Trustees: appointment, duties, powers, and liabilities - Types of authorized investments under the Trustee Act 2000

Learning Outcomes

This article explains the general power of investment conferred on trustees by the Trustee Act 2000. It details the standard investment criteria trustees must consider and their duty to obtain and consider proper advice. It also covers the ongoing duty to review investments and the rules regarding delegation of investment functions. Understanding these principles is necessary for advising trustees on managing trust assets effectively and for addressing potential liability for breach of trust related to investments in the SQE1 assessments.

SQE1 Syllabus

For SQE1, you are required to understand the duties and powers of trustees, particularly regarding investment. A key aspect involves applying the Trustee Act 2000. You should be prepared to analyse scenarios involving investment decisions, assessing compliance with statutory duties and identifying potential breaches.

As you work through this article, focus your revision on:

  • The scope of the general power of investment under the Trustee Act 2000.
  • The standard investment criteria (suitability and diversification) and their application.
  • The trustee's duty to obtain and consider proper advice.
  • The ongoing duty to review trust investments.
  • The rules and limitations concerning the delegation of investment functions.

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 Act provides trustees with a general power of investment?
    1. Trustee Act 1925
    2. Trusts of Land and Appointment of Trustees Act 1996
    3. Trustee Act 2000
    4. Charities Act 2011
  2. What are the two components of the standard investment criteria under the Trustee Act 2000?
    1. Profitability and risk
    2. Suitability and diversification
    3. Liquidity and security
    4. Ethical considerations and beneficiary requests

  3. True or False: Trustees must always obtain professional financial advice before making any investment decision.

  4. Can trustees delegate their investment decision-making powers to a beneficiary?
    1. Yes, if the beneficiary is suitably qualified.
    2. Yes, if all beneficiaries consent.
    3. No, delegation can only be to suitably qualified agents or co-trustees.
    4. No, investment decisions cannot be delegated under any circumstances.

Introduction

One of the most fundamental duties of a trustee is to manage the trust property for the benefit of the beneficiaries. In most trusts, this involves not just safeguarding the assets but also investing them prudently to generate income and/or capital growth, depending on the trust's objectives and the beneficiaries' needs. Historically, trustees' investment powers were often restricted, but the Trustee Act 2000 introduced a significant shift, granting trustees wider powers while simultaneously imposing stricter duties regarding how those powers are exercised. This article focuses specifically on the investment duties and powers under the Trustee Act 2000.

The General Power of Investment

The Trustee Act 2000 ('TA 2000') provides trustees with a broad power of investment, fundamentally changing the previously restrictive framework.

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.

This power is subject to the general duties of trustees, particularly the statutory duty of care, and any restrictions or exclusions contained within the trust instrument itself. The power applies to all trusts, regardless of when they were created, unless the trust instrument provides otherwise.

The TA 2000 also grants trustees specific power regarding land. Under s.8 TA 2000, trustees may acquire freehold or leasehold land in the UK either as an investment, for occupation by a beneficiary, or for any other reason. This power is distinct from the general power of investment but is subject to the same duties regarding suitability and diversification.

Worked Example 1.1

The trustees of the Smith Family Trust hold £500,000. The trust instrument is silent on investment powers. The beneficiaries include a life tenant requiring income and remaindermen interested in capital growth. Can the trustees invest in a portfolio comprising UK company shares, overseas government bonds, and a small commercial property in Manchester?

Answer: Yes. The TA 2000 grants a general power of investment (s.3) and a specific power to acquire UK land (s.8). Subject to fulfilling their duties regarding the standard investment criteria and obtaining advice, the proposed portfolio appears within the scope of their powers. They must balance the need for income (for the life tenant) and capital growth (for the remaindermen).

Statutory Duties Relating to Investment

While the TA 2000 grants wide powers, it balances this with strict duties. The overarching duty is the statutory duty of care under s.1 TA 2000. Trustees must exercise such care and skill as is reasonable in the circumstances, having regard to any special knowledge or experience they have or hold themselves out as having. Professional trustees are held to a higher standard reflecting their professional proficiency.

Specifically concerning investment, the TA 2000 imposes duties regarding standard investment criteria and the need for advice.

Standard Investment Criteria (SIC)

Section 4 TA 2000 requires trustees, when exercising any power of investment or reviewing investments, to 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, in so far as is appropriate to the circumstances of the trust.

Key Term: Suitability
Relates to the appropriateness of a particular investment, or type of investment, for the specific trust, considering its objectives, duration, size, tax position, and the beneficiaries' needs (e.g., income vs capital growth).

Key Term: Diversification
Relates to spreading investments across different asset classes, sectors, and geographical regions to reduce risk. The extent of diversification required depends on the trust's specific circumstances.

Trustees must consider the SIC both when making new investments and when reviewing existing ones. Failure to properly consider the SIC can lead to liability for breach of trust if loss results.

Worked Example 1.2

Trustees of a small trust fund (£50,000) established for a single beneficiary who will become entitled to the capital in two years' time decide to invest the entire fund in shares of one newly established tech company, hoping for rapid growth. Does this comply with the SIC?

Answer: Likely not. While suitability might be argued (potential for growth), investing the entire fund in a single, high-risk stock fails the diversification requirement appropriate for most trusts, especially one with a short timeframe where capital preservation might be important. The lack of diversification significantly increases risk.

Duty to Obtain and Consider 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, both when making and reviewing investments.

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.

This advice should relate to how the investment powers should be exercised having regard to the standard investment criteria. The trustees must consider the advice obtained, but the ultimate decision remains theirs.

This duty does not apply if the trustees reasonably conclude in all the circumstances that it is unnecessary or inappropriate to obtain such advice. This might be the case for very simple investments or where a trustee possesses the relevant skills themselves (e.g., a professional investment manager acting as trustee).

Exam Warning

Lay trustees cannot simply ignore the duty to take advice because they feel they know best or wish to save costs. They must reasonably conclude it is unnecessary. For significant or complex investments, failure to take advice is likely a breach of duty.

Duty to Review Investments

Section 4(2) TA 2000 explicitly requires trustees to review the trust investments from time to time and consider whether, having regard to the SIC, they should be varied. The frequency and depth of review depend on the nature of the trust and its investments. Market conditions may necessitate more frequent reviews. Failure to conduct appropriate reviews is a breach of duty.

Delegation of Investment Functions

Trustees generally have a duty to act personally. However, the TA 2000 permits trustees to delegate certain functions, including asset management functions (which include investment decisions), provided they comply with specific safeguards.

Key Term: Delegation
The act by which trustees authorise an agent to exercise certain functions on their behalf.

Under s.11 TA 2000, trustees may authorise an agent to exercise delegable functions. Investment decisions fall under 'asset management functions' (s.15) which can be delegated.

Key requirements for delegating asset management functions include:

  • The delegation must be by an agreement in writing.
  • The trustees must prepare a written policy statement providing guidance on how the functions should be exercised to ensure they align with the beneficiaries' best interests.
  • The agent must agree to comply with the policy statement.
  • Trustees must exercise the statutory duty of care when selecting the agent and when agreeing the terms of the agency agreement.
  • Trustees have an ongoing duty under s.22 TA 2000 to keep the delegation arrangements under review.

Trustees are generally not liable for the acts or defaults of the agent, provided they have complied with their own duties of care in selecting, appointing, and reviewing the agent (s.23 TA 2000). However, failure to comply with these duties (e.g., appointing an unsuitable agent or failing to provide an adequate policy statement) can lead to trustee liability for losses caused by the agent's actions.

Worked Example 1.3

The trustees of the Green Trust wish to delegate investment management to XYZ Investments Ltd. They verbally agree the terms and tell XYZ to "invest prudently". Six months later, XYZ makes a speculative investment that results in a significant loss. Are the trustees liable?

Answer: Potentially, yes. While delegation is permitted, the trustees failed to comply with the statutory requirements. The agreement was not in writing, and they failed to provide a written policy statement. These failures constitute breaches of the trustees' own duties regarding delegation. If these breaches caused or contributed to the loss (e.g., a proper policy statement might have prevented the speculative investment), the trustees could be personally liable despite the agent making the investment decision.

Ethical Investments

A trustee's primary duty is usually to maximise the financial return for the beneficiaries, considering the level of risk appropriate for the trust. However, questions arise about whether trustees can or should consider non-financial ethical factors.

The general position (established in cases like Cowan v Scargill) is that trustees must prioritise the best financial interests of the beneficiaries. They cannot allow their own personal, social, or political views to influence investment decisions if it results in significantly lower financial returns.

However, exceptions exist:

  • The trust instrument may explicitly authorise or require ethical considerations.
  • If choosing between two investments with identical financial prospects, trustees can choose the more ethical option.
  • For charitable trusts, investments conflicting with the charity's aims may be avoided (Harries v Church Commissioners).
  • If all beneficiaries are sui juris (adult and mentally capable) and consent, they can authorise an ethical investment policy even if it risks lower returns.

Key Point Checklist

This article has covered the following key knowledge points:

  • The Trustee Act 2000 grants trustees a general power of investment (s.3) and a power to acquire UK land (s.8).
  • This power must be exercised in accordance with the statutory duty of care (s.1).
  • Trustees must consider the standard investment criteria (SIC): suitability and diversification (s.4).
  • Trustees have a duty to obtain and consider proper advice before investing or reviewing investments, unless it is reasonably unnecessary (s.5).
  • Trustees must review trust investments periodically (s.4(2)).
  • Investment (asset management) functions can be delegated to suitable agents under strict conditions, including a written agreement and policy statement (ss.11, 15, 22).
  • Trustees are generally not liable for agents' defaults if they complied with their duties in delegation and review (s.23).
  • Ethical considerations are generally secondary to maximising financial returns unless the trust instrument permits otherwise, the beneficiaries consent, or specific exceptions apply (e.g., charities).

Key Terms and Concepts

  • General power of investment
  • Standard investment criteria
  • Suitability
  • Diversification
  • Proper advice
  • Delegation
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