Discretionary investment management and Lasting Powers of Attorney

8 January 2021

Lasting Powers of Attorney

A Lasting Power of Attorney, (LPA) for Finance and Property  is a legal document under which you  appoint one or more people (attorneys) to make financial decisions on your behalf, especially if you lose mental capacity ( through old age or illness) to manage your own affairs.

On the back of an aging population, LPAs are being registered in record numbers. To the year-end April 2020, nearly 875,000 LPAs were registered, compared to nearly 500,000 in 2015 – 2016

While we assist many clients in the preparation of an LPA, there’s no requirement to enlist the help of a solicitor.  An explanation of the process and all appropriate forms are available on the Government’s website.

Careful attention to the process will enable you to create your own LPA effectively. If you do make a mistake or misunderstand a step of the process the Office of Public Guardian      (OPG) will promptly point you in the correct direction. The OPG is the administration arm of the LPA with which the LPA needs to be registered.

But we just wanted to flag up one common issue that’s commonly overlooked.

Including a clause on discretionary investment management 

Your attorney is bound to manage your finances and investments; they aren’t, however, permitted to delegate that management to a third party. So they can’t simply allow your investment manager to continue to run your portfolio on a “discretionary” basis.

The OPG issued new guidance for drafting LPAs on 7th September 2015. In this guidance, the OPG stated that if a “donor” (the person who granted the LPA) has investments managed by a bank or financial institution on a discretionary basis and would like it to continue after they lose capacity, a donor ‘must’ give their attorney this power explicitly in the LPA. The OPG even provided standard wording for this clause:

My attorneys may transfer my investments into a discretionary management scheme. Or, if I already had investments in a discretionary management scheme before I lost capacity to make financial decisions, I want the scheme to continue. I understand in both cases that managers of the scheme will make investment decisions and my investments will be held in their names or the names of their nominees.”

The rationale behind this lies in the law of agency. It is established in case law that agents do not have the power to delegate their authority except when the donor has given them this power. This is because the donor has reason to nominate specifically that person to exercise this power on their behalf, and no one else.

 Practically speaking, however, our trusted friends and family are quite likely to be inexperienced with managing investments, and/or will have their own lives and jobs concurrent with their new responsibilities as an attorney. It is usually preferable to allow them to delegate their discretion to an expert in this area, who can take decisions quickly and in reaction to our fast-paced and complex world of investment.

What are the consequences?

If an LPA is granted without including the discretionary management permission clause is any bank or financial institution approached by the attorney will simply refuse to take instructions without the required clause, as will any institution/manager already looking after the Donors investments on a discretionary basis.

Resolution of the dilemma involves lengthy application to the Court of Protection to amend the document with the necessary clause. Alternatively, or perhaps in the interim, the attorney will need to amend the instructions to the investment manager to an “advisory“ basis, meaning every proposed change of investments will need to be agreed with the attorney.

 If the donor continues to have the requisite capacity, then it may be easier to simply draft and register a new LPA with the power included.

Exposure of the fund manager and attorney

If the investment manager accepts instructions to act on a “discretionary” basis from the attorney without this clause, the contract created between them runs the risk of being void for lack of authority. It also may open the door to regulatory and compliance consequences.

For the attorney, delegating their discretion to a fund manager without authority could risk a claim for breach of fiduciary duty or breach of trust. In practice, it won’t be the donor who raises the issue but, rather, disgruntled members of the family (resentful at not having been appointed attorney themselves and keen to find fault) or beneficiaries of the donor’s will on his/her death.

Conversely, if the attorney has to move the assets into an advisory scheme and takes financial decisions without the required skill and knowledge or without expert guidance, this also opens them up to claims of negligence where those decisions have caused the donor loss.

Easy to avoid

What’s positive, however, is that there is clear guidance on this available from the OPG, and that inclusion of the clause will avoid any such issues down the line.

When the LPA has this clause, and is registered and in place, attorneys can now use the new ‘Use an LPA’ online system from the OPG to give organisations (such as investment managers) access to view an online summary of the LPA. This should streamline the process of using an LPA (and spare the need to circulate ‘hard’ certified copies). ‘Use an LPA’ is automatically available to LPAs registered from 17 July 2020.

Further information

If you have an LPA and you would like us to check the document for you, or if you would like to draft one, please contact a member of our private client team.

 

About the authors

Phoebe Alexander joined Kingsley Napley in 2020. She is currently a trainee solicitor in the Private Client team, where she assists with the administration of trusts and estates, and the drafting of Wills and Lasting Powers of Attorney. Phoebe also assists with Court of Protection matters, including the drafting of Deputyship applications. 

Jim Sawer is a partner in our Private Client team. He has a broad private client practice and has advised families in the UK and overseas, including those with commercial and landed interests, for over 30 years.  Clients appreciate his ability to identify the true crux of a matter promptly and his results-orientated approach to resolving private client issues in the family context.

 

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