Trustees: appointment, duties, powers, and liabilities - Duty to invest and powers relating to investment

Learning Outcomes

This article examines the essential duty of trustees to invest trust assets. It details the scope of the general power of investment under the Trustee Act 2000, the requirement to follow standard investment criteria, the obligation to seek advice, and the principles governing the delegation of investment responsibilities. Understanding these elements is critical for assessing trustee compliance and potential liability in trust administration scenarios encountered in the SQE1 assessments.

SQE1 Syllabus

For SQE1, you are required to understand the duties and powers trustees have concerning the investment of trust property. A thorough understanding of this area is necessary to advise on appropriate investment strategies and identify potential breaches of trust related to investment decisions.

Your revision should concentrate on:

  • The statutory duty of care applicable to trustees' investment functions.
  • The general power of investment granted by the Trustee Act 2000.
  • The requirement for trustees to consider suitability and diversification (standard investment criteria).
  • The trustees' obligation regarding obtaining and considering proper investment advice.
  • The duty to review investments periodically.
  • The rules permitting delegation of asset management functions and the associated duties of trustees.

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. Under the Trustee Act 2000, what are the two standard investment criteria trustees must consider?
    1. Profitability and Risk
    2. Liquidity and Security
    3. Suitability and Diversification
    4. Short-term gain and Long-term stability
  2. A trustee is managing a trust fund solely for an adult beneficiary with full capacity who is absolutely entitled. Can the trustee delegate investment decisions to a qualified financial advisor?
    1. Yes, without restriction.
    2. Yes, provided they comply with the statutory requirements for delegation, including providing a written policy statement.
    3. No, the beneficiary's absolute entitlement prevents delegation.
    4. No, trustees must always make investment decisions personally.
  3. Are lay trustees and professional trustees held to the same standard of care when making investment decisions under the Trustee Act 2000?
    1. Yes, the standard is the same for all trustees.
    2. No, professional trustees are expected to exercise a higher degree of skill and care.
    3. No, lay trustees have no duty of care regarding investments.
    4. Yes, but only if the trust instrument explicitly states this.

Introduction

Trustees are entrusted with managing assets for beneficiaries. A core aspect of this management involves the duty to invest the trust fund. This duty requires trustees not merely to preserve the trust property but to make it productive, generating income and/or capital growth as appropriate for the beneficiaries, while acting prudently. The Trustee Act 2000 provides the modern framework governing trustees' powers and duties regarding investment, replacing older, more restrictive rules. This article explores these key statutory provisions and associated common law principles.

The Statutory Duty to Invest

Unless excluded or modified by the trust instrument, trustees generally have a duty to invest trust money rather than leaving it unproductive, for example, in a current account yielding no interest. Failure to invest appropriately can constitute a breach of trust if it leads to loss. The Trustee Act 2000 (TA 2000) grants trustees broad powers while simultaneously imposing significant duties.

General Power of Investment

Section 3 TA 2000 confers on trustees a General Power of Investment.

Key Term: General Power of Investment
The power under s 3 TA 2000 enabling trustees to make any kind of investment they could make if they were absolutely entitled to the trust assets, except for investments in land specifically covered by s 8.

This power provides significant flexibility, allowing investment in assets like shares, bonds, and collective investment schemes (like unit trusts). It contrasts sharply with the restrictive lists of authorised investments under previous legislation.

Power to Acquire Land

Section 8 TA 2000 grants a distinct power for trustees to acquire freehold or leasehold land in the United Kingdom. This can be done:

  • As an investment (e.g., buying property to let out for rental income).
  • For occupation by a beneficiary.
  • For any other reason (e.g., acquiring land adjoining existing trust property).

This power is separate from the general power under s 3 and is specifically limited to UK land unless the trust instrument permits acquiring land abroad.

Statutory Duty of Care

When exercising investment powers (and other specified functions like appointing agents), trustees are subject to the statutory duty of care defined in s 1 TA 2000.

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

This duty imposes an objective standard but adjusts it based on the trustee's actual or purported competence. Consequently, a professional trustee (e.g., a solicitor or trust corporation) is held to a higher standard than a lay trustee (e.g., a family member) with no specialist financial knowledge.

Standard Investment Criteria

Section 4 TA 2000 mandates that trustees, when exercising any power of investment (whether statutory or under the trust instrument) or reviewing investments, must have regard to the Standard Investment Criteria.

Key Term: Standard Investment Criteria
The criteria set out in s 4 TA 2000 requiring trustees to consider (a) the suitability to the trust of investments, and (b) the need for diversification of investments, so far as appropriate.

Key Term: Suitability
Relates to the specific trust's needs. Trustees must consider the appropriateness of both the type of investment (e.g., equities, bonds, property) and the specific investment being considered (e.g., shares in Company X) in light of the trust's objectives, duration, size, tax position, and beneficiaries' requirements (e.g., income versus capital growth).

Key Term: Diversification
Spreading investments across different asset classes (shares, bonds, property, cash), geographical areas, and industry sectors to reduce risk. The extent of diversification required depends on the trust's circumstances; a small, short-term trust might require less diversification than a large, long-term one.

Failure to properly consider these criteria constitutes a breach of duty.

Duty to Obtain Advice

Section 5 TA 2000 requires trustees to obtain and consider Proper Advice before exercising any power of investment or when reviewing investments.

Key Term: Proper Advice
Advice on how investment powers should be exercised, considering the standard investment criteria, given by a person reasonably believed by the trustees to be qualified to give it due to their ability and practical experience of financial and other relevant matters.

Trustees need not obtain advice if they reasonably conclude in all the circumstances that it is unnecessary or inappropriate to do so. This might apply if:

  • The amount being invested is very small.
  • The proposed investment is very simple and low-risk (e.g., depositing funds in a standard savings account).
  • A trustee possesses the requisite competence themselves (e.g., a trustee who is a qualified investment manager acting within their competence).

However, lay trustees should be cautious about deciding advice is unnecessary, as failure to take advice when appropriate can lead to liability.

Duty to Review

Trustees have an ongoing duty under s 4(2) TA 2000 to review the trust investments from time to time and consider whether they should be varied, having regard to the standard investment criteria. The frequency depends on the nature of the investments and the trust's circumstances, but regular reviews are essential.

Worked Example 1.1

The trustees of the Green Family Trust (fund value £500,000) hold the fund for Mrs Green for life, remainder to her adult children. Mrs Green relies on the trust income. The trustees, believing technology stocks offer the best growth, invest the entire fund in shares of one company, TechFutures plc, without seeking advice. The shares subsequently fall significantly in value.

Have the trustees breached their duties?

Answer: Yes, the trustees have likely breached several duties. Firstly, by investing the entire fund in a single company, they have failed to consider the need for diversification (s 4 TA 2000). Secondly, this high-risk strategy potentially ignores the suitability requirement regarding the income needs of the life tenant, Mrs Green. Thirdly, unless one of the trustees possessed relevant professional competence, they likely breached their duty under s 5 TA 2000 by failing to obtain proper advice before making such a significant and undiversified investment. Their failure to consider the standard investment criteria demonstrates a breach of the statutory duty of care (s 1 TA 2000).

Delegation of Investment Functions

Trustees must generally act personally. However, the TA 2000 permits the collective delegation of certain functions, including most asset management functions (which include investment decisions), to an agent.

Key Term: Delegation
Authorising an agent to exercise certain trustee functions, governed by ss 11-15 and 22-23 TA 2000.

Formal Requirements for Delegation (s 15)

To delegate asset management functions, trustees must:

  1. Appoint the agent under a written agreement.
  2. Prepare a written policy statement giving guidance on how the functions should be exercised in the best interests of the trust (considering suitability, diversification, and trust objectives). Trustees must use reasonable care preparing this statement.
  3. Ensure the written agreement requires the agent to comply with the policy statement.

Trustees' Duties When Delegating (s 22)

Even when functions are delegated, trustees retain important duties:

  1. Duty of Care in Selection: They must exercise the statutory duty of care (s 1) when selecting the agent, ensuring they are suitably qualified.
  2. Duty of Review: They must keep the arrangements under review, considering whether the agent is complying with the policy statement and whether the policy statement itself needs revision.

Liability for Agents (s 23)

Critically, s 23 TA 2000 states that a trustee is not liable for any act or default of the agent unless the trustee has failed to comply with their duty of care under s 1 TA 2000 either in the appointment process or in the ongoing review process required by s 22.

Exam Warning

While trustees can delegate investment decisions, they cannot delegate responsibility entirely. Liability can still arise if they are negligent in choosing or supervising the agent, or in providing an inadequate policy statement. Remember s 23 protection is conditional on compliance with their duties under ss 1 and 22.

Key Point Checklist

This article has covered the following key knowledge points:

  • Trustees have a general duty to invest trust funds, governed primarily by the Trustee Act 2000.
  • Section 3 TA 2000 provides a broad general power of investment.
  • Section 8 TA 2000 provides a power to acquire UK land.
  • Trustees must follow the statutory duty of care (s 1 TA 2000).
  • Trustees must consider the standard investment criteria: suitability and diversification (s 4 TA 2000).
  • Trustees generally must obtain and consider proper advice before investing or reviewing (s 5 TA 2000).
  • Trustees have an ongoing duty to review investments (s 4(2) TA 2000).
  • Trustees can delegate asset management functions to an agent, subject to strict requirements regarding written agreements, policy statements, and review (ss 11, 15, 22 TA 2000).
  • Trustees are generally protected from liability for an agent's acts unless they breached their own duties in appointment or review (s 23 TA 2000).

Key Terms and Concepts

  • General Power of Investment
  • Statutory Duty of Care (s 1 TA 2000)
  • Standard Investment Criteria
  • Suitability
  • Diversification
  • Proper Advice
  • Delegation
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