Hong Kong Family Offices Put Renewed Faith in Trusts

Hong Kong Family Offices Put Renewed Faith in Trusts

However, high compliance costs and a lack of mainland understanding of trust structures could dampen future growth. 

Trusts. The structures go back centuries, even millennia, to the days of Ancient Rome and the Crusades. It became a way, as international law firm Appleby indicates, for English Knights to be able to go off and fight for years, even decades.

The problem was that many of them would hand their land titles and deeds to trusted friends and relatives only to find that the latter discovered that ownership of something given to them for free was more than somewhat gratifying. 

Beneficial Ownership

Thus, for many, it became all too easy to refuse to hand them back when the Knight in question returned, with the frequency and injustice of that kind of thing spurring the development of the first trusts law by the ancient Court of Chancery, a form of feudal high court. 

That was where the idea of splitting the legal and beneficial ownership of titles, deeds, or assets first sprang up, something that prevented sole trustees from keeping what was not theirs - a fundamental principle that exists to this very day.

Occasionally Aberrant

Now, the popular understanding of structures is mainly by way of the rather polarizing term «trust fund baby», or a way for the uber-wealthy to keep occasionally aberrant sons and daughters from investing too much of the family fortune in Lego collectibles or chipped Wedgwood sets.

Still, their use has waxed and waned with time, and market cycles, even though private banks and wealth managers around the world have always kept them as part of their product palette.

Rude Awakenings

Until recently in Hong Kong, however, their use was largely on the wane at the average private bank and wealth manager because of high costs and administrative burdens.

In the mid-2010s, for example, many AML-challenged institutions were rudely awakened by an HKMA wielding the ominous onsite thematic inspection after the introduction of the new money laundering rules, with some of the more inveterate offenders having to submit to a dreaded Section 59 audit. 

The BVI Question

Individual private bankers rarely recommended them because of the cost and effort of implementing and administering them, not to mention the Sisyphean burden of keeping the documents updated for high-risk clients or PEPs.

As an example, during audits or inspections, droves of external consultants from the Big Four had to be drafted in for months at a time to help with mass tooth-pulling exercises, doing things like extracting updated Certificate of Incumbency (CoI) documents from BVIs. 

Modest Growth

Yet things look like they might be changing again, as several factors are now standing them in good stead, according to the Hong Kong Trust Industry Spotlight 2025, a joint report co-authored by the Hong Kong Trustees’ Association (HKTA) and KPMG China released on Tuesday.

Although growth is still a modest 3 percent year-on-year (end-2023) for assets held under trusts for governments, sovereign wealth funds, central banks, family offices, and private trusts, a completely overhauled Capital Investment Entrant Scheme (CIES) and Hong Kong’s tax incentives have put the city «on the map» as the «go-to» hub for UHNWIs and investment, the report indicates.

«The new CIES is just one of a suite of measures introduced in recent years to enhance Hong Kong’s attractiveness as a destination for family offices. These measures have been successful in attracting interest from family offices and high-net-worth individuals from regions including the Chinese Mainland, ASEAN countries, the Middle East, and Europe,» the report stated.

The Family Office Side

Moreover, InvestHK has established the Family Office Hong Kong as a dedicated one-stop platform for the establishment of family offices, handling more than 650 inquiries since the regime was created in 2021.

By late 2023, 2,700 single-family offices were operating in the city, something that will be fertile ground for trusts, as most of the former are either owned by trusts or manage wealth held in such structures.

The Regional Market

The sheer scale of Asia also presents a solid opportunity for the city’s trust industry, with the mainland having the most immediate and significant potential in the next 3-5 years. 

As an example, the size of the Greater Bay Area (GBA) market is now $2 trillion, and driving demand for cross-border wealth management, although the general lack of familiarity mainland investors have with the concept of trust is a challenge.

«The concept of trust is still relatively new in China. Many investors are unfamiliar with the legal and practical implications of setting up a trust, and they need to be educated about the benefits and potential risks,» the report indicates.

Unexpected Costs

Another issue is are sharply rising compliance costs. The report indicates that many survey respondents saw increases of between 5-15 percent in the 12 months preceding the report alone, particularly related to capital adequacy requirements, licensing, due diligence, and transaction monitoring.

Deja Vu

As with the private banks a decade ago, regulators are also likely to step up scrutiny of the trust industry to make sure they comply with the new regulations, raising the specter of potential fines and other penalties.

«With all the new regulation in recent years, some smaller players may need to streamline or rethink their operations, or even consider exiting the market,» the report stated.