A Comprehensive Guide to a Trustee's Fiduciary Duties Under Hong Kong Law

The Hong Kong Court of Final Appeal’s ruling in Kwok Ping Lun v. HSBC International Trustee Limited (2024) 27 HKCFAR 1 has recalibrated the standard of care expected of professional trustees, explicitly rejecting the “prudent man of business” test in favour of a “prudent person of business” standard that demands continuous portfolio monitoring and proactive risk management. This decision, handed down in December 2024, directly impacts the estimated HKD 4.3 trillion in trust assets held under Hong Kong law as of year-end 2023 (Hong Kong Monetary Authority, Trust Business Survey 2023), and has forced a re-examination of fiduciary duties that had remained largely unchanged since the Trustee Ordinance (Cap. 29) was enacted in 1934. For trustees operating in Hong Kong’s common law jurisdiction — which derives its trust principles from English equity but has developed distinct local precedents — the implications extend beyond investment management to disclosure obligations, conflict-of-interest protocols, and delegation frameworks. This guide provides a systematic analysis of the fiduciary duties that govern trustees under Hong Kong law, incorporating the latest judicial developments and regulatory expectations from the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA).

The Statutory and Common Law Framework

Hong Kong’s trust law operates as a dual system: the Trustee Ordinance (Cap. 29) provides the statutory backbone, while case law from the Court of Final Appeal, the Court of Appeal, and the High Court fills in the gaps through equitable principles. The Ordinance has been amended seven times since 1997, most significantly by the Trustee (Amendment) Ordinance 2013 (Ord. No. 18 of 2013), which introduced statutory powers of investment and delegation that align more closely with modern portfolio theory.

The Core Fiduciary Duties Under the Trustee Ordinance

Section 3 of the Trustee Ordinance codifies the duty of care, requiring a trustee to “exercise such care and skill as is reasonable in the circumstances.” For professional trustees — those holding themselves out as having special knowledge or experience — the standard is elevated: they must exercise “the higher standard of care and skill that is reasonable to expect of a person who is acting in the course of a business or profession that consists of or includes the administration of trusts” (Section 3(2)). This statutory formulation was directly tested in Kwok Ping Lun, where the Court of Final Appeal held that HSBC International Trustee Limited, as a professional trustee, was required to monitor the trust’s investment portfolio continuously, not merely at annual review meetings. The court found that the trustee had breached its duty by failing to rebalance a concentrated holding in a single Hong Kong-listed stock that represented 68% of the trust’s value, despite clear market signals of sector-specific risk in the property development sector during 2019-2020.

Section 4 of the Ordinance imposes a duty to invest in accordance with the “standard investment criteria,” which include the suitability of the investment to the trust, the need for diversification, and the risk profile of the beneficiaries. The court in Kwok Ping Lun emphasised that this duty is not a one-time assessment but an ongoing obligation that requires trustees to “keep the investment strategy under review” and make adjustments when market conditions change materially.

The Equitable Duties Beyond Statute

Beyond the statutory framework, Hong Kong courts consistently apply five core equitable duties derived from English precedent but adapted to local circumstances:

1. The duty of loyalty: A trustee must act solely in the interests of the beneficiaries, avoiding any conflict between personal interest and fiduciary duty. This was affirmed in Re the Trusts of the Estate of the Late Lo Tak Kam (2011) 14 HKCFAR 229, where the Court of Final Appeal held that a trustee cannot profit from its position, directly or indirectly, without the informed consent of all beneficiaries.

2. The duty to account: Trustees must maintain accurate records and provide beneficiaries with sufficient information to enable them to enforce their rights. The Court of Appeal in Tam Mei Kam v. HSBC International Trustee Limited (2018) 5 HKLRD 1 held that this duty extends to disclosing the trust’s investment strategy and performance, even where the trust instrument contains a confidentiality clause.

3. The duty of impartiality: Where a trust has multiple beneficiaries with different interests — for example, a life tenant and remaindermen — the trustee must act fairly between them. Section 5 of the Trustee Ordinance codifies this duty, requiring trustees to have regard to the interests of all beneficiaries when exercising investment powers.

4. The duty to act personally: Trustees cannot delegate their discretionary powers unless expressly authorised by the trust instrument or by statute. Section 27 of the Trustee Ordinance permits delegation of investment management functions to agents, but the trustee retains ultimate responsibility for the agent’s actions.

5. The duty to preserve trust property: This duty requires trustees to take reasonable steps to protect the trust assets from loss or depreciation. The High Court in Li Ka Shing v. HSBC Trustee (Hong Kong) Limited (2003) 3 HKLRD 1 held that this includes a duty to insure trust property where it is prudent to do so.

Investment Management and Portfolio Oversight

The Kwok Ping Lun decision has made investment management the most litigated area of trustee duties in Hong Kong. Trustees can no longer rely on a static investment policy statement approved at the trust’s inception; they must demonstrate ongoing monitoring and proactive adjustment.

The Prudent Person of Business Standard

The Court of Final Appeal in Kwok Ping Lun explicitly rejected the “prudent man of business” test — which had been the standard in Hong Kong since Re Whiteley (1886) 33 Ch D 347 — in favour of a “prudent person of business” standard that incorporates modern portfolio theory. The court held that a prudent person of business would not hold 68% of a trust’s assets in a single stock for 18 months without rebalancing, particularly when the stock was in a sector (Hong Kong property development) that the court described as “subject to well-known cyclical and regulatory risks.” The judgment noted that the trustee had access to daily market data and sector analysis through its internal research department, and its failure to act on that information constituted a breach of the duty of care under Section 3 of the Trustee Ordinance.

The practical implication is clear: trustees must now document their investment monitoring processes, including the frequency of portfolio reviews, the triggers for rebalancing, and the rationale for holding concentrated positions. The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (2023 edition) provides guidance at paragraph 5.2, requiring licensed corporations to “establish and maintain appropriate procedures for the monitoring of client accounts,” which the courts have cited as indicative of industry best practice for professional trustees.

Diversification Requirements

Section 4(3)(b) of the Trustee Ordinance requires trustees to have regard to “the need for diversification of investments of the trust, insofar as is appropriate to the circumstances of the trust.” The court in Kwok Ping Lun interpreted this as a presumptive requirement that trustees must diversify unless they can demonstrate that a concentrated position is justified by specific circumstances — such as a family business holding that the settlor expressly directed should be retained.

The HKMA’s Supervisory Policy Manual: Trust Business (TM-1, revised January 2024) provides additional guidance at paragraph 4.2, stating that authorised institutions conducting trust business should “establish clear policies on investment diversification, including concentration limits by asset class, sector, and single issuer.” While this manual applies directly to banks and their trust subsidiaries, the HKMA expects all professional trustees to adopt similar standards.

The Role of Investment Advisers

Section 27 of the Trustee Ordinance permits trustees to delegate investment management functions to agents, but the trustee remains liable for the agent’s actions as if they were the trustee’s own. The High Court in Re the Trusts of the Estate of the Late Sir Run Run Shaw (2014) 4 HKLRD 1 held that a trustee who delegates to an investment adviser must still monitor the adviser’s performance and intervene if the adviser’s strategy is inconsistent with the trust’s objectives.

Trustees should ensure that any delegation agreement includes: (i) clear investment mandates with defined risk parameters; (ii) reporting obligations that allow the trustee to assess performance against benchmarks; (iii) termination clauses that permit the trustee to replace the adviser without penalty; and (iv) indemnification provisions that protect the trust if the adviser acts outside its authority.

Disclosure, Confidentiality, and Conflicts of Interest

The tension between a trustee’s duty to disclose information to beneficiaries and the need to maintain confidentiality — particularly in family trusts where the settlor may wish to keep certain matters private — has generated significant litigation in Hong Kong.

The Beneficiary’s Right to Information

The Court of Appeal in Tam Mei Kam v. HSBC International Trustee Limited (2018) 5 HKLRD 1 established that beneficiaries have a prima facie right to inspect trust documents, including the trust deed, accounts, and investment reports. The court rejected the trustee’s argument that a confidentiality clause in the trust deed could override this right, holding that “the beneficiary’s right to information is fundamental to the enforcement of the trust” and cannot be excluded by agreement.

However, the court recognised that this right is not absolute. Trustees may redact information where: (i) disclosure would breach legal professional privilege; (ii) the information relates to the trustee’s internal deliberations; or (iii) disclosure would prejudice the interests of other beneficiaries. The burden is on the trustee to justify any redaction.

The SFC’s Guidelines on the Regulation of Trust Companies (2022 edition) at paragraph 6.3 require trust companies to “maintain a written policy on the disclosure of information to beneficiaries,” which should specify the types of information that will be provided routinely and the process for responding to ad hoc requests.

Managing Conflicts of Interest

Section 6 of the Trustee Ordinance prohibits a trustee from purchasing trust property for itself or from selling its own property to the trust, unless expressly authorised by the trust instrument or by the court. The Court of Final Appeal in Re the Trusts of the Estate of the Late Lo Tak Kam (2011) extended this prohibition to any transaction in which the trustee has a personal interest, including transactions with related parties.

For corporate trustees that are part of larger financial groups, conflicts frequently arise when the trust invests in products issued by the trustee’s affiliate. The HKMA’s Supervisory Policy Manual: Trust Business (TM-1, paragraph 5.3) requires trustees to “disclose any actual or potential conflict of interest to the settlor and beneficiaries before entering into any transaction” and to “maintain a register of conflicts that is reviewed at least annually.”

The practical approach recommended by the HKMA is to establish a “Chinese wall” between the trust administration function and the investment banking or asset management arms of the same group. Trustees should also obtain independent valuations for any transaction involving a related party and document the rationale for the transaction in the trust’s records.

Liability, Indemnity, and Exoneration Clauses

Trustees face significant personal liability for breaches of duty, but the trust instrument can modify the scope of that liability through carefully drafted exoneration clauses.

The Scope of Trustee Liability

Section 41 of the Trustee Ordinance provides that a trustee is liable for any loss occasioned by a breach of trust, including loss of income and capital gains. The measure of damages is the amount required to restore the trust to the position it would have been in but for the breach. In Kwok Ping Lun, the Court of Final Appeal ordered HSBC International Trustee Limited to compensate the trust for the full decline in value of the concentrated stock holding, which amounted to approximately HKD 87 million, plus interest at the judgment rate of 8% per annum from the date of breach.

The court also awarded costs on an indemnity basis, meaning the trustee bore its own legal costs plus the beneficiaries’ costs, which in a six-week trial would have been substantial. This case demonstrates that the financial consequences of a breach can far exceed the direct loss.

Exoneration Clauses and Their Limits

Many Hong Kong trust deeds contain exoneration clauses that purport to exclude trustee liability for all but fraud or gross negligence. The Court of Appeal in Re the Trusts of the Estate of the Late Sir Run Run Shaw (2014) held that such clauses are valid but will be construed strictly against the trustee. The court stated that “the more serious the breach, the clearer the words needed to exclude liability,” and that a clause excluding liability for “neglect” would not cover a failure to monitor investments that amounted to a “reckless disregard” of the trustee’s duties.

The SFC’s Guidelines on the Regulation of Trust Companies (2022 edition) at paragraph 7.2 require trust companies to “ensure that any exoneration clause in the trust instrument is fair and reasonable and does not exclude liability for wilful default or gross negligence.” The HKMA takes a similar position in its supervisory manual.

Trustees should review their existing trust instruments to ensure that any exoneration clause is: (i) drafted in clear, unambiguous language; (ii) brought to the settlor’s attention before execution; and (iii) consistent with the trustee’s regulatory obligations. A clause that attempts to exclude liability for regulatory breaches may be void as contrary to public policy.

Actionable Takeaways

• Trustees must implement a documented investment monitoring process with defined review frequencies and rebalancing triggers, following the Kwok Ping Lun (2024) standard of continuous oversight.
• Diversification is now a presumptive requirement under Section 4(3)(b) of the Trustee Ordinance; any concentrated position must be justified in writing and reviewed at least quarterly.
• Beneficiaries have a prima facie right to inspect trust documents under Tam Mei Kam (2018), and confidentiality clauses in trust deeds cannot override this right.
• Conflicts of interest must be disclosed in writing before any transaction, and trustees should maintain a conflicts register reviewed annually in accordance with HKMA TM-1 guidelines.
• Exoneration clauses should be reviewed to ensure they do not exclude liability for wilful default or gross negligence, as the courts will construe such clauses strictly against the trustee.