The Trustee Act 2000

IMPLICATIONS FOR TRUSTEES AND INVESTMENT MANAGERS

The Trustee Act 2000 has now been tested in the Courts and the implications of this are seen to be both serious and urgent. There are new interpretations of Trustees’ responsibilities and of appointed Investment Managers’ duties, which the Courts would expect to be adopted in any cases coming before them. Bearing in mind the prolonged time-frame, any Trustee or Appointed Investment Manager needs to take on board the new situation in order to be able to offer a defence in the event of a dispute. There is no doubt that more cases will come before the Courts in the light of this new Act.

This document is presented as an Ashcourt guideline into a number of the key issues arising and as a pointer towards those areas that are considered by the Regulators/Authorities.

The Trustee Act has imposed new duties and responsibilities on Trustees and has clarified their responsibilities in relation to investments.

1. Trustees have responsibility of drawing up an Investment Policy Statement and agreeing the Investment Managers Mandate.

2. Trustees must monitor the performance of investments and Investment Managers. The Investment Manager does not have legal liability unless he exceeds his brief (but must have a full understanding of the Trust objectives in order to be able to construct an appropriate portfolio).

The Act imposes on Trustees a new statutory investment power referred to as "The General Power of Investment". The practical implication of this is that Trustees have responsibility for investments unless prohibited to do so by the Trust Deed. This responsibility will now often over-ride more general exclusions currently regarded as acceptable.

In exercising any Power of Investment the Trustee must have regard to the "Standard Investment Criteria". These are:

a) The "Suitability" of Investments

b) The need for "Diversification" as is appropriate to the Trust

 

Prior to exercising any Investment Power, the Trustee is required to obtain and consider advice as to how:

a) The Investment Power should be exercised

b) The Investments should be varied

The Meaning of Investment

The Investment should be reviewed on the basis of "The Best Overall Return" rather than solely on Income Yield.

The Trust imposes on Trustees a "Duty of Care" which differs for Lay and Professional Trustees.

a) For Lay Trustees the duty is subjective ­ i.e. what expertise does this Trustee claim to have? (if any)

b) For Professional Trustees it is objective ­ i.e. what expertise should be expected from someone in that particular profession?

The Delegation of Duties

Where Trustees delegate asset management to an agent the duty of care is carried over to the Process of Appointment and monitoring of the agent (Investment Advisor).

The Investment Manager then assumes this duty of care and is bound to apply the Standard Investment Criteria and review the investments.

There must be a Written Agreement for delegation. This must include a written policy statement detailing how investment policy is to be conducted with a view to ensuring that management will be in the best interests of the trust.

"Duty to Invest"

The Trustees have a "fiduciary" Power to obtain the best return by way of income and capital in relation to the risks involved.

The "Meaning of Investment" is not defined and is subject to Legal Determination. One legal interpretation is that the power must be exercised so as to yield the best return for all of the beneficiaries, judged in relation to the risks of the investments in question. It is becoming established that overall return is of high importance. The Investment Manager should discuss with Trustees the use of liquidity and a policy on Capital Gains Tax may be appropriate.

The Trustees have a duty to balance the differing interests of the beneficiaries.

Social and Political restrictions (ethical policy) are only accepted if inherent within the original Trust Deed.

Trustee exoneration clauses ­ limiting liability of the Trustees in Investment matters ­ have become commonplace but this is a subject of discussion with the Law Commission and they may be curtailed by legislation.

Note the Myners Report looked critically at:

• Benchmarking

• Policy Making

• Trustee Decision Making and Knowledge

• The roles of Fund Managers ­ notably the cost/frequency of dealing and its benefits

The Trustees must

a) Have clear general objectives

b) Review total assets against liabilities

c) Identify the role of the trust’s investments

d) Understand risk

e) Accept volatility

f) Specify a reasonable period for monitoring the Investment Managers

The Investment Managers must

a) Educate the client

b) Advise on choices to meet objectives

c) Explain ranges

d) Discuss choice of Benchmarks

e) Agree comparators

Reporting must be

a) Clear and unambiguous

b) Consistent

c) Relevant to the investor

d) Set in context i.e. just UK or wider geographical areas

e) Summarisable for:-

i. The Trustees

ii. Certain beneficiaries

iii. The public (if appropriate)

f) There must be clear timetables

i. For valuations

ii. For reports

iii. For different categories of meeting

It is clear that the responsibility for the establishment of the various investment matters rests with the Trustees. However, there is a wider remit affecting the Appointed Investment Manager and a duty to ensure that their appointment is in full compliance with the Act and its possible interpretations. It is Ashcourt’s view that this requires the adoption of Best Practice principles and that Trustees should be approached with a view to commencing this process.

Should you require further assistance in assessing the implications of this act, please contact Ashcourt Asset Management at 11 Tower View, West Malling, Kent, ME19 4UN. Telephone 01732 520 780.

AAM is authorised and regulated by the Fnancial Services Authority. Ashcourt Asset Management Limited: Registered Office: 11 Tower View, Kings Hill, West Malling, Kent ME19 4UN. Registered in England and Wales with company number 3691998

The information contained herein has been prepared by Ashcourt Asset Management for the general interest of readers. It is not intended to be a definitive analysis of the implications for trustees of the Trustee Act 2000 and none of the information is to be considered as an offer or invitation to enter into any investment transaction or constitutes investment, financial or professional advice. Professional advice should be taken on specific issues and before any course of action is pursued.