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Powers of attorney

October 1, 2007 was a momentous day. Did you notice? For anyone involved in managing and investing assets for adults who lack, or may lack, capacity to make decisions for themselves because of a mental disorder or mental illness, it will go down in history as the day when a revolution took place.

On this day, most of the Mental Capacity Act 2005 came into force, affecting a large number of people, their families and advisers. However, there seems to be widespread ignorance about the impact. What should the fuss have been about?

It is important to understand the rationale behind the act, which is that people should be empowered to make decisions for themselves if possible. The act begins with five overriding principles, one of which states that: “A person is not to be treated as unable to make a decision unless all practicable steps to help him do so have been taken without success.” It also introduces the concept of a function-specific test of capacity. This recognises that a person may be capable of making some decisions but not others and that a person’s capacity to make a decision may fluctuate.

The test is laudable but it poses a significant challenge to decision-makers and their advisers. An assessment of the individual’s capabilities must be carried out each time a decision has to be made.

For many, their first brush with the act will be with lasting powers of attorney. These allow an individual (the donor) to nominate one or more attorneys to make decisions on their behalf. There are two types of LPAs – personal welfare LPAs which authorise attorneys to make welfare and healthcare decisions, and property and affairs LPAs for financial decisions.

Unlike ordinary powers of attorney, the attorneys’ authority is not revoked if the donor becomes mentally incapable and therefore LPAs are often regarded as an integral part of the donor’s wealth management strategy as they enable assets to be managed for the benefit of the donor and his or her family, even if mental incapacity intervenes. Without them, in the event of mental incapacity, no one has authority to deal with the person’s assets or to instruct an adviser to invest them.

In this situation, a lengthy and expensive application to the Court of Protection for the appointment of a deputy is required but full authority to manage the person’s investments may not be given to the deputy by the court. Therefore, checking whether your client has made an LPA or enduring power of attorney (EPA) may be good for you and your client.

Property and affairs LPAs supersede EPAs but any EPAs created before October 1, 2007 remain effective.

Family members are often appointed as attorneys under but professional advisers may also be appointed. Before October 1, 2007, the duties of EPA attorneys and the way in which they exercised them were not codified, encompassing a mixture of common law and case law.

Contrast this with the codified requirements of the new act. First, the attorney must decide whether the donor lacks mental capacity to make the material decision. Deciding on a balance of probabilities is sufficient but the attorney must take all practicable steps to help him take the decision if possible. If the attorney concludes that the donor is incapable of making this particular decision, they must then make the decision “in the donor’s best interests”, which means following a checklist laid down by the act. This includes having regard to the donor’s past and present wishes and feelings, beliefs and values and potentially consulting others.

A code of practice accompanies the act. At 296 pages long, it is not a quick read but the act states that LPA attorneys are under a duty to have regard to it. In addition, others acting in relation to a person lacking mental capacity, including in a professional capacity or for remuneration, must have regard to it. Breaching the code does not in itself give rise to a liability but it would be taken into account should the situation be assessed by the court and may have other legal ramifications. Arguably, for paid advisers who are not appointed attorneys, it is not clear whether the requirement to have regard to the code stops with the decision-maker – the attorney – or whether it also extends to the adviser.

The most sensible approach will be to take precautions. If you deal with the finances of mentally incapable people, you should be familiar with the code and consider making a contemporaneous note of why you believe your recommendations or actions are within the spirit of the code.

EPA attorneys are also affected. The code indicates that they should have regard to the best interest checklist and perhaps, by implication, the whole code as well. However, remunerated or professional EPA attorneys must now have regard to it.

Another new feature is that LPAs must be registered before they can be used. To avoid a situation where the attorneys are unable to act if the donor suddenly becomes mentally incapable, many donors register LPAs as soon as possible. However, some wish to include a restriction that the attorneys may not act until the donor is incapable. This may create problems for advisers as, unlike EPAs, the fact that the LPA has been registered does not mean that instructions should only be taken from the attorneys. If the donor has fluctuating capacity, then you may find it difficult to know, on any given day, whether you may accept instructions from the donor or the attorneys.

You should take steps to protect yourself. Ask to see a copy of the LPA to check for registration and restrictions and, if need be, obtain written confirmation from the attorneys that the donor is not currently capable of making the decision and that they are acting within the scope of their power. Unless you have actual knowledge that the LPA is not created validly or has been revoked, you may then rely on the attorneys’ instructions.

The changes wrought by the Mental Capacity Act are significant but there are many uncertainties associated with its operation. Until these are resolved, attorneys and their advisers need to adopt a cautious approach and familiarise themselves with the new regime.

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