HONG KONG: GBA to fuel jurisdiction growth as trust hub.

As published on theasset.com, Wednesday 23 June, 2021.

Hong Kong’s outlook as a trust centre remains bullish in the short to medium term, with the mainland China market, as well as the Greater Bay Area (GBA), as a key growth driver for the industry.

Despite the strong growth prospects, however, a number of challenges remain, including a fragmented regulatory regime for trustees, the need for greater tax clarity, and increasing compliance costs, according to a joint report by accounting major KPMG and the Hong Kong Trustees’ Association (HKTA).

Ongoing efforts to further open up China’s financial services sector, along with the development of the GBA and the rise of private wealth, present enormous opportunities for the rapid growth of the city’s trust industry, says the report, which was based on a survey of HKTA member institutions and in-depth interviews with more than 30 senior industry executives and regulatory officials.

Assets held under trusts in Hong Kong amounted to HK$3,844 billion (US$494 billion) at the end of 2019, up 11% from a year earlier, according to the latest survey by the Securities and Futures Commission (SFC).

Vivian Chui, partner, head of securities and asset management, Hong Kong, at KPMG China, says: "There have been numerous changes affecting the trust industry over the last few years, driven by developments such as the introduction of a licensing regime for trust or company service providers (TCSPs), initiatives to attract family offices to Hong Kong, and the launch of the Open-ended Fund Company and Limited Partnership Fund (LPF) regimes, as well as various regulatory reforms in the funds space which have helped promote Hong Kong’s attractiveness as a fund domicile. In particular, we expect that the LPF regime will be an increasingly attractive option for mainland Chinese asset managers looking to raise offshore capital."

The GBA, comprising Hong Kong, Macau and nine cities in Guangdong province, is home to more than 71 million people, with a combined GDP of US$1.6 trillion. In 2019, 20% of all high net worth individuals (HNWIs) in China lived in the GBA. The sizeable population and growing amount of wealth in the region present opportunities not just for the asset management industry, but also for private trusts, family offices and private collective investment schemes, the report says. Already, 54% of the survey respondents say they have a strategic plan for the GBA, while another 23% plan to formulate a strategy in the next 12 months.

“Hong Kong is well positioned to take advantage of the rapidly growing wealth in the region. Wealthy customers from mainland China and other parts of Asia are increasingly looking for more comprehensive types of services such as estate and succession planning activities, and family office services. This is where the trust industry in Hong Kong has a pivotal role to play,” says Bonn Liu, head of asset management for Asia-Pacific, KPMG China.

The report says Hong Kong should take advantage of its role as a fund-raising centre and a testing ground for innovation. For example, the city is keen on developing its real estate investment trust (Reit) market, which could help developers in the GBA to attract capital and finance property development.

Hong Kong is also working to create a more attractive environment for family offices. In September 2020, for example, the SFC issued updated guidance on investment vehicles, which should allow more single family offices run by experienced professionals to qualify as corporate professional investors. It also makes them eligible for certain exemptions related to sales suitability, client agreements and disclosures.

“However, there are still a lot of complexities that family office newcomers to Hong Kong have to face in terms of different legislation involving different governmental departments. There is also currently no specific licensing regime for family offices,” the report says.

This reflects the highly fragmented regulatory regime for the city’s trust industry. For example, trustee service providers for different pension products – Mandatory Provident Fund, Occupational Retirement Schemes Ordinance (Orso) or pooled retirement funds – could be subject to different regulators, such as the Mandatory Provident Fund Schemes Authority, SFC, Hong Kong Monetary Authority and the Insurance Authority, according to the report.

The fragmented regulatory regime leads to unnecessary compliance costs. According to the survey, 85% of respondents say their compliance costs have increased in the last 12 months. While the size of the increase appears to have eased, the ongoing compliance burden remains a key issue.

“The government should carefully review the regulatory regime for professional trustees as it is hard to clarify who is a ‘professional trustee’ and who is not. While the TCSP licensing regime has been helpful in dealing with AML (anti-money laundering) risks, it does not factor in fit and proper considerations as to the standards of professionalism of the trustees, or any consumer/investor protection elements,” says Jacqueline Shek, HKTA chairperson and executive director of Zedra (Hong Kong) Limited.

Tax has also been highlighted by industry players as a key issue. The report cites several interviewees calling for reforms and greater clarity on the taxation of trusts and trustees to encourage HNWIs and wealthy families to have their trusts managed in Hong Kong.

More than half of the survey respondents (51%) believe that the tax legislation needs to be amended to provide more certainty to the taxation of trusts in Hong Kong, although 20% say it does not need to be amended and 29% are unsure.

While interviewees acknowledge that there have been positive tax developments such as exemptions and concessions in the funds segment, more clarity on the taxation of trusts and trustees is needed, particularly in the private trusts space, according to the report.

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