In this article, we examine the impacts of the new approval mechanism from the Hong Kong Education Bureau (EDB) for “Other Charges” set out in EDB Circular No. 15/2023, the Implementation Details and related documents.
The new approval mechanism represents the first significant regulation of school debentures and similar fees, and presents legal and practical challenges for Hong Kong’s private schools, international schools and school operators.
This is the latest in our series of articles about the EDB’s development of a regulatory framework for Other Charges.
We understand the EDB may soon release another circular concerning Other Charges and kindergartens, and this article is limited to international schools and private schools only.
Background
The EDB has been developing a permanent mechanism to approve capital levies, debentures and nomination rights fees (Other Charges) collected by private schools and international schools since early 2020.
Interim approvals granted under a transitional scheme will expire at the end of the 2024/25 school year (ie, July / August 2025 for most international schools in Hong Kong). Schools are prohibited from collecting Other Charges after this time without approval under the new mechanism (see regulation 61(1) of the Education Regulations (Cap. 279A)).
On 22 August 2023, EDB Circular No. 15/2023 was released which outlines the new mechanism for approval of Other Charges.
On 8 May 2024, the EDB wrote to international schools reminding them that, in most cases, applications for approval of Other Charges will be due in November 2024.
A few schools have already lodged their applications which are currently under assessment by the EDB.
We have been assisting several schools with their applications, and have discussed the new regulatory mechanism with the EDB.
We set out the key impacts and our top tips below.
Key features and impacts of the new approval mechanism for Other Charges
Collection Agreement required
As will be the case at most schools, if the school itself (ie, the management committee for the school) is not collecting Other Charges:
- the school must demonstrate the connection between the school and the entity collecting the Other Charges (usually a company like the sponsoring body or operator) (the Payee); and
- the school must enter into an agreement with the Payee (a Collection Agreement).
Among other things, the EDB requires that the Collection Agreement:
- establishes a principal / agent relationship between the school and Payee (with the school remaining principally liable to payors of Other Charges, even though Other Charges were collected by the Payee);
- regulates the handling and investment of proceeds of Other Charges;
- deals with licensing obligations (if any);
- includes reporting and information rights;
- contains certain procedures dealing with the insolvency / financial distress of the Payee;
- provides certain remedies / damages to payors of Other Charges in specified circumstances; and
- restricts subcontracting.
The Collection Agreement must be disclosed to the EDB and made available to payors of Other Charges (ie, parents).
Even where a Collection Agreement isn’t required (because the school itself is collecting the Other Charges), the EDB now requires certain clauses to be inserted into the contract or terms and conditions governing Other Charges.
As a result, all schools will probably need to revise their paperwork to include the EDB’s requirements.
Securities law review and legal sign off needed
When applying for approval of Other Charges, the supervisor of the school must sign the paperwork to confirm that the collection and handling of Other Charges complies with the following legislation – and the application must name the lawyer who has reviewed the Collection Agreement and terms of any contracts with parents concerning Other Charges (ie, debentures, admission agreement, school fee policy, etc):
- Education Ordinance (Cap. 279);
- Education Regulations (Cap. 279A);
- Companies Ordnance (Cap. 622);
- Companies (Winding Up and Miscellaneous Provisions Ordinance) (Cap. 32) (CWUMPO); and
- Securities and Futures Ordinance (Cap. 571) (SFO).
This legal review is required as debentures (and some alternative Other Charges) may be classified as “securities” (in the same way as a stock, bond or derivative) under Hong Kong law.
For decades, schools have often issued debentures (and alternative Other Charges) without legal sign off, and which may not comply with Hong Kong securities laws.
As a result of the EDB’s new regulatory focus on Other Charges, the EDB now requires all schools to obtain legal sign-off to ensure all Other Charges are compliant with Hong Kong’s securities laws. As a result, the structure and wording of each Other Charge must now be carefully considered with legal advisors.
While the requirement for legal sign off on securities laws like the CWUMPO and SFO is a significant new imposition on schools, in many cases there are exemptions from licensing and prospectus regulation (under the SFO and CWUMPO) for securities offered in connection with schools. In other cases, Other Charges can be designed so that they are not securities, and schools will not need to rely on any exemption. In either case, careful legal consideration is required.
Restrictions on use of proceeds of Other Charges / annual reporting and parent consultation
Before applying for approval of Other Charges, schools must communicate the proposed use of the proceeds of each Other Charge with parents. That communication must then be shared with the EDB, and the school must annually update parents about collections and use of Other Charges.
Schools cannot use the proceeds of Other Charges for any other purposes other than those communicated to parents and the EDB.
The EDB expects schools to use the proceeds of Other Charges for “long-term/ large scale works and/or non-works projects”. The EDB also says that “ongoing small-scale repair /maintenance, such as repair/ replacement of facilities/equipment within school premises, should be covered by school fees” (and not the proceeds of Other Charges).
In effect, we understand the EDB will only approve Other Charges that will be used for one-off, capital expenditure (ie, CapEx), not reoccurring operational expenses (ie, OpEx).
This represents the most significant regulatory constraint on school funding in recent memory.
This restriction, plus the transparency and reporting obligations, means that the common practice of schools using debentures and capital fees to fund staff expenses, rent and other ordinary, reoccurring expenses cannot continue.
In practice, schools will now need to reassess their budgets, and forecast potential uses of proceeds of Other Charges across the approval period (four years, if a Collection Agreement is required), and build in flexibility and contingencies in their communications with parents and the application to the EDB.
Top tips
For many schools, their system of debentures, capital fees, nomination rights and other similar charges have been developed iteratively over many years.
Schools are now, for the first time, needing to take a wholesale look at their charges and paperwork - and the related legislative framework.
We have seen several schools seek to simplify their Other Charges as a result.
Our top tip for schools and operators is to start work early, as the application process:
- requires legal review and sign off from lawyers with experience in education and securities law;
- is likely to necessitate new contractual arrangements between (a) school entities and (b) the school and parents;
- involves advance communication with parents; and
- likely necessitates school leaders to work closely with their finance teams to assess what Other Charges will be imposed in the future (and to account for future restrictions and reporting requirements about the use of proceeds of these Other Charges).
In our experience, schools should allocate 2-4 months to prepare all paperwork for the application.
With the November 2024 application deadline fast approaching, we advise schools to begin the process now.
*Any reference to "Hong Kong" or "Hong Kong SAR" and "Macau" or "Macau SAR" shall be construed as a reference to "Hong Kong Special Administrative Region of the People's Republic of China" and "Macau Special Administrative Region of the People's Republic of China".
