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Balancing Act

Most important, the proposal for both England and Wales and for Scotland is that the trustees should have the same power to make any investment as they would have if they were absolute owners of the trust assets.

Interestingly, a precedent for this already exists in section 34 of the Pensions Act 1995 in respect of trustees of occupational pension scheme trusts. This resulted from the recommendations of Pro-fessor Goode in the 1993 report of the Pension Law Review Committee, where the trustee investment rules in the Trustee Investments Act 1961 were said to be “widely regarded as excessively rigid and quite unsuited to mod-ern investment needs and practices”.

The Law Commissions have decided that the prin-ciple adopted in section 34 of the Pensions Act 1995 should be extended to all trusts. The recommendation is that, subject to the expression of a contrary intention in the instrument creating the trust, trustees should have the same power to make an investment of any kind as if they were absolutely (or beneficially) entitled to the assets of the trust.

Granting trustees such wide powers must clearly be balanced by the inclusion of appropriate safeguards protecting the interests of the beneficiaries. Clearly, notwithstanding the recommendation that trustees should be able to invest as if they were absolute owners, the trustees are obviously not the absolute owners of the assets under their control and the beneficiaries of the trust need protection from the risk that the trust funds could be lost or dissipated in unwise investments.

Obviously, any proposals for wider powers of investment would not affect the general duties of trustees under general trust law, such as the duty to act in the best interests of the beneficiaries and to avoid any conflict between their duties as trustees and their personal interests.

However, both Law Commissions felt that the legislation conferring such wide default powers should also set out specific statutory duties which would balance such powers. Accordingly, there are proposals to include two particular statutory duties – a duty to have regard to the need for diversification and suitability of investments in the trust and a duty to obtain and consider proper advice where appropriate.

The duty to have regard to the need for diversification and the suitability of the trust investment is already included in section 6 of the Trustee Investments Act.

The two Law Commissions agreed that retention of these duties in the new legislation is appropriate. Such requirements conform with modern portfolio theory, which emphasises that investments are best managed by balancing risk and return across the portfolio as a whole rather than by looking at each investment in isolation.

As far as the duty to obtain and consider proper advice is concerned, at present the Trustee Investments Act only contains provisions regarding such advice where trustees are investing under the Act. Further duties to obtain advice have been considered by the courts, in particular in Cowan v Scargill (1985), where it was said that the trustees should obtain advice on any matters on which they were not competent to decide for themselves.

The requirement to undertake regular reviews of a trust portfolio was mentioned in the case of Nestle v NatWest Bank plc (1993).

In its consultation document, the Treasury proposed that, notwithstanding the common law duty, the trustees should be required both to take advice when necessary and to review portfolios.

The Law Commissions decided that, regardless of whether there is a general duty to seek advice (and whether it is implicit in any general duty of care to which the trustees are subject), the need for the trustees to obtain and consider advice is of such importance that it should be put on a statutory footing. However, they did not feel that it was necessary to impose specific restrictions on those who should be able to give advice or that the advice should be in writing.

The specific recommendations on the trustees&#39 need to obtain advice are that:

Before exercising the proposed powers of investment, the trustees should obtain and consider proper advice about the way in which those powers should be exercised, having regard to the need for diversification of investments of the trust and the suitability to the trust of the proposed investments.

The requirement to obtain advice should not apply if the trustees reasonably conclude that in, all the circumstances, it is unnecessary or inappropriate to do so.

Trustees should review the trust portfolio from time to time and consider whether the investments should be varied, again having regard to the need for diversificat-ion and to the suitability of investments.

For these purposes, proper advice would be the advice of a person who the trustees reasonably believe to be qualified to give it by his or her ability in and practical experience of financial and other matters relating to the proposed investment.

From the standpoint of the financial services industry and, in particular, those giving advice to trustees of existing trusts, the provisions in the Bill that will put the requirement to seek investment advice on a statutory footing could represent a welcome opportunity.

It would be a rare occasion indeed where the trustees would be able to reasonably conclude that it was unnecessary or inappropriate for them to seek such advice.

For those giving advice in the area of trustee investments, it is, of course, necessary to have a fundamental knowledge of trusts, trust taxation and the legal principles applying to trustee investments.

The chances are that, following the implementation of the legislation or even the publicity given to the proposed legislation, there will be renewed interest in and increased requirement for such advice and, therefore, expertise in this area.


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