Relevant Legal Rulings

Trustee Duties in relation to investment

  1. The first question that arises is the scope of any express investment power contained in the trust deed. A trustee may be circumscribed by the terms of such an express power – see e.g. Nestlé v National Westminster Bank (2000) W.T.L.R. 795: and on appeal (1993) 1 W.L.R. 1260.

  2. Most modern trusts contain wide powers of investment that permit trustees to invest in any sort of investment.

  3. Under the Trustee Act 2000 Trustees have a general power of investment. That provides that:

"(1)Subject to the provisions of this Part, a trustee may make any kind of investment that he could make if he were absolutely entitled to the assets of the trust.

  1. Section 6 of the Act provides:

"(1)The general power of investment is:

(a)In addition to powers conferred on trustees otherwise than by this Act, but
(b)Subject to any restriction or exclusion imposed by the trust instrument or by any enactment or any provision of subordinate legislation.

The statutory power can therefore supplement the power conferred on trustees by the trust deed but in certain cases the statutory power may as a matter of construction be limited by the terms of the deed. The effect of the deed is always going to be a matter of construction to be determined according to the usual principles of construction of deeds.

  • A restriction will need to be in clear terms
  • The grant of a limited express power of investment will not oust the more general statutory power but an express prohibition against a particular type of investment will.
  1. Assuming that a trust power permits a wide range of investments, it will still be necessary for the Trustees to exercise the power in a trustee like fashion.
  2. Trustees are now subject to a statutory duty of care in exercising various functions including investment.
  3. Section 1 of the Trustee Act 2000 provides:

"(1)The duty of care
Whenever the duty under this subsection applies to a trustee, he must exercise such care and skill as is reasonable in the circumstances, having regard in particular:

(a) To any special knowledge or experience that he has or holds himself out as having, and

(b) If he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession."

  1. Schedule 1 of the Acts sets out when the statutory duty applies. That schedule amongst other things provides that the duty of care applies to a trustee:
    1. When exercising the general power of investment or any other power of investment, however conferred;
    2. When carrying out a duty to which he is subject under sections 4 or 5 (duties relating to the exercise of a power of investment or to the review of investments).
  2. The new statutory test codified the existing common law tests that had been established in cases. The old common law standard was the standard which the ordinary prudent man of business would exercise when acting in the management of his own affairs – Speight v Gaunt (1883) 22CH D 727 per Bacon V-C. Remunerated and professional trustees were expected to meet a higher standard than ordinary lay trustees – National Trustee Company of Australia v General Finance Co of Australia Ltd (1905) Act 373. Re Watermans Will Trusts (1951) 2 All ER 1054. A trustee who held himself out as having special expertise beyond that of the ordinary prudent person could be held liable if loss was incurred as a result of failure to exercise that level of expertise – Bartlett v Barclays Bank (Nos 1 & 2) ( 1980) Ch 515.
  3. Section 4 of the Act provides:

"4. -Standard investment criteria.

(1) In exercising any power of investment, whether arising under this Part or otherwise, a trustee must have regard to the standard investment criteria.
(2) A trustee must from time to time review the investments of the trust and consider whether, having regard to the standard investment criteria, they should be varied.
(3) The standard investment criteria, in relation to a trust, are-

(a) The suitability of the trust of investments of the same kind as any particular investment proposed to be made or retained and of that particular investment as an investment of that kind, and
(b) The need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust.

  1. Section 5 of the Act provides

"5. -Advice.

(1) Before exercising any power of investment, whether arising under this Part or otherwise, a trustee must (unless the exception applies) obtain and consider proper advice about the way in which, having regard to the standard investment criteria, the power should be exercised.
(2) When reviewing the investments of the trust, a trustee must (unless the exception applies) obtain and consider proper advice about whether, having regard to the standard investment criteria, the investments should be varied.
(3) The exception is that a trustee need not obtain such advice if he reasonably concludes that in all the circumstances it is unnecessary or inappropriate to do so.
(4) Proper advice is the advice of a person who is reasonably believed by the trustee to be qualified to give it by his ability in and practical experience of financial and other matters relating to the proposed investment.

  1. There is no statutory obligation to follow advice and indeed a fiduciary has to exercise his own independent judgement and make the relevant decisions himself. However if a trustee disregards advice received from a competent investment adviser he will need to be able to justify his decision and provide evidence of his reasoning.
  2. Other general trust principles apply to the exercise of an investment power.
  • Trustees have been said to have a paramount duty to exercise their powers in the best interest of the present and future beneficiaries of the trust – Cowan v Scargill (1985) Ch 270 286-287.
  • Trustees must exercise powers for proper purposes.
  • They must not make secret profits.
  • They must not allow a conflict of interest to interfere with proper exercise of power.
  • They must act impartially between the beneficiaries.
  • They must consider all relevant factors.
  • They must not take into account irrelevant factors.
  • They must not fetter their discretion.
  • Trustees must not only disregard their own financial or family interest, they must also put aside their social and political opinions and motivations when making investments - Cowan v Scargill (1985) Ch 270.
  1. Hoffman J in Nestle v National Westminster Bank PLC stated that

"Modern trustees acting within their investment powers are entitled to be judged by the standards of current portfolio theory, which emphasises the risk level of the entire portfolio rather than the risk attaching to each investment taken in isolation."

  1. Trustees have to consider the whole range of types of investments open to them. It is not enough for them to consider whether a particular investment is suitable. In considering particular investment they have to consider the alternative investment available and whether and how the particular investment fits into the portfolio as a whole. It is inappropriate to isolate one particular investment out of a vast portfolio and enquire whether that be justified as a trust investment. Such a line by line approach is misplaced. The inquiry, rather, should be to look at a particular investment and enquire whether that is justified as a holding in the context of the overall portfolio – see Lord Nicholls in 1995 9 trust law International 71.
  2. The requirement to consider suitability is mandatory whereas diversification is required only if it is appropriate to the circumstances of the trust. Diversification may not be appropriate e.g. a trust holding a large shareholding in a family company. The size of the trust fund will be a factor that affects diversification. In the case of a large fund diversification will usually be appropriate and indeed necessary - see Cowan v Scargill (1984) 2 All ER 750. Other general considerations that might need to be balanced against the desirability of diversification include the tax position of the trust fund – the impact of capital gains tax and the availability of annual reliefs.
  3. Trustees in exercising powers must hold an even hand among all the beneficiaries except insofar as the settlement authorises them to discriminate – see Nestlé v National Westminster Bank per Hoffmann J where the test was redefined in terms of fairness and was stated not to be a mechanical process.

Deputies and Attorneys

  1. Deputies and attorneys are fiduciary agents and as such they owe duties of care to P. In addition to this, the Mental Capacity Act 2005 imposes a statutory requirement that any decision or action taken on behalf of an incapacitated person (''P'') must be in their best interest.
  2. In the case of Re Buckley (Public Guardian v C) (2013) EWHC 2965 (COP) Senior Judge Lush considered the position in the relation to attorneys acting under a Lasting Power of Attorney. The principles he stated are considered to be equally applicable to Deputies appointed under the Mental Capacity Act 2005.
  3. Judge Lush stated as follows:

"20. There are two common misconceptions when it comes to investments. The first is that attorneys acting under an LPA can do whatever they like with the donors' funds. And the second is that attorneys can do whatever the donors could – or would- have done personally, if they had the capacity to manage their property and financial affairs.

Managing your own money is one thing. Managing someone else's money is an entirely different matter.

People who have the capacity to manage their own financial affairs are generally not accountable to anyone and don't need to keep accounts or records of their income expenditure. They can do whatever they like with their money, and this includes doing nothing at all. They can do whatever they like with their money, and this includes doing nothing at all. They can stash their cash under their mattress, if they wish and, of course, they are entitled to make unwise decisions.

None of these options are open to an attorney acting for an incapacitated donor, partly because of their fiduciary obligations and partly because an attorney is required to act in the donor's best interest. The Mental Capacity Act 2005, section 1 (5), states that ''an act done, or decision made, under this act for or on behalf of a person who lacks capacity must be done, or made, in his best interests.

  1. Judge Lush went on to say that attorneys were fiduciaries and were in a similar position to trustees. He therefore suggested that they should follow the approach that trustee was bound to follow by virtue of the duties imposed by the Trustee Act 2000.
  2. The Judge commented that two of the most important factors when considering the suitability on Investments are the donor's age and life expectancy. Most donors are older people. Their average is 80 years and 11 months.
  3. The Judge concluded

"Until such time as the Office of the Public Guardian Issues its own guidance to attorneys and deputies on the investment of funds, I would suggest that, as they have fiduciary obligations that are similar to those of trustees, attorneys should comply with the provisions of the Trustee Act as regards the standard investment criteria and the requirement to obtain and consider proper advice. I would also recommend that attorneys and their financial advisers have regard to the criteria that were historically approved by the court and the antecedents of the OPG in investing for Patients, albeit with some allowance for updating, as suggested in paragraph 37 above."

In paragraph 37 the Judge had suggested an updated version of the historic codes that used to operate prior to the introduction of the Mental Capacity Act 2005. It is notable that his suggested code was extremely conservative and advocated holding large parts of a portfolio in cash and gilts. It will therefore only be in the case of wealthy incapacitated persons that the question of investment in equity funds will arise at all since the investment of P's funds in an equity fund will be appropriate in cases where there are substantial funds available.

  1. The Judge went on to state:

"Generally speaking, attorneys acting under an LPA should ensure that any investment products or services they acquire on a donor's behalf are provided by individuals or firms who are regulated by the Financial Services Authority. One of the advantages of this course of action is that the donor's investments will be covered by the Financial Services Compensation Scheme ('FCSC'), in which eligible deposits are protected up to a maximum of £85,000."

  1. Having regard to Re Buckley, attorneys and deputies should in general adopt a very cautious and conservative approach to investment on behalf of an incapacitated person. In this respect they have less freedom than trustees.
  2. Lastly Judge stated that the attorneys should be aware of the law regarding their role and responsibilities and that ignorance was no excuse.