Trustees: appointment, duties, powers, and liabilities - Duties governing investment decisions

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.

SQE1 Syllabus

For SQE1, a practical understanding of trustees' investment duties is essential. You will likely need to identify the relevant duties in a given scenario, determine if a breach has occurred, and understand the consequences. Pay attention to the interplay between statutory powers and duties under the Trustee Act 2000 and the general fiduciary obligations of trustees.

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)
  • 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.

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.

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.

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.

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). However, this broad power is not unrestricted; it must be exercised in accordance with specific statutory duties and the trustees' overriding fiduciary obligations.

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: Trustees must consider whether a proposed investment is appropriate for the specific trust. This involves looking at the trust's objectives, the beneficiaries' needs (e.g., balancing income for a life tenant and capital growth for remaindermen), the size of the fund, and the timescale for investment.
  • Diversification: Trustees must consider the need to spread investments across different asset classes (e.g., shares, bonds, property) and sectors to mitigate risk. The extent of diversification required depends on the circumstances of the particular trust.

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.

This advice must be sought before making an investment and also when reviewing investments (see below). However, the duty does not apply if the trustees reasonably conclude in all the circumstances that it is unnecessary or inappropriate to do so (e.g., if a trustee possesses the relevant professional knowledge).

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.

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 means that:

  • A higher standard is expected of professional trustees (e.g., solicitors, accountants) compared to lay trustees.
  • A lay trustee with relevant experience (e.g., a retired stockbroker) may also be held to a higher standard than a lay trustee with no experience.

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 (e.g., 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 (e.g., by the trust instrument or statute for professional trustees).

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.
  • The duty of loyalty requires them 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 (Cowan v Scargill [1985] Ch 270).

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.

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

  • Power: Trustees have the power under s 11 to authorise an agent to exercise asset management functions.
  • Agent Selection: Trustees must exercise the statutory duty of care when selecting the agent.
  • 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 must be prepared with reasonable care and skill.
  • Agreement: The agreement with the agent must include a term requiring the agent to comply with the policy statement (s 15).
  • Review: Trustees have a duty to keep the arrangements with the agent under review (s 22).

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.

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.

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 [1993] 1 WLR 1260).
  • Measure of Liability: The aim is to restore the trust fund to the position it would have been in had the breach not occurred.
  • 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).

Worked Example 1.3

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 might still face scrutiny regarding whether the initial investment (without advice) met the standard investment criteria (s 4) and the statutory duty of care (s 1). The failure to take advice is itself a breach, even if no loss flows directly from it in this specific scenario.

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.
  • 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.
  • Trustees must exercise the statutory duty of care (s 1 TA 2000) when carrying out investment functions, with a potentially higher standard for professionals.
  • Trustees must act impartially and loyally, avoiding conflicts of interest and unauthorised profits.
  • 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.
  • Trustees can be personally liable for losses caused by a breach of their investment duties.

Key Terms and Concepts

  • General Power of Investment
  • Standard Investment Criteria
  • Proper Advice
  • Duty of Care (Statutory)
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