Trustees: appointment, duties, powers, and liabilities - Dut...

Learning Outcomes

This article outlines the principal duties and powers of trustees concerning the investment of trust assets. It examines the statutory duty of care, the requirement to consider standard investment criteria, the obligation to seek advice, and the rules relating to delegation. For the SQE1 assessments, you need to understand how these duties operate in practice and how they interact with the trustees' overarching fiduciary responsibilities. Understanding these principles will enable you to apply them effectively to SQE1-style multiple-choice questions concerning trust administration and potential breaches of trust related to investment decisions.

In particular, focus on how the general power of investment under the Trustee Act 2000 must be exercised alongside the standard investment criteria (suitability and diversification), when obtaining proper advice is required and when it may be unnecessary, and the need for periodic review of investments. You should also be comfortable with the statutory duty of care and the heightened expectations for professional or specially skilled trustees, the fiduciary requirements of loyalty and impartiality, and the specific conditions governing the delegation of asset management functions, including policy statements and ongoing supervision. Finally, understand how causation, loss measurement, exculpation clauses, and court relief can affect trustee liability where investments perform poorly or duties are breached.

SQE1 Syllabus

For SQE1, you are required to understand trustees' investment duties and their practical application, including identifying relevant duties in given scenarios, determining whether a breach has occurred, and understanding the consequences, while paying attention to the interplay between statutory powers and duties under the Trustee Act 2000 and the general fiduciary obligations of trustees, with a focus on the following syllabus points:

• the scope of the general power of investment under the Trustee Act 2000
• the power to acquire land (s 8 TA 2000) and limits to UK land
• the standard investment criteria (suitability and diversification)
• the trustees' duty to obtain and consider proper advice
• the duty to review investments
• the requirements for delegating investment functions
• the statutory duty of care applicable to investment decisions
• the potential liability of trustees for investment losses
• how fiduciary obligations (loyalty, impartiality, no-conflict, no-profit) constrain investment choices
• ethical investment considerations and when non-financial factors may lawfully be taken into account
• how exculpation clauses and court relief can affect liability.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which ONE of the following best describes the standard investment criteria under the Trustee Act 2000?
   1. Maximising capital growth above all else.
   2. Generating the highest possible income for the life tenant.
   3. Considering the suitability of investments and the need for diversification.
   4. Investing only in government bonds for maximum security.

2. True or False: Trustees must always obtain professional financial advice before making any investment decision, regardless of the circumstances.

3. A trustee invests a significant portion of the trust fund in a single, speculative company share recommended by a friend, without taking advice. The share value subsequently plummets. Has the trustee likely breached their investment duties?
   1. No, trustees have a general power of investment.
   2. No, provided they acted honestly.
   3. Yes, they likely failed to consider suitability and diversification, and failed to take proper advice.
   4. Yes, only because the investment resulted in a loss.

Introduction

Trustees are entrusted with managing trust assets for the benefit of beneficiaries. A fundamental aspect of this management role involves making decisions about how the trust fund should be invested. The law imposes significant duties on trustees to ensure that these decisions are made prudently, appropriately, and in the best interests of the beneficiaries. These duties stem from both statute, primarily the Trustee Act 2000 (TA 2000), and the general principles of equity relating to fiduciary obligations. Failure to comply with these duties can lead to personal liability for any resulting losses.

Investment decision-making requires trustees to consider the trust’s purposes, the composition and size of the fund, the differing interests of beneficiaries (for example, life tenants focused on income and remaindermen focused on capital), the timescale and liquidity needs of the trust, tax consequences, and overall portfolio risk. Modern portfolio theory is relevant to the standard of care: trustees are judged on the risk and return characteristics of the portfolio as a whole rather than isolated investments, but they must still comply meticulously with the statutory framework, seek appropriate advice, and carry out periodic reviews.

Key Term: General Power of Investment
The power granted by s 3 TA 2000, allowing trustees to make any kind of investment that they could make if they were absolutely entitled to the assets of the trust, subject to restrictions in the trust instrument or other legislation.

The General Power of Investment

Prior to the TA 2000, trustees' investment powers were often restricted, limiting their ability to achieve optimal returns. Section 3 of the TA 2000 grants trustees a broad general power of investment. This is a default power: a trust instrument may expand, restrict, or exclude it, and trustees must read the instrument carefully to confirm any bespoke investment regime.

This power allows trustees to invest in a wide range of assets, including shares, bonds, and land (s 8 TA 2000 specifically provides power to acquire land in the UK). Trustees can acquire UK freehold or leasehold land for investment, for occupation by a beneficiary, or for any other purpose consistent with the trust. The land power under s 8 is confined to the UK; acquiring land abroad will fall outside s 8 and will generally be unauthorised absent express power in the trust instrument.

Although the general power is broad, it is not a licence to speculate or act without structure. Trustees must evaluate investment choices against statutory duties (including the standard investment criteria) and equitable duties (including impartiality and loyalty). Trustees should also be aware that not every outlay counts as an investment: unsecured loans are typically not investments absent express authority, gambling or betting is not investment, and high-cost depreciating chattels are usually inappropriate unless justified by the trust’s aims and risk-tolerance.

When investing in private companies, trustees should exercise enhanced diligence: consider dividend history, liquidity of shares, governance standards, and whether trustees should seek a board role to monitor the company effectively. In Bartlett v Barclays Bank Trust Co Ltd [1980], a trustee bank was held to a high standard of oversight of a company in which the trust held a controlling shareholding; trustees must actively supervise such holdings.

Statutory Duties Relating to Investment

The TA 2000 imposes several key duties on trustees when exercising their investment powers.

Standard Investment Criteria

Section 4 TA 2000 requires trustees, when exercising any power of investment or reviewing trust investments, to have regard to the standard investment criteria.

Key Term: Standard Investment Criteria
Defined in s 4 TA 2000 as the suitability to the trust of investments of the kind proposed and the particular investment proposed, and the need for diversification of investments, so far as appropriate to the circumstances of the trust.

Suitability has two dimensions:

• Suitability of the asset class to the trust. Trustees should consider whether, given the trust’s objectives and constraints, the type of investment is appropriate (for example, equities vs bonds vs property vs cash). This involves assessing volatility, liquidity, likely return profile, and alignment with beneficiary needs.
• Suitability of the particular investment. Trustees must assess the specific company, fund, property, or instrument, including sector exposures, geographic risks, management quality, creditworthiness, and tax implications.

Diversification requires trustees to consider how to spread risk across asset classes, sectors, issuers, and geographies. Diversification is not an absolute requirement; s 4 requires trustees to consider the need for diversification “so far as appropriate.” A small trust requiring immediate liquidity may warrant a higher cash allocation; a larger fund with a long horizon may call for a broader spread across equities, bonds, property, and alternative assets. Trustees should avoid concentration risk, such as loading too heavily into one sector or a single issuer, unless the trust instrument or compelling circumstances justify it.

Trustees must also consider the different interests of beneficiaries when applying the criteria. Acting impartially may require balancing income-generating assets for life tenants with capital growth assets for remaindermen. Traditional apportionment rules have been simplified in recent years, but the fundamental equitable duty to treat beneficiaries even-handedly remains central.

Duty to Obtain and Consider Proper Advice

Section 5 TA 2000 imposes a duty on trustees to obtain and consider proper advice about how the power of investment should be exercised, having regard to the standard investment criteria.

Key Term: Proper Advice
Defined in s 5(4) TA 2000 as the advice of a person who is reasonably believed by the trustee to be qualified to give it by their ability in and practical experience of financial and other matters relating to the proposed investment.

Trustees should normally take advice both before making investments and when reviewing and varying them. The adviser does not have to hold formal qualifications, but trustees must reasonably believe the adviser is competent through ability and practical experience. The duty to obtain advice does not apply if the trustees reasonably conclude in all the circumstances that it is unnecessary or inappropriate to do so. For instance, a trustee who is a qualified and experienced investment professional may, after careful evaluation, decide that external advice is unnecessary for routine matters; equally, the cost of advice regarding a minor transaction relative to the fund size might make advice disproportionate.

The duty is to obtain and consider advice; it is not a duty to follow advice slavishly. Trustees must still exercise their powers personally and reach independent decisions on investment selection and portfolio construction. It is good practice to document advice obtained, the trustees’ reasoning, and how suitability and diversification were addressed.

Worked Example 1.1

The trustees of a family trust (£500,000) for a widow (life tenant) and her young children (remaindermen) are considering investing the entire fund in shares of a single technology start-up company, based on a tip from a relative. They do not seek professional advice.

Have the trustees complied with their duties under ss 4 and 5 TA 2000?

Answer:
It is highly unlikely they have complied. Investing the entire fund in a single speculative share likely breaches the duty to consider diversification (s 4). It also likely breaches the duty regarding suitability (s 4), given the need to balance income for the widow and capital security/growth for the children. Furthermore, failing to obtain proper advice (s 5) before making such a significant and risky investment is almost certainly a breach, unless the trustees themselves possess and reasonably rely on relevant knowledge, which is not indicated here.

Duty to Review Investments

Trustees also have a duty under s 4(2) TA 2000 to review the trust investments from time to time and consider whether, having regard to the standard investment criteria, they should be varied. The frequency of review depends on the nature of the trust and its investments. A steady-state portfolio might be reviewed semi-annually or annually; where market conditions shift materially (such as a rapid fall in a sector to which the trust is heavily exposed, or a sudden change in beneficiary needs), an earlier review is required. Reviews should document the continuing suitability of asset classes and particular holdings, whether diversification remains appropriate, and whether advice is needed.

Regular review is part of a continuous process: initial due diligence, portfolio construction, monitoring of performance and risk, and periodic rebalancing. Failure to review is itself a breach of duty even if no immediate loss arises.

Statutory Duty of Care

Section 1 TA 2000 imposes a statutory duty of care on trustees when exercising certain powers, including the power of investment and the duties relating to advice and review.

Key Term: Duty of Care (Statutory)
The duty under s 1 TA 2000 requiring a trustee to exercise such care and skill as is reasonable in the circumstances, having regard in particular to any special knowledge or experience they have or hold themselves out as having, and, if acting professionally, to the knowledge or experience reasonably expected of such a professional.

This duty is objective and context-sensitive:

• A higher standard is expected of professional trustees (for example, solicitors or accountants) compared to lay trustees, and trustees with special investment skills are held to that higher standard.
• Trustees must apply prudence across the whole portfolio, consistent with modern portfolio theory, while adhering to statutory criteria. Acting conservatively will not save trustees from liability if they fail to consider relevant factors, obtain advice when necessary, or carry out reviews.

Trustees with significant shareholdings in companies must maintain an appropriate level of oversight. In Bartlett v Barclays Bank Trust Co Ltd, the trustee’s duty of care demanded active supervision of a company in which the trust held a controlling interest. Where trust assets include private companies, trustees should consider board representation, governance oversight, and robust monitoring.

Exculpation clauses in the trust instrument may limit liability for negligence, but they do not permit fraud or dishonesty. Armitage v Nurse confirms that trustees may be protected against liability for loss arising from negligence where the instrument so provides, but core fiduciary duties remain.

Worked Example 1.2

Two trustees, one a retired accountant and the other a layperson with no financial experience, invest trust funds. They follow advice from a qualified financial advisor but fail to adequately diversify the portfolio, leading to a significant loss when one sector underperforms.

Could both trustees be liable for breach of the statutory duty of care?

Answer:
Potentially, yes. Both trustees have a duty under s 1 TA 2000. The accountant, possessing special knowledge, might be held to a higher standard regarding understanding the diversification advice (or lack thereof). The lay trustee still had a duty to act with reasonable care and skill; simply relying on the professional co-trustee or the advisor without independent consideration might constitute a breach, especially concerning a fundamental principle like diversification. Liability would depend on whether their actions were reasonable in the circumstances.

Fiduciary Duties

Alongside the statutory duties, trustees remain subject to fundamental fiduciary duties derived from equity. These include:

• Duty of Loyalty: To act solely in the beneficiaries' best interests.
• Duty to Act Impartially: To balance the interests of different beneficiaries fairly (for example, life tenants and remaindermen).
• No-Conflict Rule: To avoid situations where their personal interests conflict with their duties to the trust.
• No-Profit Rule: Not to profit personally from their position as trustee unless authorised (for example, by the trust instrument or statute for professional trustees).

Additional fiduciary rules relevant to investment include self-dealing and fair-dealing. Self-dealing (a trustee purchasing trust property) is generally prohibited and transactions are voidable at the instance of beneficiaries. Fair-dealing (a trustee purchasing a beneficiary’s equitable interest) may be allowed if full disclosure is made and a fair price given, but the transaction is closely scrutinised. Trustees must also secure the best price reasonably obtainable when selling trust property.

Relevance to Investment

These duties directly impact investment decisions. For example:

• Trustees cannot choose investments that benefit themselves personally over the beneficiaries.
• When balancing income and capital growth, they must act impartially between the life tenant and remainderman, ensuring even-handedness (see the balancing principle echoed in Howe v Earl of Dartmouth).
• The duty of loyalty requires trustees to seek the best financial return consistent with prudence and the trust's objectives, generally putting aside their own personal ethical views unless authorised by the trust instrument or all adult beneficiaries consent.

In Cowan v Scargill [1985] Ch 270, the court stressed that trustees’ primary investment duty is to act in the beneficiaries’ best financial interests. Refusing suitable investments for non-financial reasons will generally be a breach unless the trust permits such considerations or all sui juris beneficiaries consent.

Key Term: Ethical Investment
Investment choices that incorporate non-financial considerations (for example, environmental, social, or governance criteria). Trustees may take ethical factors into account only if consistent with their duty to act in beneficiaries’ best financial interests, or where authorised by the trust instrument, or with informed consent of all adult beneficiaries; charitable trusts may avoid investments conflicting with the charity’s purposes provided doing so does not significantly compromise financial returns.

Charitable trusts occupy a limited exception. In line with charity law principles (for example, Harries v Church Commissioners), charity trustees may decline investments that conflict with charitable objects or risk alienating supporters, provided they remain mindful of financial consequences.

Delegation of Investment Functions

Recognising the complexity of investment management, the TA 2000 permits trustees to delegate investment functions (referred to as asset management functions) to an agent, such as an independent financial adviser or discretionary fund manager.

Key Term: Asset Management Functions
Investment-related functions that trustees may authorise an agent to perform under s 11 TA 2000, including acquiring, managing, and disposing of trust investments, subject to statutory safeguards and the trustees’ ongoing supervisory duties.

Key Term: Policy Statement
A written statement trustees must provide to an investment agent under s 15 TA 2000 setting out how the functions should be exercised in the best interests of the trust, including investment objectives, risk profile, diversification, and any constraints the agent must follow.

Requirements for Delegation (ss 11, 12, 15, 22, 23 TA 2000)

• Power: Trustees have the power under s 11 to authorise an agent to exercise asset management functions.
• Acting Jointly: Where more than one trustee is authorised to exercise the same function, they must act jointly (s 12).
• Agent Selection: Trustees must exercise the statutory duty of care when selecting the agent. Select agents with appropriate competence and integrity; a competent stockbroker or discretionary manager is preferable to a generalist without specialist investment experience (Fry v Tapson).
• Policy Statement: Trustees must provide the agent with a written policy statement giving guidance on how the functions should be exercised in the best interests of the trust (s 15). This requires careful consideration of investment objectives, risk tolerance, time horizon, liquidity needs, beneficiary profiles, suitability, and diversification. The agreement must include a term requiring the agent to comply with the policy statement.
• Monitoring and Review: Trustees must keep the arrangements with the agent under review (s 22). This involves monitoring performance relative to objectives, assessing adherence to the policy, and intervening or replacing the agent where appropriate.
• Agreement and Documentation: A written agreement should define scope, reporting, benchmarks, permitted investments, risk limits, fees, and compliance with the policy statement.

Trustees cannot delegate core trustee functions, such as decisions about distributing trust assets, allocating payments between income and capital, or appointing trustees. Nor should they appoint a beneficiary as the investment agent; that would risk a conflict between personal interests and fiduciary responsibilities.

Trustee Liability When Delegating

If trustees comply with their duties in selecting, instructing (via the policy statement), and reviewing the agent, they will generally not be liable for the agent's acts or defaults (s 23 TA 2000). However, they remain liable for breaches of their own duties relating to the delegation process. Trustees must demonstrate a coherent policy, appropriate selection, and diligent supervision. If they fail to exercise reasonable care in appointing or monitoring the agent, they may be liable for losses.

Exam Warning

Remember that while investment functions can be delegated, certain core trustee functions cannot be delegated under s 11 TA 2000. These include decisions about distributing trust assets, allocating payments between income and capital, and appointing trustees.

Worked Example 1.3

Trustees engage a discretionary fund manager (DFM) under a written agreement and policy statement to manage a £2 million portfolio. They do not set any diversification parameters and rely solely on quarterly performance reports. The DFM concentrates investments into a narrow basket of high-volatility technology stocks. A market correction wipes out 40% of the portfolio.

Are the trustees liable?

Answer:
The trustees may be liable for failing to comply with s 15 and s 22 duties. Although delegation is permitted, trustees must provide a clear policy statement addressing diversification and risk, and keep arrangements under review. Omitting diversification guidance and failing to monitor risk concentration may breach the statutory duty of care (s 1) and review obligations (s 22). If they cannot show reasonable care in instructing and supervising the DFM, s 23 protection may not apply.

Liability for Breach of Investment Duties

If trustees breach their statutory or fiduciary duties relating to investment and this causes loss to the trust fund, they can be held personally liable to compensate the trust.

• Causation: The loss must be shown to have resulted from the breach. Trustees are not liable simply because an investment performs poorly if they complied with their duties when making and reviewing it (Nestle v National Westminster Bank plc).
• Measure of Liability: The aim is to restore the trust fund to the position it would have been in had the breach not occurred. Compensation must reflect the loss caused by the breach, or account for unauthorised profits where a breach of fiduciary duty leads to gain.
• Joint and Several Liability: If multiple trustees are in breach, their liability is joint and several, meaning the beneficiaries can claim the full amount from any one trustee (who may then seek contribution from the others).
• Exculpation Clauses: A trust instrument may limit or exclude liability for negligence (Armitage v Nurse). Such a clause cannot absolve fraud or dishonesty.
• Court Relief: Under s 61 Trustee Act 1925, a court may relieve a trustee wholly or partly from personal liability if the trustee acted honestly and reasonably and ought fairly to be excused.
• Limitation: Claims for breach of trust are generally subject to limitation periods, though claims arising from fraud or where trustees retain trust property often fall within special provisions. In practice, limitation defences rarely shield trustees from liability for serious breaches involving investment management, but they may apply to older, minor breaches.

Beneficiaries may compel trustees to carry out their investment duties and, where appropriate, bring proceedings to recover losses. They cannot, however, ordinarily dictate investment choices or compel the exercise of discretionary powers unless the trustees’ decisions are capricious or irrational.

Worked Example 1.4

Trustees invest £50,000 in company shares without taking advice. The shares were suitable for the trust, but the company unexpectedly fails, and the shares become worthless. Evidence shows that even if the trustees had taken advice, the advisor would likely have recommended this investment based on available information at the time.

Are the trustees liable for the loss?

Answer:
Likely not for the full loss caused by the investment choice itself. Although they breached their duty under s 5 TA 2000 by failing to take advice, the evidence suggests this breach did not cause the loss, as proper advice would have led to the same investment. However, they may still face criticism for failing to comply with process duties (s 5 and s 1). Absent causation, the compensatory liability should be limited or nil, but they should tighten procedures to avoid future breaches.

Practical Application of Duties: Additional Considerations

Trustees should adopt structured investment governance to evidence compliance:

• Define objectives: income needs, capital growth, risk tolerance, time horizon, liquidity, and tax considerations.
• Asset allocation: set target ranges for equities, bonds, property, and cash, adjusted for beneficiary needs and market conditions.
• Diversification: avoid excessive exposure to one issuer, sector, or geography; consider passive index exposure and active management where appropriate.
• Suitability checks: document the rationale for each holding and how it fits the trust’s aims.
• Advice and selection: record adviser qualifications, scope of advice, and trustees’ independent decision-making.
• Monitoring: establish benchmarks, reporting frequency, risk metrics (for example, volatility, drawdown, concentration), and trigger points for review.
• Private companies and land: assess liquidity, governance, and oversight responsibilities; for UK land acquired under s 8, consider rental potential, maintenance costs, and insurance; if a beneficiary occupies trust property, ensure impartiality by addressing any impact on other beneficiaries.
• Ethical constraints: apply only as authorised, and ensure any ethical overlay does not compromise financial returns beyond acceptable levels unless trust terms permit.

Trustees should also be wary of common pitfalls:

• Over-concentration in one sector (for example, energy or technology) without justification.
• Failing to rebalance after significant market moves.
• Ignoring tax-efficient structures where appropriate (for example, considering the trust’s tax status and beneficiaries’ positions).
• Retaining unsuitable legacy assets without review.
• Delegating to an agent without a clear policy statement or ongoing supervision.

Where trustees’ actions are challenged, courts will focus on process and prudence. Pitt v Holt clarifies that decisions taken without proper consideration of relevant matters may be impugned; however, if trustees identify relevant considerations and obtain and consider appropriate advice, their decisions will not be set aside merely because the advice later proves imperfect.

Key Point Checklist

This article has covered the following key knowledge points:

• Trustees have a broad general power of investment under s 3 TA 2000, allowing investment as if they were absolute owners, but subject to duties and any restrictions in the trust instrument.
• Trustees may acquire UK land under s 8 TA 2000 for investment, occupation by a beneficiary, or other reasons; land acquisition power is limited to the UK unless the trust instrument authorises otherwise.
• Trustees must consider the standard investment criteria (suitability and diversification) under s 4 TA 2000 when making or reviewing investments.
• Trustees generally have a duty under s 5 TA 2000 to obtain and consider proper advice before investing or when reviewing investments, unless reasonably unnecessary or inappropriate.
• Trustees must exercise the statutory duty of care (s 1 TA 2000) when carrying out investment functions, with a potentially higher standard for professional or specially skilled trustees.
• Trustees must act impartially and loyally, avoiding conflicts of interest and unauthorised profits; they should seek the best financial returns consistent with prudence and trust objectives, and only consider ethical factors where authorised or consented.
• Investment functions can be delegated to an agent under the TA 2000, provided trustees comply with duties regarding selection, instruction (via a policy statement), and review; s 23 limits liability for an agent’s defaults where trustees have complied with their own duties.
• Trustees can be personally liable for losses caused by a breach of their investment duties; causation and measurement of loss focus on restoring the fund to the position but for the breach.
• Exculpation clauses may limit liability for negligence; courts have discretion under s 61 TA 1925 to relieve trustees who acted honestly and reasonably.
• Beneficiaries may compel trustees to perform investment duties but cannot ordinarily control investment discretion.

Key Terms and Concepts

• General Power of Investment
• Standard Investment Criteria
• Proper Advice
• Duty of Care (Statutory)
• Ethical Investment
• Asset Management Functions
• Policy Statement