Hong Kong changed its trust law around a year ago and the author of this item examines what has changed, what has improved and what the future holds.

Around a year ago, Hong Kong transformed its trust law – the changes took effect in December 2013 – and it was hailed at the time as an important overhaul of a regime that had not been significantly changed since before the Second World War. With jurisdictions battling to get an edge in terms of the attractiveness and appeal of their trust regimes, the change was seen as a necessary move by Hong Kong to ward off competitive threats. In this article, Matt Braithwaite, who is senior associate, Bircham Dyson Bell, examines how the change to the trust regime has fared and considers what the future may hold.

The transformations to Hong Kong’s trust law that came into force on 1 December 2013 were the first reforms since the law was initially enacted by statute in 1934. The welcomed changes aligned Hong Kong’s trust law with modern business, in what was seen as a pivotal move to secure its reputation as an international financial centre.

Nearly one year on, this article provides reflection: assessing the success, or otherwise, of the trust law reforms, with a view to underlining that the future of Hong Kong's legal system cannot be ignored.  

To ensure a just reflection is drawn, we must start at the beginning with a summary of Hong Kong’s trust law before the reforms were introduced.  

A history of Hong Kong’s trust law
Hong Kong is a common law jurisdiction. Its trust law was formulated and contained in legislation enacted back in 1934 which was based on the English Trustee Act 1925.   

In the years preceding the hand-over of Hong Kong to China in 1997, demand for Hong Kong trusts diminished. This was primarily as a consequence of the uncertainty over what effect the hand-over would have on Hong Kong’s reputation as an international financial centre.

Under the Sino-British Joint Declaration signed by the United Kingdom and the People’s Republic of China it was agreed that in accordance with the “one country, two systems” principle, the socialist system of the PRC would not be practised in Hong Kong and its previous capitalist system would remain unchanged for 50 years until 2047.  

As the dust settled in the years following the hand-over it became apparent that Hong Kong had retained its own identity, and with the Chinese economy going into overdrive, Hong Kong’s proximity and links with the PRC meant Hong Kong built on its reputation as an international financial centre.
 
With Singapore reforming its trust law in 2004, there came a realisation in Hong Kong that with an established rule of law and a concentration of high quality finance service providers, the one thing it lacked was an attractive trust law.  In 2007 the Joint Committee on Trust Law Reform was formed and Hong Kong embarked on its journey to trust law reform.

The key features of Hong Kong’s new trust law

-- Trusts can be made in perpetuity which could become a significant attraction for settlors who want the possibility for their trusts to continue over many generations.

-- Investment powers can be reserved to settlors without invalidating the trust through an argument that a settlor is retaining too much control.

-- Assets placed in trust will be protected from forced heirship rules imposed by the legal systems of certain countries.  

-- Enhanced powers of trustees allowing them to appoint professional asset managers to manage portfolios of investments.

There is also enhanced protection for beneficiaries and amendments to trustees’ duties mean that they will no longer be able to exclude liability for wilful misconduct or gross negligence.  

A success?
It is too early to say whether these reforms have been a success. Indeed, how does one gauge their success?  It is perhaps not appropriate to base it on the number of new trusts which have been set up since the reforms were introduced, but rather on what effect a modern and more credible trust law will have on Hong Kong. At the very least Hong Kong’s new trust law is evidence that Hong Kong is very much open to business as an international financial centre and has equipped itself with a full weaponry equal to that of its offshore competitors.

An uncertain future…
To end here would be to ignore two fundamental twists in this plot, both of which could pose a threat to the success of Hong Kong’s trust law, both now and in the future.

Hong Kong currently (at the time of writing) finds itself in unchartered territory: civil unrest. The “Occupy Central” protests threaten to undermine the relationship Hong Kong has for the last 17 years enjoyed with the PRC, and casts uncertainty over how this unrest will be resolved. This could threaten to undermine Hong Kong’s un-tarnished political reputation which up until now has been one of its main attractions.  

It is fair to say that for many “the elephant in the room” is 2047 when the UK-PRC agreement comes to an end. To speculate on what will happen to Hong Kong’s legal system would be somewhat presumptuous at this stage, least of all when the Occupy Central protests perhaps beg more questions.

Nevertheless it is a relevant issue particularly in the context of trusts which could last for many years beyond 2047 - indeed the ability to make them in perpetuity means that this will be the case. There is nothing at this stage to say that Hong Kong's current legal system will change, but the future of trusts under Hong Kong law hinges on this. A happy ending this may not be, just yet. Like any good cliff hanger, this story will be continued.