You own your investment decisions – no hiding behind complex trust structures

Date published





The Hong Kong Court of Final Appeal (“CFA”) recently handed down its judgment in Zhang Hong Li and others v DBS Bank (Hong Kong) Limited and others (FACV 2/2019) (22 November 2019) which reverses the findings by the Court of Appeal (“CA”) in respect of the breach of trust/fiduciary duties owed to sophisticated investment customers by the trustee and corporate services of a bank.

The parties in this case had settled their dispute subsequent to the CFA hearing but before judgment was handed down. Nonetheless, the CFA had exercised its discretion to deliver judgment despite the post-hearing settlement as important issues of law were involved and its ruling deviates from that of the lower court.

Background and lower courts’ approach 

A financially experienced couple decided to make investments through a bank, in a way that would ensure that the wife retains control over investment decisions.  For tax and asset protection reasons, they did not open a plain-vanilla investment account.  Instead, they opted for the account to be held through a complex corporate and trust structure set up with the bank’s help as part of its “one stop shop” services.  Various limitations were placed on the trustee’s duties and rights to interfere in the account’s investments.

The account holders decided on a series of high-risk investments leading to significant losses.  They then sued, amongst others, the trustee for failing to stop some of the high-risk investment decisions on the account.  The lower courts agreed, claiming (different courts had different reasons) that the trustee had a “high level supervisory duty” which included, in this case, putting a stop to high-risk investment decisions on the account.  The trustee (together with the bank and a number of other related entities) appealed to the CFA.

For more details on the main background facts and the lower courts’ (in particular the CA’s) ruling, please refer to our previous e-bulletin about the CA’s ruling in this case.

The CFA’s Ruling

The “high level supervisory duty” upheld by the lower courts was overturned by the CFA. The CFA considered that such duty was plainly inconsistent with provisions in the various agreements which expressly forbid the trustees to interfere with the Company’s management except where it has actual knowledge of dishonesty.

Further, the CFA pointed out that the risks in the investments were expressly authorised by the wording of the relevant trust documentation, so there was no basis showing that the approval of the transactions in question constituted negligence to a “serious and flagrant degree”.

As a result, the CFA unanimously concluded that the claims against the trustee (as well as a related corporate services entity) failed as they qualify for protection offered by the exculpatory clauses in the various agreements covering acts or omissions short of fraud, misconduct or gross negligence.

In addition, the CFA held that even if it did make a finding of a breach of trust, the lower courts had erred in categorising the situation in this case as one where the trustee had misapplied or lost the trust assets and was obliged to restore them to the trust.  Instead, the CFA considered this case as one where the trustee showed a lack of appropriate skill or care, leading to diminution of the value of the trust assets. In such a case, equitable compensation would be reparative and resemble (and thus not more extensive than) common law damages. Also, the common law rules of causation, remoteness of damage and measure of damages would apply by analogy.

In light of the above, had the case not been settled, the CFA would have unanimously allowed the appeal.

Cannot have cake and eat it too

It is not unusual for well-to-do people to want to invest in financial products and instruments.  They would do so through an investment account with a financial institution.

If they wanted more advice or supervision over their investments, there are a range of services available to them.  They include bank in-house or external financial advisers and portfolio managers, or trustee service providers.  They can advise on investments and/or handle investments on a discretionary basis, and be held accountable for their advice and/or chosen investments.

Alternatively, if account holders want more control over their own investments, they can simply open an execution-only, plain-vanilla investment account.  The financial institution which hosts the account then becomes essentially a service platform to make investments available for the account holders, who in turn are ultimately responsible for their own investment choses.

Sometimes, in cases such as the present, well-to-do individuals want to make their own investment decisions, but then for tax and asset planning reasons choose to layer the holding of the account through a web of trusts and corporate service entities.  The setting up and administration of such entities are often expected of financial institutions as part of their “one stop shop” suite of services.  To put all this into effect, agreements would be in place to exclude roles and duties of trustees and corporate service entities to intervene in the account’s affairs.

Against this background, the lower courts’ judgments created a moral hazard issue in scenarios such as those in the present case.  The unintended message from those judgments was that one could get all the tax and asset planning benefits of a complex account holding structure, retain control over investment decisions in the account.  And yet, when losses are suffered from the account holders’ own investment decisions, they can still blame the very trustees and entities that are excluded by agreement from decisions on the account’s investments.  What made this even more perverse was that had this been a plain-vanilla account held by the financially experienced couple directly, they would very likely have struggled to mount any semblance of a mis-selling claim against the bank.

To that end, the CFA’s ruling is a welcome corrective.  It sends a clear message that in scenarios such as the present, one cannot have one’s cake and eat it too.  One either leaves one’s investments to be subject to advice from or be actually managed by professionals who are liable for their advice and/or portfolio management, or one takes responsibility for one’s own investment decisions regardless of the account holding structure.

The common law (which when used in this broader context includes equity) has long been seen as being conducive to business and commerce precisely because it is usually developed in directions with business realities and commercial sense in mind.  The CFA has again demonstrated the common law’s strength in this judgment.  Long may that continue.