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| TRUSTEE BILL [H.L.] |
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These notes refer to the Trustee Bill [H.L.] TRUSTEE BILL [H.L.]________________
EXPLANATORY NOTES
INTRODUCTION
1. These explanatory notes relate to the Trustee Bill as brought from the Lords on 29 June 2000. They have been prepared by the Lord Chancellor's Department in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament. The notes comprise a summary of the Bill, an explanation of its background and a clause by clause commentary. A glossary of technical terms used in these notes is provided at Annex A.
2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.
SUMMARY
3. The Bill will implement, with minor modification, the changes in relation to the law of England and Wales recommended in the report by the Law Commission and the Scottish Law Commission Trustees' Powers and Duties (1999) Law Com No 260 Scot Law Com No 172. The principal change will be the creation of a new wider statutory power of investment to replace the present limited power under the Trustee Investments Act 1961. This new power of investment will be supported by a range of new powers to appoint agents, nominees and custodians; to insure trust property; and to pay professional trustees. These measures will facilitate the better administration of trusts and enable trustees to take full advantage of the wider investment opportunities now open to them, whilst protecting the interests of beneficiaries against abuse of the new powers. As under the present law the new powers will only apply to the extent that the trust instrument permits.
4. The clauses in the Bill are divided into 6 parts:
BACKGROUND5. Trust law is of wide application. It applies far beyond the traditional spheres of wills and family settlements. It has major application to charities and has increasing importance in commerce. It is very significant in relation to the management of pension and other investment funds. However, the law governing the powers and duties of trustees, particularly the relevant provisions of the Trustee Act 1925 and the Trustee Investments Act 1961, has not kept pace with the evolving social and economic role which trusts now fulfil. This discrepancy has been brought into sharp focus by the fundamental changes in the conduct of investment business during the last ten years such as the introduction of the CREST system on the London Stock Exchange. The situation is now so serious that the view is widely held that it is very difficult for such trustees acting under the terms of trust instruments which make no specific provisions as to investment powers, to satisfy their paramount duty to act in the best interests of the beneficiaries of the trust.
6. Although the awareness of the need for reform is now sharply defined, the Bill is the culmination of a long history of proposals for reform of the law of trusts. Several of the reforms in the Bill were considered in the Twenty-third report of the Law Reform Committee The Powers and Duties of Trustees in 1982. In 1995 HM Treasury carried out a consultation in relation to a proposal to adjust the proportions of permitted investments under the 1961 Act. The response to this consultation made clear that a more fundamental reform was required. In November 1995 the Law Commission embarked on a review of the powers and duties of trustees and together with the Scottish Law Commission and the Trust Law Committee provided detailed advice on the present law to HM Treasury. The Trust Law Committee itself was established in 1995 to press for reform of the law of trusts.
7. In May 1996 Investment Powers of Trustees: A Consultation Document was published by HM Treasury. In June 1997 the Law Commission published a consultation paper Trustees' Powers and Duties (LCCP No 146). Attempts were made to legislate for some of the proposed reforms under the Deregulation and Contracting Out Act 1994 but the Order was lost when Parliament was dissolved in 1997.
8. In July 1999 the Law Commission and the Scottish Law Commission jointly published Trustees' Powers and Duties (1999) Law Com No 260 Scot Law Com No 172. In this report the Law Commissions recommended that there should be primary legislation to reform the law governing the investment powers of trustees and, in so far as it would be practicable to do so, that the Trustee Investments Act 1961 should be repealed. The Law Commission also recommended certain further changes applicable to England and Wales only.
THE BILL9. The Bill has 43 clauses and 4 Schedules.
COMMENTARY ON CLAUSESPart 1: The duty of care
10. Clauses 1 and 2 form Part I of the Bill. Together they implement the recommendations in Part III of the Report. The clauses create a new precisely defined statutory duty of care applicable to trustees when carrying out their functions under the Bill or equivalent functions under the trust instrument. As in the law generally, the phrase 'duty of care' signifies a duty to take care to avoid causing injury or loss. The new duty will bring certainty and consistency to the standard of competence and behaviour expected of trustees. It will be a safeguard for beneficiaries and thereby balance the wider powers given to trustees elsewhere in the Bill. The duty will take effect in addition to the existing fundamental duties of trustees (for example, to act in the best interests of the beneficiaries and to comply with the terms of the trust) but will exclude any common law duty of care which might otherwise have applied.
The duty is a default provision. It may be excluded or modified by the terms of the trust. This new duty will apply to the manner of the exercise by trustees of a discretionary power. It will not apply to a decision by the trustees as to whether to exercise that discretionary power in the first place.
11. In relation to the investment of trust funds the new duty makes statutorily explicit the present common law duty which measures the behaviour of the trustees against that expected of the ordinary prudent man of business. This test includes a subjective element to allow for the particular skills and experience of the trustee in question. The new duty of care puts this beyond doubt. In relation to collective delegation by the body of trustees the new duty will however replace the unsatisfactory and insufficiently demanding provisions of sections 23 and 30 of the Trustee Act 1925.
Clause 1: The duty of care12. Clause 1 defines the new uniform statutory duty of care for trustees. The circumstances where the duty will apply are defined in clause 2. The duty will not apply outside those circumstances. To comply with the new duty a trustee must show such skill and care as is reasonable in the circumstances of the case making allowance for his or her special knowledge, experience or professional status (clause 1(1)(a) and (b)). Thus, in relation to the purchase of stocks and shares, a higher standard may be expected of a trustee who is an investment banker, specialising in equities, than of a trustee who is a beekeeper, particularly if the investment banker is acting as a trustee in the course of his or her investment banking business. The new duty will therefore provide a standard against which the manner of the exercise of a power by trustees can be measured in the particular circumstances of the case. In determining what constitutes reasonable care consideration would also be given to the nature, composition and purposes of the trust being administered.
Clause 2: Application of duty of care13. Clause 2 defines when the new duty will apply by reference to Schedule 1 to the Bill. In general terms the new duty will apply to any exercise by a trustee of a power to invest trust property or to acquire land; to appoint agents, nominees and custodians; or to insure trust property.
Part II: Investment14. Clauses 3 to 7 form Part II of the Bill. This Part creates and defines a new default power of investment for trustees who do not have specific powers of investment under the trust instrument or legislation or whose trust instruments do not make provision which would be contrary to the new powers. Clause 3 creates the general power of investment. Clauses 4 and 5 create additional duties on the trustees to consider standard investment criteria and to take proper advice in exercising any power of investment. Clause 6 provides that the general power of investment is a default power. Clause 7 defines the trusts to which the new power and duties will apply.
15. Under the present law the powers of a trustee are defined by the trust instrument or by legislation. Most modern trust instruments expressly confer wide investment powers. Older trust instruments frequently do not. In the absence of express powers under the trust instrument the trustees must look to legislation to define their powers. Some trustees, such as occupational pension trustees, have wide statutory powers of investment (Pensions Act 1995 s 34(1)) but most do not. These trustees are restricted to the powers contained in the Trustee Investments Act 1961. These powers, although a generous provision when enacted, are now generally considered too narrow. The 1961 Act divides the investments which trustees may make into narrower and wider range investments. Typically, narrower range investments are fixed-interest securities and wider range investments are shares.
16. Under the new provisions trustees able to take advantage of the new default powers will no longer be restricted to specified 'authorised investments' and will be able to invest in the same range of investments as an absolute owner. Coupled with the new duty of care (clause 1) the new power is intended to confer the widest possible investment powers whilst ensuring that trustees act prudently in safeguarding the capital of the trust.
17. The new power will be a default power. That is, it will apply to the extent that the investment powers of the trustees are not expressed in the instrument creating the trust or any relevant legislation. The new power is expected to be most beneficial in relation to older trusts (including many charities), trusts arising under 'home made' wills and on intestacy.
18. The provisions of Part II do not apply to occupational pension schemes, authorised unit trusts or certain schemes under the Charities Act 1993 (see clauses 36-38) which are governed by their own statutory rules.
Clause 3: General powers of investment19. Clause 3(1) will implement the Law Commission's recommendation in relation to investment powers by giving trustees, subject to the safeguards and limitations in clauses 3-7 of the Bill, the same power to invest trust assets as if they owned the assets themselves rather than holding them on trust. This new power will enable trustees to hold investments jointly or in common with other persons thereby reversing the present rule.
20. The new power is however not entirely general. It does not extend to investments in land other than by way of loans secured on land (subsections (3) - (5)). The effect of this limitation is reduced by clause 8 which confers a power to acquire land for any purpose including as an investment. Separating the powers of investment in relation to land and other assets in this way has facilitated the making of consequential amendments to other legislation (see Schedule 2 to the Bill). The new power is not entirely unfettered. First, trustees will remain subject to their fundamental duties (for example, the duty to act in the best interests of the present and future beneficiaries and to avoid any conflict between their duties as trustees and their personal interests). Second, the new duty of care created in Part I of the Bill will apply (Schedule 1 paragraph 1(a)). At present, investment under the Trustee Investments Act 1961 is subject to the common law duty of care. Third, clauses 4 and 5 impose specific duties to have regard to the need for diversification and suitability of investments and to obtain and consider proper advice where appropriate. These duties will apply to trustees in the exercise of a power of investment. Under the present law there is a general duty to have regard to the need for diversification so far as appropriate to the circumstances of the trust and to the suitability to the trust of the proposed investment and, where exercising certain statutory powers to invest, to take advice before making the investment (Trustee Investments Act 1961 s 6).
21. The term 'asset' is defined in clause 39(1) as including any right or interest. "Investment" is not defined in the Bill. The general power of investment permits trustees to invest assets in a way which is expected to produce an income or capital return. 'Land' is also not defined in the Bill but is defined in Schedule 1 to the Interpretation Act 1978 as including buildings and other structures, land covered with water, and any estate, interest, easement, servitude or right in or over land.
Clause 4: Standard investment criteria22. Clause 4(1) provides that in exercising a power of investment, whether under clause 3 or otherwise, a trustee must have regard to the suitability to the trust of the investment and, secondly, to the extent that it is appropriate in the circumstances, to the need for diversification of the trust's investments. These factors are defined in the Bill (clause 4(3)) as the standard investment criteria. "Suitability" relates both to the kind of investment proposed and to the particular investment as an investment of that kind. It will include considerations as to the size and risk of the investment and the need to produce an appropriate balance between income and capital growth to meet the needs of the trust. It will also include any relevant ethical considerations as to the kind of investments which it is appropriate for the trust to make.
23. Clause 4(2) requires a trustee to keep the investments of the trust under review and to consider whether, in the light of the standard investment criteria, they should be varied. This provision codifies the common law position, under which "a trustee with a power of investment must undertake periodic reviews of the investments held by the trust": Nestle v National Westminster Bank plc (No 2) [1993] 1 WLR 1260, 1282G, per Leggatt LJ.
24. The definition of the standard investment criteria in clause 4(3) is closely modelled on section 6(1) of the Trustee Investments Act 1961 and accords with modern portfolio theory. The general duty of care applies in relation to the application of the standard investment criteria by a trustee (Schedule 1 paragraph 1(b)). As the exercise of a power of investment is subject to the duty of care in clause 1, trustees may need to have regard to other matters in addition to the standard investment criteria, as defined. However, the standard investment criteria will be of central importance in every case.
Clause 5: Advice25. Clause 5 introduces a safeguard for beneficiaries in relation to powers of investment under clause 3 or otherwise. The new safeguard is that a trustee, when considering the exercise of a power of investment or carrying out a review of the investments of the trust, must obtain and consider proper advice about how, in view of the standard investment criteria (see note on clause 4)), the power to invest should be exercised or the investments of the trust be varied (clause 5(1) and (2)). However, as the imposition of an unqualified duty to take and consider advice before making any investment or change in investments would be unnecessarily burdensome, clause 5(3) provides that the new duties to obtain advice will not apply if the trustee reasonably concludes that it is unnecessary or inappropriate to do so. This would be the case, for example, if the proposed investment is small, so that the cost of obtaining advice would be disproportionate to the benefit to be gained from doing so, or where the trustees themselves possess skills and knowledge making separate advice unnecessary. These provisions are at once more extensive and more flexible than the obligation to take advice in relation to most narrower and all wider range investments under the Trustee Investments Act 1961 s 6. Where the 1961 Act does not apply at present, the obligation of a trustee to take advice (if any) is dependent upon the application of the rule that trustees must act with reasonable prudence in exercising powers of investment.
26. 'Proper advice' is defined in clause 5(4). This definition is based on that in section 6(4) of the Trustee Investments Act 1961 and recognises that there may be circumstances in which a person is qualified to give advice by reason of his or her ability in and practical experience of issues other than financial matters. Although financial expertise will be the primary attribute of an investment adviser, other skills may also be relevant. For example, when an investment in land is proposed, the necessary qualities of the person giving the advice are likely to include expertise in the valuation of land. In addition, if the trustees propose to invest in works of art, they would no doubt require advice from an expert in the relevant field.
27. Clause 5(1) builds upon and extends the present duty on trustees wishing to invest in anything other than a very restricted class of investments (for example, National Savings Certificates and Bonds) to obtain and consider proper advice (such advice to be given or confirmed in writing) as to whether the investment is satisfactory bearing in mind the need for suitability and diversification (Trustee Investments Act 1961 s 6(2) and (5)). There is no express requirement in clause 5 for the advice to be given or confirmed in writing, but to do so will no doubt be regarded as best practice in many circumstances, and may be necessary for trustees to show compliance with the general duty of care in clause 1.
28. The new general statutory duty of care is to apply in relation to the exercise of the duty to obtain and consider proper advice under clause 5 (Schedule 1 paragraph 1(b)).
29. Subject to clauses 36-38, which exclude the provisions of Part II from occupational pension schemes, authorised unit trusts or certain schemes under the Charities Act 1993 clauses 6 and 7 define the trusts to which the new power of investment will apply.
Clause 6: Restriction or exclusions of this part etc.
30. Clause 6 provides that the new general power of investment (defined in clause 3(2)) is a default provision. It specifies that subject to the provisions of clause 7 relating to trusts in existence when the Bill is brought into force, the new power will be available to all trustees in addition to any limited express power of investment vested in them, but subject to any limitation imposed by the trust instrument or by primary or subordinate legislation (clause 6(1)). This provision follows the precedent of section 69(2) of the Trustee Act 1925 in relation to the powers conferred by that Act.
31. 'Subordinate legislation' is defined in clause 6(3) by reference to the Interpretation Act 1978 to mean Orders in Council, orders, rules, regulations, schemes, warrants, byelaws and other instruments made or to be made under any Act (Interpretation Act 1978 s 21(1)).
Clause 7: Existing trusts32. Clause 7 provides for the application of Part II of the Bill to trusts in existence when Part II comes into force (see clause 42 as to commencement). The general rule is that Part II applies to all trusts irrespective of the date of their creation (clause 7(1)). This rule is however subject to certain exceptions. First, Part II does not apply to pension trusts, authorised unit trusts or funds established under schemes made under sections 24 or 25 of the Charities Act 1993 (see clauses 36-38). Second, the effect of the rule that the new general power of investment is subject to any restriction or exclusion imposed by the trust instrument (clause 6(1)(b)) is not to apply to any trust instrument made before 3 August 1961 (clause 7(2)). This will ensure that old restrictions overcome by the 1961 Act do not revive to restrict the benefits of the new general power of investment. Such restrictions pre-date a general statutory power. Fourth, clause 7(3)(a) provides that where a trust instrument gives the powers of investment equivalent to the default powers for the time being authorised by law, the trustees should have the general power of investment. This provision ensures that an intention of a settlor to provide ample powers of investment is not frustrated by this liberalisation of the general law. It continues the policy underlying section 3 of the Trustee Investments Act 1961 which provided that any power of investment to invest property in any investment for the time being authorised by law for the investment of trust property, conferred before the passing of the 1961 Act, was to confer the same power to invest as sections 1 and 2 of that Act. Clause 7(3)(b) makes similar provision for trust instruments made after the 1961 Act was passed.
33. It may be helpful to give an example of how clauses 6 and 7 will operate.
34. Take, for example, an express power of investment in a post 2 August 1961 trust instrument authorising trustees to invest "only in government bonds". This power would be taken to exclude the general power of investment (clause 6(1)(b)). On the other hand, an express power in another instrument of the same date to invest "in shares quoted on the London Stock Exchange, but not in shares of X plc" would take effect as the general power of investment, subject to the restriction on investing in X plc (clause 6(1)). Had the trust instruments pre-dated 3 August 1961, the general power of investment would have applied free of either limitation (clause 7(2)) as would the new statutory powers conferred under the 1961 Act when it came into force (Trustee Investments Act 1961 s 1(3)).
35. Had the trust instrument merely stated that the trustees were to have such powers of investment as may for the time being be authorised by law (or words to that effect), the Bill would confer the general power of investment (clause 7(3)).
Part III: Acquisition of Land36. Clauses 8 to 10 form Part III of the Bill. They create a new power for trustees to acquire and deal with land on behalf of the trust. Part III does not apply to occupational pension schemes, authorised unit trusts and certain schemes under the Charities Act 1993 (see clauses 36-38) or to trusts where, before Part III is brought into force, the trustees already have power to invest or apply trust funds by virtue of primary or subordinate legislation (defined in clause 6(2)): for example, under the Settled Land Act 1925.
37. At present, although trustees of land and Settled Land Act trustees have power to buy land (with or without the aid of a mortgage in the case of trustees of land) in England and Wales for any reason (not just for investment), trustees of personal property only have power to acquire land if expressly authorised to do so in the trust instrument.
38. The new general power of investment introduced by clause 3 of the Bill has only limited application to land (see clause 3(3)) and is in any event restricted to investment. The Bill therefore makes separate provision to remedy the disparity between the powers of different types of trustees in relation to the purchase of land.
Clause 8: Power to acquire freehold and leasehold land39. Clause 8(1) gives trustees the power to acquire freehold or leasehold land in the United Kingdom as an investment, for occupation by the beneficiaries or for any other reason. This provision is broadly modelled on section 6(3) and (4) of the Trusts of Land and Appointment of Trustees Act 1996. The express duty to have regard to the interests of the beneficiaries in exercising powers under section 6(5) of the 1996 Act is not replicated in the Bill. However that provision merely clarifies what is already the law and the omission of an equivalent provision is not intended to diminish the obligations of trustees.
40. The phrase 'freehold or leasehold land' is defined in clause 8(2). In England and Wales it means a legal estate in land. The only estates in land which are capable of being legal estates are an estate in fee simple absolute in possession and an estate for a term of years absolute. These estates correspond to freehold and leasehold respectively (Law of Property Act 1925 s 1(1)). Trustees may also acquire the equivalent interests in land in Scotland and Northern Ireland.
41. Having acquired land a trustee must be able to deal with it effectively. Following the precedent of section 6(1) of the Trusts of Land and Appointment of Trustees Act 1996, clause 8(3) gives trustees who acquire land the powers, for the purpose of exercising his or her trustee functions, of an absolute owner in relation to the land. For example, trustees will have the power to hold land jointly with other persons, have powers of sale and leasing, and power to grant mortgages in respect of land.
42. Clauses 9 and 10 have a similar effect in relation to the application of Part III of the Bill as clauses 6(1) and 7(1)-(3) respectively in relation to Part II.
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