In recent years, the wealth management issue that has received the closest attention in China is no doubt the reform of the trust system. As trusts are no longer a purely financial product or instrument, they have also become a mechanism for truly assisting people in managing and passing on their wealth. However, taking a broad view of the international community, every country that has successfully implemented the trust system has without exception steered a cautious course in designing the relationships between the Trustor (or Grantor), the Trustee, and the Beneficiary.
Due to the immature environment in the past and the profit-making intentions of some practitioners in the industry, China’s trust market has gone through constant disturbances and several rounds of rectifications. In recent years, whether it is regarding the revisions to the Trust Law or the introduction of relevant opinions or guidelines, the focus has always been the regulation of the Trustee, with the purpose of safeguarding the rights and interests of the Beneficiary. Such a direction of development is also consistent with the international trend. The Guidelines on the Supervision Rating and Classified Supervision of Trust Companies, issued in 2010 and revised in August 2014, was introduced with the hope of achieving the classified supervision of the Trustee in commercial trusts (that is, trust companies) on an ongoing basis.
Meanwhile, on the basis of comprehensively evaluating the development of the market, the China Banking Regulatory Commission (CBRC) will also adjust the evaluation elements and criteria for the supervision rating of trust companies according to the principle of “prudent supervision” in a timely manner. The evaluation elements here mainly include three aspects: risk management, asset management, and compliance management. The risk management element mainly evaluates the rationality of trust companies’ governance structure, the effectiveness of their internal control system and risk management system, the status of their capital management, the risk management of their trust business, and so forth. It is aimed at guiding trust companies to establish a sound risk management system; the asset management element mainly evaluates trust companies’ comprehensive operating capacity, trust business operating capacity, profitability, R&D and innovation capacity, marketing capacity, and reputation management capacity, aiming to guide them to improve their active management capacity and profitability level. The compliance management element mainly evaluates the construction of trust companies’ compliance management system and their compliance with relevant laws and regulations, as well as companies’ systems and trust documents, and inspects whether supervisory measures, administrative punishment, criminal punishment, and so forth, have been taken for the violation of laws and regulations. It also aims at guiding them in fulfilling the obligations of honesty, credibility, prudent management, and safeguarding the interests of the Beneficiary.
In addition, there has been a change in the way of thinking on the part of regulators in 2015 regarding the rating of trust companies, that is, from the previous supervision rating to the present dual-rating mode of supervision rating and industry rating. The China Trustee Association (CTA) issued the Guidelines on the Industry Rating of Trust Companies (Trial Implementation) (Consultative Draft) to some trust companies, and summed up their feedback and comments in May. The Guidelines covers four indices, that is, capital strength index, risk management capacity index, value-adding capacity index and social responsibility index, and classifies trust companies into three levels: level A (85-100 points), level B (70-85 points), and level C (below 70 points). To be specific, the capital strength index (30 points) consists of net capital (10 points), net capital/risk capital ratio(15 points) and net capital/trust risk project scale ratio(5 points); the risk management capacity index (30 points) consists of non-performance rate of inherent credit risk assets (10 points), normal liquidation rate of trust projects (10 points), and recovery rate of trust property loss (10 points); the value-adding capacity index (36 points) consists of return on net assets (6 points), trust business income/total revenue ratio (6 points), operating expense/revenue ratio (6 points), per capita net trust income (6 points) and share of self-marketing trust products (6 points); the social responsibility index accounts for 10 points.
However, what needs to be pointed out here is that the Guidelines is a rating initiative that is independent of supervision rating and that intends to comprehensively evaluate the operating management of trust companies. Given that currently there is no authoritative system for the evaluation of trust companies in China’s trust market, it’s indeed necessary to establish an authoritative system for the competitive evaluation of trust companies that is independent of supervision ratings to a certain extent, so as to facilitate the selection of the Trustee by the Trustor and provide substantial support to the development of family trusts, which has been receiving widespread attention in recent years.
The selection of the “Trustee” is of great importance for the trust system, and also constitutes a major breakthrough point in the course of development. As far as the establishment of a trust is concerned, the emphasis should be placed on the ability of the Trustee and the Trustor’s trust in the Trustee, especially since, in the course of the essential development of a trust from investment channels to transaction management, the Trustee will also abandon the index indicating the high return. Thus, as far as the development of family trusts is concerned, success will come when conditions are ripe.
However, in addition to the development of onshore family trusts, the structure and establishment of offshore trusts are also closely related to the Trustee. For instance, is there a unified judicial jurisdiction when selecting a Trustee within the same judicial jurisdiction as the place of the trust’s establishment, and is it possible to prevent the judicial perplexity of conflicting rules? What form does the Trustee take on, and will there be functional differences when an individual, an institution, a private trust company or a third-party agency (like a law firm) is selected as the Trustee? Besides, when an offshore location has gradually become a mainstream place of establishment for trust, to clear up the doubt of the Trustee, the role of the trust protector is becoming increasingly important.
Given that British Virgin Islands, Cayman Islands, Cook Islands, Singapore, and so on are all important regions in the offshore planning of family trusts, so the laws and regulations of these regions have been correspondingly adjusted. For instance, Singapore allows the imposition of limitations on the obligations of the Trustee in the trust contract, and the transfer of the investment obligation to an external investment consultant (who may be designated by the Trustor); the criteria for due diligence investigations are relatively rigorous, and there are also relevant specifications for declaration. With regard to the hope that the Trustee will hold a family enterprise and assets on a long-term basis for the purpose of passing on the wealth without the Trustee getting too deeply involved in the operations of the family business, British Virgin Islands has introduced the Virgin Islands Special Trust Act (VISTA) as a response. In other words, as long as this law applies to a certain trust, the Trustee will be banned from interfering with any operation of the enterprise held, and the directors or professional manager of the enterprise will be responsible for implementation.
What’s also noteworthy is that the revised new Trust Law of Hong Kong officially took effect on December 1, 2013. The new law reformed the old laws of 1934 and 1970, including the conference of a greater presupposed power to the Trustee, the coverage of insurance, commission agents, franchise investment and remuneration collection, the abolition of two principles of common law, the introduction of anti-forced heirship regime, and so on, which established a niche for Hong Kong’s family trust industry. In addition, the new Trust Law has clarified the powers and obligations of the Trustee, the Settlor, and the Beneficiary, included proper checks and balances as a supplement, and offered incentives for private wealth management institutions, so that more trustors are once again willing to accept Hong Kong as a jurisdiction for modern trusts. Furthermore, according to the provisions of common law, unless authorized via a trust instrument or under specific circumstances, the Trustee shall not collect any remuneration. The new Trust Law has made major revisions to this section, and stated that, as long as the trust instrument has expressly stated the issue of remuneration collection, a professional Trustee may collect remuneration from the trust fund.
Meanwhile, the new law has conferred power to the Trustee to delegate the agent, nominee and custodian, and the Trustee may also buy equal insurance according to the market value of the property. The law has also eliminated the limitations to the amount of insurance by the Trustee. As for franchise investment projects, the Government of Hong Kong has also lowered the investment threshold, changed the amount of market capitalization of equity investment from 10 billion HKD to 5 billion HKD, removed the provision of five-year dividend payouts regarding investment companies, and changed it into the provision of three-year dividend payouts in the past five years (scrip dividend). More importantly, the law has preserved the power of trust asset investment and asset management for the Trustor, which is equivalent to providing double insurance for family trusts. In addition to the fact that the Trustee should employ insurance, stock, and fund investment to maintain the stability of trust assets according to the statutory duty of care, the Trustor may also change the investment portfolio according to the risk preferences in different periods, thus providing maximum flexibility for trusts established in Hong Kong. This is especially important for the high net-worth individuals from Mainland China who attach great importance to the right of ownership of property.
In conclusion, the healthy development of the trust system depends on the three parties of the trust properly playing their respective roles. When the trust is no longer deemed as an investment channel but is brought back to the right path of development, and when the rights and obligations – as well as information of the Trustee – have become transparent, the foundation of the trust relations between the Trustee and the Trustor will be established. In the past years, the development of family trusts have not been as successful as expected, which is largely related to the unclear orientation of the Trustee. With the increasing maturation of various rules and regulations and the gradual connection of onshore and offshore decrees, it can be expected that family trusts will take root and sprout on China’s land.
Dr. Lee, Chih-Jen
Chief Consultant, Fidelity Law Group With a dual background in law and finance, Dr. Lee has extensive experiences in production, academic research, and as a government officer. Dr. Lee is currently a versatile talent with paying special attention to the trust development in Chin, and is playing an active role in Mainland China, Hong Kong & Macao, and Taiwan in the offshore industry.
