More regulations coming for Trust businesses in Hong Kong’s banking sector

Proposals from HKMA call for more fairness, integrity and diligence when dealing with customers

In response to the industry’s call for strengthening supervision over the trust business in banking sector, the Hong Kong Monetary Authority (HKMA) proposes to regulate and supervise trust business via a Code of Practice for Trust Business (see draft code) (Code), which will apply to authorised institutions (AIs) and subsidiaries of locally incorporated AIs that conduct trust business in Hong Kong. Other trustees and trust companies in Hong Kong are encouraged to adopt the Code to an extent applicable.

The regulatory body, HKMA, intends to enhance protection of trust assets, to align with international standards and promote the practice of treating customers fairly in the trust business. It is not including any trust-specific prudential requirements or anti-money laundering or counter-terrorist financing requirements, as these has been included in other legislation.

The Code covers 6 principles:

  • Principle 1 Fairness, honesty and integrity: A trustee should act honestly, fairly and with integrity in conducting its trust business;
  • Principle 2 Due skill, care and diligence: A trustee, in conducting its trust business, should act with due skill, care and diligence, and in the interest of its customers. A trustee should ensure that the entity through which trust business is conducted and all relevant staff are fit and proper to perform their roles and functions;
  • Principle 3 Management and Control of trust assets: A trustee should exercise due care in understanding, managing and controlling all assets held within the trust in full conformity with its fiduciary obligations;
  • Principle 4 Corporate governance and internal controls: A trustee should establish a proper corporate governance structure and implement adequate internal controls and risk management systems to ensure that its trust business is effectively managed;
  • Principle 5 Compliance with legal and regulatory requirements and standards: A trustee should comply with relevant legal and regulatory requirements and standards applicable to the conduct of its trust business activities; and
  • Principle 6 Co-operation with regulators: A trustee should deal with relevant regulators in an open and co-operative manner.

HKMA is also contemplating the idea of maintaining a list of trust companies on its website for banks and banks’ subsidiaries that conduct trust business in Hong Kong, as well as for other trust companies that have submitted a declaration that they observe the proposed Code, to be accessed by members of the public.

Furthermore, the supervision is planned to include off-site surveillance in the form of regular and ad-hoc surveys, and on-site examinations that may require banks or banks’ subsidiaries to provide a copy of the auditors’ report, together with their management response on remedial action plan.

Any material non-compliance of the Code may call into the question the fitness and propriety of the trustee, whether the institution continues to satisfy the minimum criteria under laws, and/or fitness and propriety of chief executive, directors and shareholder controllers of the institutions concerned.

Comments on the proposal are required to be submitted by 9 October, 2020 voluntarily. It is proposed that when the Code is finalised, banks and banks’ subsidiaries should be required to comply as soon as is practicable within 6 months from the date of issuing the Code. Other trust companies will be encouraged to follow the same timeline to adopt the standards.

For more information, please contact Alpadis Group