The Misuse of Enduring Powers of Attorney

Tom Dumont examines the position of financial institutions dealing with attorney instructions and
the probems for them in ignoring misuse of such powers
(taken from Isssue No 15 – April 2001


A bank or other financial institution may rightly think that the scales of justice are finely balanced. On one side is the devil and on the other the deep-blue sea. The institution can be liable for failing to act on a customer’s instruction, but can also be liable if it does act on a customer’s instruction. Nowhere is this difficulty more sharply etched than with enduring powers of attorney (EPAs). The problem arises from the fact that, in law, the attorney’s instructions are the customer’s, but in reality of course the attorney is not the same person as the customer, and the customer probably has no idea what is happening. The Master of the Court of Protection has estimated that as many as 15% of EPAs may be operated improperly or fraudulently. That is a shockingly high proportion, which must send a shiver through any bank that stops to think about its ramifications.

Bank-customer relationships
It may help to start with a little background. The bank-customer relationship is a contractual one, in which the bank is subject to an implied term that it will exercise due skill and care in and about executing the customer’s orders. That duty is subsidiary to the bank’s main contractual duty, to execute promptly a valid and proper order from the customer. A bank will therefore be protected in acting upon a customer’s order unless the bank:

knows the order was given dishonestly;
shuts its eyes to the obvious dishonesty;
recklessly executed the order, having failed to make normal inquiries;
negligently executed the order, having failed to make normal inquiries1.

Other financial institutions can assume that the same applies to them.

Enduring powers of attorney
EPAs were brought in in 1985, because a normal power of attorney is terminated if the person who gave the power (called the donor) loses capacity to understand what is being done on his or her behalf. In old age, that is of course exactly the time when the donor needs someone to be acting on their behalf. Statute has therefore provided that an EPA is not terminated by the incapacity of the donor. The EPA’s validity is suspended, but becomes valid again when the EPA is registered with the Court of Protection.

Authority to make gifts
An EPA gives an attorney power over the assets of a person who by definition will be in no state to supervise that power. EPAs are therefore subject to limits on what the attorney can do in applying money or assets for his own benefit or the benefit of persons other than the donor. There are two limits, depending on whether the attorney is making a pure gift on the donor’s behalf, or providing for the needs of another person.

Under s.3(4) Enduring Powers of Attorney Act 1985 the attorney may benefit himself or others if the donor might be expected to meet the needs of that person, and the attorney does no more than the donor might be expected to do, to meet those needs.

Under s.3(5) Enduring Powers of Attorney Act 1985 the attorney may only make gifts which are normal birthday, wedding or seasonal (such as Christmas) gifts.

It is therefore pretty clear that any gifts must be small, and all other payments which are not for the donor’s benefit must be linked to a need which the donor would be expected to cover. Anything further than that cannot be done under an EPA. A specific application must be made to the Court of Protection. There has not been much opportunity for the court to give any guidance as to what `need` means. In Phillips v. Cameron2 Lindsay J decided that paying £62,500 in the early 1990s into a school fees plan (education being a need), was something that a wealthy grandmother might be expected to do for her only grandson.

Potential for fraud
So far so simple: where is the problem? Any gifts are likely to be relatively small. No need to lose any sleep over them, as they will never be litigated. `Need` may be difficult to define, but is easy to spot in practice. Common sense will make matters easy. Where money is drawn by cheque, the bank is not likely to be put on notice that anything is wrong, since the bank’s only duty is to scrutinise the cheque as an instrument, and not to unravel the underlying transaction.

Such an approach is understandable, as may be that of the ostrich. But any bank taking that attitude is failing to take account of the F-word: fraud. 15% of EPAs may be abused. About 10,000 EPAs are registered every year. A similar amount are probably being operated without registration. A calculated guess suggests that there may be anywhere between 100,000 – 250,000 EPAs being used at any given time. There could therefore be between 10,000 and 37,500 EPAs being abused over any given period. All of those EPAs will be used to operate a bank or building society account. All a bank has to do is divide that figure by its market share to realise that there is a significant risk that an account provided by it to an elderly customer is being abused.

It may be worth giving an example from practice (with a few small alterations to preserve confidentiality), if only as a warning against complacency. In this case, the bank held the donor’s will, which it knew left everything to the attorney (who was not related to the donor). The bank took comfort from that, and was lulled into a sense of security. There cannot be much harm in the donor’s money being passed to the attorney early, since no one else will be affected. So the Bank paid £250,000 out of the donor’s account, while she was alive, to the attorney’s company. After death, a relative turned up from abroad, and started an action to overturn the will on the grounds of fraud. The payment was clearly outside the power of the attorney. If the will is set aside, the relative will be entitled to the estate. The £250,000 will have to be repaid. The prospects of the company being able to repay are nil. The bank will no doubt be sued for the money. What this case serves to highlight is that the limits on EPAs must be respected. It is not enough to assume that you will be able to identify fraud.

Nor does it matter, in fact, whether anyone was actually being fraudulent. What counts is whether the limited powers of the attorney were exceeded. The following proposals, while seeming innocent enough, go beyond the powers of an attorney:

  • Passing assets to the next generation to mitigate Inheritance Tax (as transfers which will be exempt if the donor lives for 7 years, and taxed at a reduced rate if the donor survives more than 3 years)
  • Purchase of an insurance product also designed to mitigate tax.
  • Building an extension to the attorney’s house.
  • Lending money to a family member.
  • Using the money to pay off an overdraft, possibly at the same bank, of another family member.
  • Passing money on `because the donor no longer needs it` as he or she is adequately provided for, and no longer has any need of money apart from nursing home fees.
  • Paying over money because the donor would not want it to be used to pay for nursing care, if he or she had to go into a home.

Is there any protection against fraud?
The Enduring Powers of Attorney Act 1985 itself offers no protection. The promisingly titled part `Protection of Attorneys and Third Parties` (s.9) only offers protection in circumstances where the power is invalid or has been revoked. That may be useful protection against a power of attorney which has been executed after the donor lost capacity. It does not apply where the attorney’s act is outside the scope of the power.

Most financial institutions encourage their wealthier clients to consider Inheritance Tax planning. The most straightforward method is of course the transfer of money direct from one generation to the next. Many other approaches are available. It would be natural for any family to consider such activity, even if not encouraged to do so by the financial institution, which would want to be as helpful as possible in this thoroughly understandable aim. The children to be benefited may already be customers, or it may be hoped to obtain them as customers. On a different level, a bank may be pressing a customer to reduce his overdraft, against promises from the customer of a prospective inheritance. The transfer of money from one account, the donor’s, to another, the attorney’s, effectively gives the family a far better rate of interest. Instead of receiving say 3% taxable, 10% interest may be saved.

These are, or may be, perfectly innocent steps which the donor would be only too happy to carry out if he or she were still capable of doing so. Any financial institution would be very reluctant to create any difficulties, but it is clear that the proposal is wholly outside the scope of an EPA. These are no modest birthday or Christmas gifts. The motive is not to provide for someone’s needs.

Assisting the fraud
Any bank or financial institution that assisted the family in taking these steps, by acting on the strength of a power of attorney, would be treated in law as knowing that the attorney had no power to act. The financial institution would therefore know that it had no valid authority from its customer – the donor – to debit his or her account. It is not only banks that are in the firing line; building societies, stockbrokers, insurance companies, accountants, solicitors, anyone who handles finances or assets for an elderly client.

What the law does not require any of these institutions or professionals to do is to go behind each and every payment request or instruction. Banks and financial institutions are not (except where required by statute) obliged to police their customer’s instructions. It is the customer who chose the attorney, and chose to execute an EPA. If there is nothing to take the payment out of the ordinary the bank is entitled and even obliged to act on the attorney’s instruction. The question is – just how much does it take to put the bank (or other institution or professional) on notice? The proper approach to this question may involve an element of risk assessment. Individual risk assessment may not be possible in every case, although the knowledge that an elderly donor had appointed as her attorney a son who was a struck-off solicitor in severe financial difficulties, might well be held up later as a matter which would have made any bank wary. The general risk assessment may be more relevant: if 10 – 15% of EPAs are abused, then we are already in a high-risk area.

Combine the known high risk of EPA abuse, with the very limited nature of payments allowed under EPAs for the benefit of anyone other than the donor. It is a powerful, almost explosive, combination, which suggests that banks and other financial institutions should be taking steps to protect themselves, and their customers.

Controlling the risk
Wherever any reason is given for wanting to make a transfer out of the account, it will have to be scrutinised against the three criteria: benefit to the donor, small gifts, reasonable needs of others. It is not enough that the proposal seems sensible, fair or honest. If the attorney gives his reason, then it becomes part of the bank’s knowledge, and another factor to add to the known risk of abuse, and the very limited power of the attorney. Although ignorance may not be bliss, knowledge can make its recipient look a fool in court.

Where the reason for the instruction is not given, other facts may put the bank, financial institution on notice. These may include:

The size of the payment;
The recipient of the payment;
The frequency of the payment;
The nature of the payment;
The character of the attorney;
Anything known about the donor or his or her family.

This is obviously a wide-ranging list. On any given occasion, some of these may be irrelevant, not obvious or unknown.

Approach the issue this way. Ask yourself how you would feel if asked various questions in court. One question might be as follows. `You knew that a power of attorney had been registered, and that the donor was in a nursing home, with no needs other than the payment of nursing home fees. Could you not have provided for those fees to be paid by standing order, and then put a limit on any other substantial funds being paid out of the current account, with all but a small float being held in a deposit account?` Such an arrangement would require the agreement of the attorney, but his refusal to agree might itself be a risk indicator. If the reality is that the donor has no need for more than a regular payment or two each month, and there is a small float for regular gifts, it should be possible to structure the banking or other arrangements so that no significant payment-out is made without justification.

Most institutions will not want to involve themselves in arrangements of this kind. But it is the risks inherent in not doing so, which make it essential to consider whether to, or not. If your institution is caught having made avoidable payments outside the scope of the Enduring Powers of Attorney Act 1985 let it be because you have considered whether you wanted to put protective measures in place, and rejected that course in the knowledge of the consequences. Let it not be because the problem was not confronted.

What can be done when fraud is suspected?
There is a further problem: what do you do if you have reason to suspect that the attorney is exceeding his powers or simply acting fraudulently? The first stage, unless serious fraud is suspected, is to communicate directly with the attorney, recommend the taking of legal advice, and try to resolve matters constructively and amicably. But if that does not work, direct contact should be made to the Court of Protection, which retains a supervisory jurisdiction over EPAs unders.8(2) Enduring Powers of Attorney Act 1985. The court’s permission is probably necessary for a formal application, but may be granted under the Court of Protection (Enduring Power of Attorney) Rules. The Court of Protection is far more accessible than its name suggests, and initial inquiries can helpfully be made by telephone. It should be remembered that the Court shows little sympathy for anyone, particularly a large institution or professional, who does nothing in a crisis. Whistle-blowing, or reporting to the appropriate regulatory or similar authority, is more and more expected.

I have not gone in any detail into the law in relation to the liability of banks and others for excessive use of EPAs. An attorney is in a fiduciary relationship to the donor, which gives rise to additional risk of a bank being found liable as having assisted the attorney, knowing that he was in breach of that fiduciary duty. This has been an extremely fertile ground for litigation over the past few years. The exact ambit of such accessory liability, as it is called, is subject to regular development, and can give rise to expensive and uncertain litigation. I have assumed in relation to banks that it will not matter. There is authority, in theLipkin Gorman case1, that a bank will not become liable as an accessory to a fiduciary unless it is also negligent. That simpler test (simpler in law, if not in practice) of liability is all that needs to be considered. Other institutions and professionals may well not be able to rely on that principle.

There is a proposal to change the scope of the attorney’s power to make all payments possible, subject presumably to an overriding fiduciary duty. This would make life a lot easier for banks and others, since they could not be fixed so easily with notice of the lack of the attorney’s power. It would still leave the bank exposed where there was reason to suspect, or inquire into, the payment on the basis of breach of fiduciary duty.

Tom Dumont is a barrister of 11 New Square , Lincoln’s Inn, London, WC2A 3QB.

1 Barclays Bank v. Quincecare [1992] 4 All ER 363, Lipkin Gorman v. Karpnale [1992] 4 All ER 409 CA
2 [1999] Ch 386