Trustees’ Powers and Duties

M J Frost, FCIB, TEP

Barclays Bank Trust Company Limited

The Law Commissions’ combined report into trustees’ powers and duties was published on 20th July this year.  Copies can be obtained from The Stationery Office or from the Law Commission’s website (http://www.open.gov.uk/lawcomm).

This report is a result of consultation papers from H M Treasury (on trust investment in 1996) and the Law Commission (on trustees’ powers and duties in July 1997).  The latter paper was a result of work carried out in conjunction with the independent Trust Law Committee which TACT has supported both with financial contributions and representation on working parties and the main committee.

Attached to the new report are two draft Trustee Bills, one for England and Wales and one for Scotland.  This article deals with the Bill for England and Wales.  I anticipate a subsequent article in this Review on Scottish Trust Law and that may well be a more appropriate place to comment on the proposed Scottish changes.

At the time of writing it is not known if, or when, the Bill will be introduced into Parliament.  However, at the annual conference of the Society of Trust and Estate Practitioners shortly before publication of the report, Charles Harpum, the Law Commissioner who heads the trust and property law team of the Commission, sounded as optimistic as his position would allow that the Bill will be introduced.  There has been some speculation that the Bill could be introduced into the Lords as early as this autumn.  As this Bill is potentially the biggest change to trust law since 1925 its progress will be watched very closely.

This short article is not the place to set out in detail all of the terms of the Bill, or to go into depth as their full implications, but it does attempt to provide a summary of the main issues.

The Bill is arranged in six main sections

Part I (cl.1-2)                         The Duty of Care

Part II (cl.3-7)                        Investment

Part III (cl.8-10)                     Acquisition of Land

Part IV (cl.11-27)                  Agents, Nominees and Custodians

Part V (cl.28-33)                   Remuneration

Part VI (cl.34-43)                  Miscellaneous

Part I (cl.1-2)                  The Duty of Care  

It is proposed that a trustee must exercise such care and skill as is reasonable, having regard to the special knowledge or experience that he holds himself out as having, in carrying out his functions under the Bill.  If he acts as a trustee in the course of his business then regard must be given to any special skill or experience that it is reasonable to expect of a person in that profession.

Schedule 1 to the Bill sets out in more detail the application of this duty to certain specified classes of transaction:-

  •  Exercising investment powers and when reviewing investments
  •  Acquiring land
  •  Using agents, nominees or custodians
  •  Insuring property

Part II (cl.3-7)      Investment 

Clause 3 proposes that a trustee may make any kind of investment that he could make if he was absolutely entitled to the assets.    If this is implemented we will be done with the prescriptive list approach of the Trustee Investment Act 1961.

Clause 4 creates “standard investment criteria” which would apply to all trustees exercising investment powers.  These criteria derive from s.6(1) TIA 1961 and concern

  •         suitability to the trust of any investment proposed and
  •         the need for diversification in so far as is appropriate to the circumstances of the particular trust.

Advice is required under Clause 5 unless the trustee concludes that in all the circumstances it is not necessary.  The advice should have regard to the standard investment criteria and should be taken when exercising the power and when reviewing the portfolio.  Proper advice is defined as that 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 (this is based on the existings.6(4) TIA 1961).  Note that there is no requirement for the advice to be in writing, but few would doubt that written advice would be best practice.  The Law Commission have observed, in their report, that it could be questioned whether or not a trustee had complied with his duty of care if the advice was not in writing.

The new requirement regarding advice does not retain, from s.6(4) TIA 1961, the express statement that advice may be given by an officer or servant in the course of his employment which, when read with s.6(6), meant that advice could be given by a trustee or an employee of a corporate trustee.    Whether in practice this will make any difference remains to be seen, but the present Bill would not appear to be worded so as to exclude advice being taken in this way.

As a general proposition the new investment powers would apply to trusts created both before and after the Bill is enacted, but with specific provisions in Clauses 6-7 that modify this general statement.

Part III (cl.8-10)   Acquisition of Land 

Clause 8 is in similar terms to the existing s.6(3)-(4) Trusts of Land and Appointment of Trustees Act 1996 which it is intended to replace.  The main difference in the new provision is that it is not restricted to trustees of land, but applies to trustees generally, and it is not limited to a legal estate in land in England and Wales, but embraces the United Kingdom.

Part IV (cl.11-27) Agents, Nominees and Custodians 

The provisions relating to agents concern the powers of collective delegation in default of express powers in the trust deed.  Individual delegation continues to be governed bys.25 Trustee Act 1925.

Rather than set out a list of delegable functions, Clause 11 permits the delegation of a non-charitable trustee’s functions other than in the four areas specified below

  •   Any function relating to the way a trust should be distributed
  •   Any powers to allocate fees against either capital or income
  •   Any power to appoint a trustee
  •   Any sub-delegation (apart from that specifically authorised later in the Bill).

There are different restrictions in Clause 11(3) for charitable trustees.     

Clause 12 will permit trustees to appoint as an agent one of their own number, but it prohibits the appointment of a beneficiary.  Clause 14 permits a trustee to authorise an agent’s terms and remuneration, but this is subject to three general restrictions on not permitting the agent to appoint a substitute, not permitting a restriction on the agent’s liability for his actions and not permitting an agent to act where there is a conflict of interest.  A trustee may accept terms which breach any of these three general restrictions if “it is reasonably necessary for them to do so”.

  • No delegation of asset management is permitted unless it is in writing; 15(1)

  • No delegation can be made unless the trustee has prepared an investment policy statement with which the agent will comply (or with any revised or replacement statement); 15(2).    The trustee must keep the policy statement under review;22(2)
  •      The policy statement must be in writing (15(4)) and must contain guidance that it is in the best interests of the trust; 15(3)

For non-custodian trustees, Clauses 16-17 permit the use of nominees and custodians in relation to the trust assets, provided that their appointments are in writing.  A custodian must be appointed where non-custodian trustees hold bearer securities; Clause 18. However, the custodian or nominee appointed must either be a person who carries on a business which consists, at least in part, of acting as a nominee or custodian or is a body corporate which is controlled by the trustees.  Clause 20 regarding the terms of appointment of nominees or custodians mirrors the provisions of Clause 14 (see above) for the appointment of agents.

Clause 22 requires the trustee to keep the delegation to agents, nominees and custodians under review and, if necessary, to give directions or revoke the appointment.  A trustee will not be liable for the defaults of his agent, nominee or custodian unless he has breached his duty of care under Schedule 1.

Part V (cl.28-33) Remuneration 

Clause 28 applies to charging clauses in deeds whenever created, but only to services provided after enactment.  It reverses the common law rule that a charging clause is to be construed strictly against a trustee and specifically entitles the remunerated trustee to payment in respect of acts which are capable of being provided by a lay trustee.  It further abolishes the concept of remuneration under charging clauses being a gift under the terms of a will.  This means that s.15 Wills Act 1837 will no longer apply to such terms and wills will be capable of being witnessed by someone who benefits from a charging provision.  Such payments will also cease to be a gift for the purposes ofs.34(3) Administration of Estates Act 1925 (the order of priority in which an estate is paid out).

Clause 29 effectively inserts a charging clause into any trust deed which is silent upon the point.  It operates in favour of trust corporations and trustees acting in a professional capacity and entitles them to “reasonable remuneration”.  These provisions do not apply to charitable trusts as separate provisions are made the regulation of charitable trustees under Clause 30 (see below).

In practice, Clause 29 may be of very limited value to corporate trustees.  All commercial corporate trustees will operate a set published terms and conditions of business which are expressly authorised in trust deeds.  The Bill does not offer any statutory authorisation for these general terms and conditions of business as well as the remuneration and it is hard to see how a commercial corporate trustee can act confidently without them.  General terms and conditions are necessary to authorise a range of activities such as acting as banker to the trust and retaining any incidental profits so earned.  Having said this the reforms proposed by the Bill may go some way to reducing the content of the general terms and conditions as the power to use nominees is, for example, traditionally contained in them.  I think that commercial corporate trustees will look very carefully at the practical value to them of this provision.

Clause 30 confers a power on the Secretary of State to make provision by statutory instrument for the remuneration of charitable trustees.  The report recognises that further consultation with the interested parties on the approach to remuneration is needed.

Clauses 31-32 provide specific authority for a trustee to be reimbursed for expenses properly incurred when acting on behalf of the trust, including the remuneration of agents, nominees and custodians.

Part VI (cl.34-43)                Miscellaneous 

Clause 34 provides a replacement for s.19 Trustee Act 1925 (power to insure).    Under the new provision a trustee may insure “any property” in the trust against “risks of loss or damage due to any event” and pay the premiums out of the trust fund.  This, it should be noted, is a power and not a duty.  There are further provisions relating to property held on bare trusts.

Clause 35  provides for the terms of the Bill to apply equally to legal personal representatives as trustees and for references to trusts to also be read as references to wills.

Clause 36 governs the application of the Bill to pension funds.  Parts II and III of the Bill do not apply to them, as these issues are covered by s34 Pensions Act 1995.  Further, their power to appoint nominees and custodians arises under s47 Pensions Act 1995 and therefore those parts of the Bill relating to nominees and custodians do not apply to them.  Consequently, the duty of care in Part I does not apply to pension trustees in so far as it relates to these three areas of the Bill

Clause 37 bars Parts II and IV from apply

The Law Commissions’ combined report into trustees’ powers and duties was published on 20th July this year.  Copies can be obtained from The Stationery Office or from the Law Commission’s website (http://www.open.gov.uk/lawcomm).

This report is a result of consultation papers from H M Treasury (on trust investment in 1996) and the Law Commission (on trustees’ powers and duties in July 1997).  The latter paper was a result of work carried out in conjunction with the independent Trust Law Committee which TACT has supported both with financial contributions and representation on working parties and the main committee.

Attached to the new report are two draft Trustee Bills, one for England and Wales and one for Scotland.  This article deals with the Bill for England and Wales.  I anticipate a subsequent article in this Review on Scottish Trust Law and that may well be a more appropriate place to comment on the proposed Scottish changes.

At the time of writing it is not known if, or when, the Bill will be introduced into Parliament.  However, at the annual conference of the Society of Trust and Estate Practitioners shortly before publication of the report, Charles Harpum, the Law Commissioner who heads the trust and property law team of the Commission, sounded as optimistic as his position would allow that the Bill will be introduced.  There has been some speculation that the Bill could be introduced into the Lords as early as this autumn.  As this Bill is potentially the biggest change to trust law since 1925 its progress will be watched very closely.

This short article is not the place to set out in detail all of the terms of the Bill, or to go into depth as their full implications, but it does attempt to provide a summary of the main issues.

The Bill is arranged in six main sections

Part I (cl.1-2)                          The Duty of Care

Part II (cl.3-7)                        Investment

Part III (cl.8-10)                     Acquisition of Land

Part IV (cl.11-27)                   Agents, Nominees and Custodians

Part V (cl.28-33)                    Remuneration

Part VI (cl.34-43)                Miscellaneous

Part I (cl.1-2)                 The Duty of Care    

It is proposed that a trustee must exercise such care and skill as is reasonable, having regard to the special knowledge or experience that he holds himself out as having, in carrying out his functions under the Bill.  If he acts as a trustee in the course of his business then regard must be given to any special skill or experience that it is reasonable to expect of a person in that profession.

Schedule 1 to the Bill sets out in more detail the application of this duty to certain specified classes of transaction:-

  •         Exercising investment powers and when reviewing investments
  •         Acquiring land
  •         Using agents, nominees or custodians
  •         Insuring property

Part II (cl.3-7)      Investment 

Clause 3 proposes that a trustee may make any kind of investment that he could make if he was absolutely entitled to the assets.    If this is implemented we will be done with the prescriptive list approach of the Trustee Investment Act 1961.

Clause 4 creates “standard investment criteria” which would apply to all trustees exercising investment powers.  These criteria derive from s.6(1) TIA 1961 and concern

  •          suitability to the trust of any investment proposed and
  •         the need for diversification in so far as is appropriate to the circumstances of the particular      trust.

Advice is required under Clause 5 unless the trustee concludes that in all the circumstances it is not necessary.  The advice should have regard to the standard investment criteria and should be taken when exercising the power and when reviewing the portfolio.  Proper advice is defined as that 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 (this is based on the existings.6(4) TIA 1961).  Note that there is no requirement for the advice to be in writing, but few would doubt that written advice would be best practice.  The Law Commission have observed, in their report, that it could be questioned whether or not a trustee had complied with his duty of care if the advice was not in writing.

The new requirement regarding advice does not retain, from s.6(4) TIA 1961, the express statement that advice may be given by an officer or servant in the course of his employment which, when read with s.6(6), meant that advice could be given by a trustee or an employee of a corporate trustee.    Whether in practice this will make any difference remains to be seen, but the present Bill would not appear to be worded so as to exclude advice being taken in this way.

As a general proposition the new investment powers would apply to trusts created both before and after the Bill is enacted, but with specific provisions in Clauses 6-7 that modify this general statement.

Part III (cl.8-10)   Acquisition of Land 

Clause 8 is in similar terms to the existing s.6(3)-(4) Trusts of Land and Appointment of Trustees Act 1996 which it is intended to replace.  The main difference in the new provision is that it is not restricted to trustees of land, but applies to trustees generally, and it is not limited to a legal estate in land in England and Wales, but embraces the United Kingdom.

Part IV (cl.11-27) Agents, Nominees and Custodians 

The provisions relating to agents concern the powers of collective delegation in default of express powers in the trust deed.  Individual delegation continues to be governed bys.25 Trustee Act 1925.

Rather than set out a list of delegable functions, Clause 11 permits the delegation of a non-charitable trustee’s functions other than in the four areas specified below

  •          Any function relating to the way a trust should be distributed
  •          Any powers to allocate fees against either capital or income
  •          Any power to appoint a trustee
  •          Any sub-delegation (apart from that specifically authorised later in the Bill)

There are different restrictions in Clause 11(3) for charitable trustees.     

Clause 12 will permit trustees to appoint as an agent one of their own number, but it prohibits the appointment of a beneficiary.  Clause 14 permits a trustee to authorise an agent’s terms and remuneration, but this is subject to three general restrictions on not permitting the agent to appoint a substitute, not permitting a restriction on the agent’s liability for his actions and not permitting an agent to act where there is a conflict of interest.  A trustee may accept terms which breach any of these three general restrictions if “it is reasonably necessary for them to do so”.

Clause 15 contains proposals specifically for asset management. 

  •          No delegation of asset management is permitted unless it is in writing;15(1)
  •         No delegation can be made unless the trustee has prepared an investment policy statement with which  the agent will comply (or with any revised or replacement statement); 15(2).    The trustee must keep the policy statement under review; 22(2).
  •         The policy statement must be in writing (15(4)) and must contain guidance that it is in the best interest  of the trust; 15(3)

For non-custodian trustees, Clauses 16-17 permit the use of nominees and custodians in relation to the trust assets, provided that their appointments are in writing.  A custodian must be appointed where non-custodian trustees hold bearer securities; Clause 18. However, the custodian or nominee appointed must either be a person who carries on a business which consists, at least in part, of acting as a nominee or custodian or is a body corporate which is controlled by the trustees.  Clause 20 regarding the terms of appointment of nominees or custodians mirrors the provisions of Clause 14 (see above) for the appointment of agents.

Clause 22 requires the trustee to keep the delegation to agents, nominees and custodians under review and, if necessary, to give directions or revoke the appointment.  A trustee will not be liable for the defaults of his agent, nominee or custodian unless he has breached his duty of care under Schedule 1.

Part V (cl.28-33) Remuneration 

Clause 28 applies to charging clauses in deeds whenever created, but only to services provided after enactment.  It reverses the common law rule that a charging clause is to be construed strictly against a trustee and specifically entitles the remunerated trustee to payment in respect of acts which are capable of being provided by a lay trustee.  It further abolishes the concept of remuneration under charging clauses being a gift under the terms of a will.  This means that s.15 Wills Act 1837 will no longer apply to such terms and wills will be capable of being witnessed by someone who benefits from a charging provision.  Such payments will also cease to be a gift for the purposes ofs.34(3) Administration of Estates Act 1925 (the order of priority in which an estate is paid out).

Clause 29 effectively inserts a charging clause into any trust deed which is silent upon the point.  It operates in favour of trust corporations and trustees acting in a professional capacity and entitles them to “reasonable remuneration”.  These provisions do not apply to charitable trusts as separate provisions are made the regulation of charitable trustees under Clause 30 (see below).

In practice, Clause 29 may be of very limited value to corporate trustees.  All commercial corporate trustees will operate a set published terms and conditions of business which are expressly authorised in trust deeds.  The Bill does not offer any statutory authorisation for these general terms and conditions of business as well as the remuneration and it is hard to see how a commercial corporate trustee can act confidently without them.  General terms and conditions are necessary to authorise a range of activities such as acting as banker to the trust and retaining any incidental profits so earned.  Having said this the reforms proposed by the Bill may go some way to reducing the content of the general terms and conditions as the power to use nominees is, for example, traditionally contained in them.  I think that commercial corporate trustees will look very carefully at the practical value to them of this provision.

Clause 30 confers a power on the Secretary of State to make provision by statutory instrument for the remuneration of charitable trustees.  The report recognises that further consultation with the interested parties on the approach to remuneration is needed.

Clauses 31-32 provide specific authority for a trustee to be reimbursed for expenses properly incurred when acting on behalf of the trust, including the remuneration of agents, nominees and custodians.

Part VI (cl.34-43)                Miscellaneous 

Clause 34 provides a replacement for s.19 Trustee Act 1925 (power to insure).    Under the new provision a trustee may insure “any property” in the trust against “risks of loss or damage due to any event” and pay the premiums out of the trust fund.  This, it should be noted, is a power and not a duty.  There are further provisions relating to property held on bare trusts.

Clause 35  provides for the terms of the Bill to apply equally to legal personal representatives as trustees and for references to trusts to also be read as references to wills.

Clause 36 governs the application of this Bill to pension funds.  Parts II and III of the Bill do not apply to them, as these issues are covered by s.34 Pensions Act 1995.  Further, their power to appoint nominees and custodians arises under s.47 Pensions Act 1995and therefore those parts of the Bill relating to nominees and custodians do not apply to them.  Consequently, the duty of care in Part I does not apply to pension trustees in so far as it relates to these three areas of the Bill.

Clause 37 bars Parts II and IV from applying to trustees of authorised unit trusts (within the meaning of s.78 Financial Services Act 1986)

Clause 38 bars Parts II and IV from applying to trustees managing a common investment scheme made under s.24 Charities Act 1993 or a common deposit scheme under s.25 of the same Act.

-o-o-

If, as is expected, the Bill does proceed through Parliament there will be further articles looking in greater depth at the implications of this very important change to trustee law.

Martyn Frost FCIB TEP

Trustee Manager, Barclays Bank Trust Company