In 1996, the Treasury published a consultation document on the possible repeal of the Trustee Investments Act 1961. A period of consultation followed with overwhelming support for reform.
The former Government's intention was that reform of the law regarding trustee investments should be achieved by means of an order under section 1 of the Deregulation and Contracting Out Act 1994. A draft deregulation order was laid before Parliament in February 1997.
It stopped short of repealing the Trustee Investments Act but, in any event, was lost when the 1997 general election was called.
In June 1997, the Law Com-mission published a consultation paper entitled, Trustees' Powers and Duties. This identified a number of current constraints on trustees' powers as being unduly restrictive, particularly the rule prohibiting delegation of trustees' fiduc-iary discretions and the inability to appoint nominees to hold trust property.
The Law Commission provisionally recommended extending the trustees' statutory powers but making them subject to the imposition of a statutory duty of care.
Following positive response to the consultation paper, the scope of the present report is wider than the consultation paper in that it is concerned both with the question of what investments trustees should be permitted to make in the absence of express authority in the trust instrument and with how they should be able to achieve the effective administration of a trust.
I do not intend to repeat the current statutory provisions of the Trustee Investments Act. However, in order to understand the Trustee Bill provisions and which particular defects of the present law they are intended to remedy, some reference will be made to the present law and trustees' problems when being subject to statutory powersof investment.
It must be said that, in practice, the trustees of most modern trusts will have adequately wide powers to invest trust assets largely free of the restrictions imposed by the Trustee Investments Act as such powers will be included in the trust document. Indeed, it has been said that a draftsman of a modern trust who fails to include a wide investment power in the trust document could well be held to be negligent.
However, a number of older trusts exist (including, in particular, many charitable trusts) where no such wide powers exist.
Statutory powers will also apply by default to trusts created on intestacy and there are also many trusts created in wills without professional advice where they will also apply.
The provisions of the Trustee Investments Act which have been severely criticised include the following:
The requirement to divide the trust fund into two parts (proportioned 3:1 between wider- and narrower-range investments) is now regarded as a crude and administratively burdensome attempt to regulate the degree of risk to which trustees may expose the trust.
The definition of wider-range investments in the Trus-tee Investments Act is, in fact, quite restrictive. The particular problem has been with the requirement that, when investing in a company, that com-pany must have paid divid-ends on all its shares for each of the immediately preceding five calendar years as this rules out a number of well-known public companies as well as all recent issues, even of investment trusts.
In the previous consultation document, the Treasury expressed a view that the Trustee Investments Act imposes unwarranted burdens on the trust because the trust assets are likely to increase in value to a lesser extent than they probably would if the trustees had the freedom to decide in what to invest. It also felt the need to conform with the requirements of the Act increases admin and dealing costs.
The task for the Law Commission in making any proposals for reform was to achieve a balance between the desirability of conferring the widest possible investment powers so that trustees should be able to invest trust assets in whatever manner is appropriate for the trust and the need to ensure that trustees act prudently in safeguarding the capital of the trust.
A similar approach has been taken in the past when extending trustee investment powers, for example, in the case of charity investments where deregulation of the investments was linked with tighter controls on the trustees making investment decisions.
The first point of distinction between the reform now proposed and that proposed by the previous Government is that reform is now proposed to be achieved by primary legislation rather than a deregulation order.
As previously indicated, the deregulation order laid before Parliament in 1997 did not propose the repeal of the Trustee Investments Act but instead proposed merely amending it. The present proposal for reform is that there should be primary legislation to reform the law governing the investment powers of the trustees and that, in so far as it is practical, the Trustee Investments Act should be repealed.
I will look at the proposals for reform of the act in detail next week.