries of a trust. However, the word customer is used in different parts of the code, in different contexts. This gives rise to potential contradictions with general principles of trust law. For example, the draft code provides that a trustee should treat the interests of customers as paramount but, under trust law principles, a trustee should treat the interests of the beneficiaries as paramount.

This creates a conceptual difficulty, especially if the settlor is not a beneficiary under the trust. It is unfortunate that the regulation of the trustee industry is being placed in the hands of an authority that is not experienced in dealing with family trusts. It remains to be seen if the language of various parts of the code will be tightened in its final version.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at