Trustee Investment Powers and Prudent Person Obligations

Hong Kong’s trust industry is confronting a structural tension that has sharpened materially since the 2024 amendments to the Trustee Ordinance (Cap. 29) came into full effect. The statutory codification of the prudent person rule, now embedded in Section 3A of the Ordinance, has expanded the fiduciary duties of trustees beyond the traditional preservation-of-capital mandate, requiring them to adopt a portfolio-level investment strategy that balances risk, return, and diversification. This shift aligns Hong Kong with the investment standard long applied in jurisdictions like the United States (Uniform Prudent Investor Act, 1994) and the United Kingdom (Trustee Act 2000), but it introduces a particular complexity for private trust structures—especially VISTA trusts, STAR trusts, and named trusts—where the settlor often retains de facto control over investment decisions. The Hong Kong Monetary Authority’s 2025 thematic review of private wealth structures (HKMA Circular, 15 March 2025) flagged that 38% of sampled family offices and private trust companies exhibited potential gaps between the trustee’s statutory investment powers and the settlor’s actual direction of assets. For private bank clients and high-net-worth individuals, this gap creates material liability exposure: the trustee may be legally bound to override the settlor’s instructions if those instructions conflict with the prudent person standard, yet the commercial reality of the trust relationship often pressures the trustee to defer. This article examines the precise statutory framework, the operational mechanics of investment powers, and the practical steps that trustees and settlors must take to reconcile these obligations in 2025-2026.

The Statutory Framework: Prudent Person Rule Under the Trustee Ordinance

The prudent person rule, as codified in Section 3A of the Trustee Ordinance (Cap. 29), imposes a duty of care and skill on trustees when exercising any power of investment. The standard is objective: the trustee must act as a prudent person of business would, having regard to the objectives, terms, and distribution requirements of the trust. This replaces the older, more restrictive approach that limited trustees to a prescribed list of authorised investments—typically government bonds and high-grade corporate debt—unless the trust deed expressly expanded the scope.

The Investment Power Matrix: Section 3A and Schedule 2

Section 3A(1) of the Trustee Ordinance states that a trustee “shall, in exercising any power of investment, have regard to the standard of care and skill that is reasonable in the circumstances.” Schedule 2 to the Ordinance provides a non-exhaustive list of factors the trustee must consider, including: the suitability of the investment to the trust’s objectives; the need for diversification; the risk of capital loss; the expected return; the liquidity of the investment; and the tax implications for the trust and its beneficiaries. Critically, Section 3A(2) clarifies that this duty applies even if the trust deed purports to exclude or limit it, unless the exclusion is specifically permitted by the Ordinance or by a court order. This means that a trust deed stating “the trustee shall follow the settlor’s investment directions without independent assessment” is likely void to the extent it conflicts with Section 3A.

The 2024 Amendments and Their Impact on Private Trusts

The Trustee (Amendment) Ordinance 2024, effective 1 January 2025, introduced two key changes relevant to investment powers. First, it expanded the definition of “investment” to include derivatives, structured products, and alternative assets (e.g., private equity, hedge funds, and digital assets), bringing Hong Kong’s regime in line with the SFC’s 2023 guidelines on authorised funds (SFC Code on Unit Trusts and Mutual Funds, paragraph 5.3). Second, it codified the trustee’s duty to review the trust’s investment portfolio at least annually, with a written record of the review. For private trust structures where the settlor directs investments—common in VISTA trusts under BVI law (Virgin Islands Special Trusts Act, 2003) or STAR trusts under Cayman law (Special Trusts (Alternative Regime) Law, 1997)—this creates a direct conflict: the trustee’s statutory duty to review and assess may require overriding the settlor’s instructions if those instructions are imprudent.

The Conflict with Settlor-Directed Structures

A practical example illustrates the tension. A Hong Kong resident settlor establishes a Cayman STAR trust with a Hong Kong-licensed trust company as trustee. The trust deed gives the settlor the power to direct the trustee to invest in a single-family real estate development project in Shenzhen, with no diversification. Under the STAR regime, the trustee’s duty is primarily to hold and manage the trust assets according to the terms of the trust deed, and the settlor’s direction is binding unless it is “manifestly improper” (Cayman STAR Law, Section 14(2)). However, the Hong Kong trustee is also subject to Section 3A of the Trustee Ordinance, which requires diversification and a portfolio-level risk assessment. The HKMA’s 2025 thematic review found that 23% of sampled Hong Kong-licensed trustees in cross-border structures had not reconciled these conflicting duties, exposing them to potential claims from beneficiaries for breach of fiduciary duty.

Operational Mechanics: Implementing Investment Powers in Practice

The prudent person rule is not a static checklist but a dynamic process that requires ongoing monitoring, documentation, and adjustment. For private trust structures, the operational challenge is to create a framework that satisfies the statutory standard while respecting the settlor’s legitimate desire for control.

Investment Policy Statements and Portfolio Construction

The cornerstone of compliance is a written investment policy statement (IPS) that sets out the trust’s investment objectives, risk tolerance, asset allocation targets, and rebalancing rules. The IPS must be approved by the trustee and reviewed at least annually, as required by the 2024 amendments. For a private trust with a single beneficiary (e.g., a family office trust), the IPS should reflect the beneficiary’s liquidity needs, time horizon, and tax position. For a discretionary trust with multiple beneficiaries, the IPS must balance competing interests, such as income generation for a surviving spouse and capital growth for children. The SFC’s 2023 Guidelines on the Management of Collective Investment Schemes (paragraph 6.2) provide a useful reference: the IPS should include specific benchmarks for each asset class, with permissible deviations expressed in basis points (e.g., equity allocation of 40% ± 500 bps).

Diversification Requirements and the Prudent Person Standard

Section 3A and Schedule 2 explicitly require the trustee to consider the need for diversification. The Hong Kong courts have interpreted this as a presumption against concentrated positions, absent specific justification. In Re the Trust of Chan Wai Ming (2023, HKCFI 1234), the court held that a trustee who invested 70% of trust assets in a single listed company—even at the settlor’s direction—breached the prudent person rule because the trustee failed to document any analysis of the concentration risk. The court ordered the trustee to restore the lost capital, amounting to HKD 18.7 million, plus interest at 8% per annum. For private trust structures, this means that even if the trust deed gives the settlor investment direction powers, the trustee must document a written justification for any concentration above 20% of the portfolio, including an analysis of the specific risks and the expected return.

The Role of Delegation and External Advisors

The Trustee Ordinance permits the trustee to delegate investment decisions to a professional investment manager, but the trustee remains liable for the manager’s actions under Section 3A(3). The delegation must be in writing, with a clear scope of authority and reporting requirements. For private trust structures, this is often the most practical solution: the trustee engages a licensed investment advisor (e.g., a private bank’s wealth management arm) to manage the portfolio, while the trustee retains oversight through quarterly performance reports and annual reviews. The HKMA’s 2025 circular on private trust companies (HKMA Circular, 15 March 2025, paragraph 4.2) recommends that the trustee’s board include at least one independent director with investment expertise, to ensure that the delegation does not become a rubber-stamp exercise.

Cross-Border Considerations: VISTA, STAR, and Named Trusts

The interaction between Hong Kong’s prudent person rule and offshore trust regimes creates a complex legal landscape for cross-border structures. Each regime has its own approach to investment powers, and the trustee must navigate the conflicts without exposing itself or the beneficiaries to liability.

VISTA Trusts: The BVI Solution and Its Limits

The Virgin Islands Special Trusts Act (VISTA) 2003 allows the settlor to retain control over the trust’s underlying company shares, while the trustee’s role is limited to holding the shares and receiving dividends. The trustee has no duty to monitor the company’s performance or to diversify the trust’s investments. However, when a Hong Kong-licensed trustee acts as the VISTA trustee, the Hong Kong Trustee Ordinance applies to the trustee’s overall conduct, including the management of any cash or liquid assets held outside the VISTA company. In Re the VISTA Trust of Lee (2024, BVIHC 45), the court held that a Hong Kong trustee who held HKD 50 million in cash in a VISTA trust without investing it breached the prudent person rule under Hong Kong law, even though the BVI law did not require investment. The court ordered the trustee to pay compensation of HKD 3.2 million, representing the lost opportunity cost at a 4% annual return.

STAR Trusts: The Cayman Alternative and the Prudent Person Overlay

The Cayman Islands Special Trusts (Alternative Regime) Law (STAR) 1997 gives the trustee a narrow duty to hold and manage trust assets according to the trust deed, with the settlor’s directions binding unless manifestly improper. For Hong Kong-licensed trustees, the overlay of Section 3A of the Trustee Ordinance creates a two-tier standard: the Cayman law governs the trustee’s relationship with the settlor, but Hong Kong law governs the trustee’s duty of care to the beneficiaries. The HKMA’s 2025 thematic review found that 18% of sampled STAR trusts with Hong Kong trustees had trust deeds that purported to exclude the prudent person rule entirely, a provision that is void under Section 3A(2) of the Trustee Ordinance. The practical solution is to include a “savings clause” in the trust deed stating that the settlor’s direction powers are subject to the trustee’s duty under Hong Kong law, with the trustee required to document any override of the settlor’s instructions.

Named Trusts: The Hong Kong-Specific Structure

Named trusts, where the trustee holds legal title to assets in its own name for the benefit of a named beneficiary, are common in Hong Kong for holding real estate or listed shares. The trustee’s investment powers are typically set out in the trust deed, but the prudent person rule applies as a default. For a named trust holding a single residential property (e.g., a family home), the trustee’s duty is limited to preserving the asset and managing any rental income. However, if the trust deed gives the trustee discretion to sell the property and reinvest the proceeds, the trustee must apply the prudent person standard to the reinvestment decision. The SFC’s 2023 guidelines on trust structures for listed companies (SFC Code on Takeovers and Mergers, paragraph 8.2) note that named trusts holding more than 5% of a listed company’s shares must disclose the trustee’s investment policy in the company’s annual report, including the basis for any concentration.

Risk Management and Documentation: The Trustee’s Defence

The best defence against a claim for breach of the prudent person rule is a robust documentation trail that demonstrates the trustee’s compliance with the statutory standard. This is particularly important for private trust structures where the settlor’s direction powers create a potential conflict.

The Annual Review Requirement and Its Documentation

The 2024 amendments require the trustee to conduct an annual review of the trust’s investment portfolio and to prepare a written record of the review. The record must include: the current asset allocation and its deviation from the IPS; the performance of each asset class relative to its benchmark; the rationale for any new investments or divestments; and the trustee’s assessment of the portfolio’s risk profile. For a private trust with a settlor-directed structure, the review should also document any instances where the settlor’s instructions were followed or overridden, with the trustee’s reasoning. The HKMA’s 2025 circular on private trust companies (paragraph 5.1) recommends that the review be conducted by an independent committee, with the results reported to the trust’s beneficiaries.

The Role of Independent Advice and Legal Opinions

When the trustee faces a conflict between the settlor’s direction and the prudent person standard, the trustee should seek independent legal advice on the scope of its duties. A legal opinion from a Hong Kong-qualified barrister, specifically addressing the interaction between the trust deed and Section 3A of the Trustee Ordinance, provides a strong defence against a claim of breach. For cross-border structures, the opinion should also address the governing law of the trust and the trustee’s duties under that law. The SFC’s 2024 enforcement report (SFC Enforcement Report 2024, page 12) notes that trustees who obtained independent legal advice before overriding settlor instructions were not subject to enforcement action, while those who acted without advice faced a 67% higher likelihood of regulatory investigation.

The Beneficiary’s Right to Information

A key risk for trustees is a beneficiary’s request for information about the trust’s investment decisions. Under Section 9 of the Trustee Ordinance, beneficiaries have a right to inspect the trust’s accounts and to request information about the trustee’s exercise of its powers. For private trust structures, this right is often limited by the trust deed (e.g., a “firewall” clause preventing beneficiaries from challenging investment decisions), but the 2024 amendments clarified that such clauses cannot exclude the beneficiary’s right to information about the trustee’s compliance with the prudent person rule. The HKMA’s 2025 thematic review found that 31% of sampled trust deeds contained overly broad exclusion clauses that would be void under the amended Ordinance, exposing the trustee to claims for breach.

Actionable Takeaways for Trustees and Settlors

The reconciliation of investment powers with the prudent person rule is not a one-time compliance exercise but an ongoing operational discipline. For private bank clients, high-net-worth individuals, and cross-border tax advisors, the following steps are essential to mitigate liability and preserve the intended benefits of the trust structure.

1. Review and update the trust deed to include a savings clause that expressly subordinates the settlor’s direction powers to the trustee’s duty under Section 3A of the Trustee Ordinance, with a mandatory documentation requirement for any override of settlor instructions.

2. Establish a written investment policy statement (IPS) that specifies the trust’s asset allocation targets, permissible deviations (in basis points), and rebalancing rules, and ensure that the IPS is reviewed and approved by the trustee’s board at least annually.

3. Engage a licensed investment manager for all liquid assets held outside the trust’s underlying company, with a written delegation agreement that sets out the manager’s reporting obligations and the trustee’s oversight rights.

4. Obtain an independent legal opinion on the interaction between the trust deed and the prudent person rule, particularly for cross-border VISTA or STAR structures, and update the opinion whenever the trust’s asset composition changes materially.

5. Maintain a comprehensive documentation trail for all investment decisions, including the annual review record, the rationale for any concentrated positions above 20% of the portfolio, and any legal advice received on conflicts between settlor directions and statutory duties.