Trustees: a new dawn

The laws that guide trustees on managing investment risks have changed to reflect todays’s economic landscape. But professional advice is key, say Glen Gilson and Alison MacNeil

Until recently, the separate jurisdictions of Scotland and England and Wales both looked to the Trustee Investments Act 1961 (TIA) for statutory guidance as to the exercise of trustees’ default powers of investment. The Trustee Act 2000 (TA) implemented the recommendations in England and Wales of the joint report of the Law Commission and the Scottish Law Commission in 1999 to widen and modernise the investment powers of trustees. Following a further report published in May 2001 by the Scottish Charity Law Review Commission (the McFadden Commission), default investment powers in Scotland have been overhauled by the Charities and Trustee Investment (Scotland) Act 2005 (CTI), which comes into force in April 2006.

The effects of trustees’ investment powers

In England and Wales, the beneficiary of a trust has beneficial ownership of the trust property, while in Scotland the rights of the beneficiary are personal and, in effect, akin to a contractual right which may be exercised against the trustees in respect of the trust estate. However, these differences in the basis of trust law have not had much effect on the law relating to the investment powers of trustees. The reason for this is that the ‘first order’ powers are usually expressed in trust deed, whereas statutory powers are only default powers that apply if there are no express powers, for example in intestacies or in the administration of estates of incapable individuals, or if powers are inadequately expressed, for instance in older charitable trusts. However, as the new statutes provide the context for the first order express powers of ordinary trustees, it is worthwhile to examine them.

In England and Wales, the default powers in the TA have relaxed considerably the restrictions that previously applied under the TIA. It is thought that the reason for this was the change in the modern perception of risk where portfolios are, in the main, managed actively and professionally. Common law and the Trustee Act 1925, which applied previously, had taken a much more cautious approach to the exercise of trustees’ powers. It had set out fixed parameters or ranges for “authorised investments”, which excluded investment in equities, thought to be unacceptably speculative for beneficiaries in comparison with fixed interest securities.

However, a changing economic climate, in which the risk of inflation eroding the value of fixed interest investments became a reality, led to the authorisation of equity investment in the TIA. Equities were initially restricted to only 50 per cent of the fund, which was later increased by order in 1996 to 75 per cent.

The core provision of the TA (Section 3) is that a trustee can make any kind of investment that they could make were they absolutely entitled to the assets of the trust. This is the “general power” which can be expanded or limited by the trust deed. Trustees must apply the standard investment criteria contained in the TA. These demand that suitability and are examined carefully before selection of investments, with professional advice as a prerequisite in all but a limited number of circumstances.

In Scotland, the CTI from April 2006 will largely follow the currently more relaxed position in England and Wales. Funds in Scotland which are currently split into narrow and wider range investments can be merged, which should result in many opportunities when portfolios are reviewed in the light of the wider standard investment criteria, which shall also now apply north of the border. The CTI amends Section 4 of the Trusts (Scotland) Act 1921, which makes provision for the general powers of trustees, so that Section 92 mirrors the TA position. Trustees in Scotland will now be permitted to make any kind of investment, which may include heritable (real) property as if they were absolute (or beneficial) owners. Helpfully, the CTI gives trustees a wider power to invest in residential property other than that limited to use by a beneficiary.

The implications of trustees’ duties to wider investment powers

The provisions of the TA and CTI that relate to seeking professional advice before exercising powers apply to all trusts, whether created before or after any of the new legislation. Effectively, this applies the new duty: to take advice on all trusts except those containing express restrictions or those excluded from the relevant provision, for example pension trusts (which are governed by the Pensions Act 1995).

This means that most trustees will be required to manage portfolios in an active manner. Even if a trustee is a professional broker it would seem advisable to obtain independent advice to avoid allegations of breach of trust should investments not perform as well as anticipated.

As regards the Financial Services and Markets Act 2000 (FSMA), trustees who only act as trustees are exempt from the requirement for authorisation, even if they do occasionally engage in activity which may fall within the scope of the FSMA.

Opportunities and pitfalls for trustees

In practical terms, how trustees arrange to take investment advice will depend on the nature and structure of the assets comprising the trust estate. For example, if heritable property rather than shares is held, advice from an estate manager and/or a surveyor may be required. Otherwise, stockbrokers or independent financial advisers may assess investment potential. Solicitors and accountants who help with administration and tax advice will have to meet regularly with trustees and other advisers, as well, perhaps, as having beneficiaries and their personal advisers attend.

Trustees in both jurisdictions now have similar wider powers to invest in a broader range of investments and, in general terms, this is very welcome. Beneficiaries will be, and should be, entitled to expect these broader powers to be exercised with proper regard given to suitability and diversification. If these conditions are not respected, trustees can expect beneficiaries to pursue claims for breach of trust.

Glen Gilson is head of private client services and Alison MacNeil is an associate at HBJ Gateley Wareing