Investing for vulnerable clients
24 July 2017
For those looking after the financial affairs of vulnerable individuals, the responsibility of managing someone else’s money is onerous. In this article, Graeme Robb, Senior Technical Manager at Prudential explores the legal background to this common issue.
• The Office of the Public Guardian (OPG) applies in England and Wales. The equivalent bodies in Scotland and Northern Ireland are The Office of the Public Guardian (Scotland) and The Office of Care and Protection.
• Where someone loses mental capacity then, under the different jurisdictions ‘deputies’, ‘guardians’ or ‘controllers’ will be appointed.
• Powers of Attorneys can be established while individuals are still mentally capable.
• Those looking after the affairs of others need to be aware of their powers and limitations.
• Managing your own money is one thing. Managing someone else’s money is an entirely different matter.
• Those acting on behalf of someone else should keep the donor’ s money and property separate from their own.
• In broad terms, attorneys and deputies acting for older clients should generally consider the provisions of the Trustee Act and the short term investment codes set out below.
Starting with England and Wales, the OPG protects those who may not have the mental capacity to make certain decisions for themselves, such as health and finance decisions.
It is possible to apply to become someone’s deputy if that person lacks mental capacity i.e. where he/she cannot make a decision for themselves at the time it needs to be made (they may still be able to make decisions for themselves at certain times).
A deputy will be authorised by the Court of Protection to make decisions on behalf of the incapacitated person. There are two types of deputy:
1. Property and financial affairs
The deputy will undertake activities such as pay the person’s bills or organise their pension.
2. Personal welfare deputy
The deputy will make decisions about medical treatment and how someone is looked after.
An individual can apply to be just one type of deputy or both. If appointed, that person will receive a court order saying what they can and can’t do. Note also that a deputy must send an annual report to the OPG explaining the decisions made.
Guidance for all deputies
This is not an exhaustive list, but when making a decision, the deputy must
• make sure it’s in the other person’s best interests
• consider what they’ve done in the past
• apply a high standard of care – this might mean involving other people, for example getting advice from relatives and professionals
• do everything to help the other person understand the decision, for example explain what’s going to happen with the help of pictures or sign language
• add the decisions to the annual report
Deputies must not
• take advantage of the person’s situation, for example profit from a decision taken on their behalf
• make a will for the person, or change their existing will
• make gifts unless the court order says they can
• hold any money or property in their own name on the person’s behalf
In particular for properties and affairs deputies, they must make sure
• their own property and money is separate from the other person’s
• they keep records of the finances being managed in the annual report
Court Funds Office account
A property and affairs deputy will need to manage a Court Funds Office account on the other person’s behalf. The deputy will need to apply on behalf of the incapacitated person to
• manage an account that was opened for them by court order, e.g. for money received from a court case
• open an account for that person
The deputy will then manage this ‘special’ account albeit that it belongs to the incapacitated person. For example, the deputy will be able to make withdrawals from the bank account on behalf of the person whose affairs are being managed. The court order appointing the deputy will instruct on the limits as to what can and can’t be done with the account. The deputy will get statements in April or May and in October or November each year. These accounts currently pay 0.5% interest gross with the rate set by the Lord Chancellor.
Deputies can invest in the stockmarket using money from the Court Funds Office account if it
• holds £10,000 or more for the person they are deputy for
• is likely to hold the money for 5 or more years
The Court Funds Office makes stockmarket investments in companies using the Equity Tracker Index Fund (ETIF). The deputy should write to the Court Funds Office asking them to invest the requisite sum in the ETIF.
Lasting power of attorney
A lasting power of attorney (LPA) is a legal document that lets the ‘donor’ appoint one or more people (known as ‘attorneys’) to help make decisions or make decisions on the donor’s behalf. This gives more control over what happens to the donor if they have an accident or an illness and can’t make their own decisions (they ‘lack mental capacity’). The donor must be 18 or over and have mental capacity (the ability to make their own decisions) when the LPA is made.
There are two types of LPA, and the donor can choose to make one type or both
• health and welfare
• property and financial affairs
Property and financial affairs LPA
This will give an attorney the power to make decisions about money and property for the donor, for example
• money, tax and bills
• bank and building society accounts
• property and investments
• pensions and benefits
Attorneys must keep the donor’s finances separate from their own, unless they already have something in both of their names like a joint bank account or they own a home together.
If an investment is made under a property and financial affairs LPA, then the investment will be owned by the donor and not the attorney. The attorney will need to refer to the LPA to determine the investment powers available and act accordingly.
Attorneys must always act honestly and in the donor’s best interests.
Once made, the LPA should be registered with the OPG.
In Scotland, a guardianship order is a court appointment which authorises a person to act and make decisions on behalf of an adult with incapacity. For example, paying bills, dealing with bank accounts or making decisions about care and personal welfare matters.
The types of decisions that are to be taken on behalf of the adult will determine the powers that might be needed, such as:
• Financial – powers in relation to the finances and property belonging to the adult.
• Welfare – powers in relation to making welfare decisions for the adult.
• Combination of financial/property and welfare – powers, if required can be applied for separately but generally they are made together within the same application to the sheriff court.
Duties of a financial guardian include submitting an inventory of the estate and management plan within three months of receiving a certificate of appointment. Thereafter, an annual account needs to be submitted detailing actions and financial decision making.
The management plan lets the guardian inform the OPG (Scotland) as to how he/she intends to manage the adult’s estate for their benefit. This should provide specific information about the adult’s day to day needs e.g. utilities, mortgage, rent, care costs, hobbies and holidays. The guardian can also use the form to advise on longer term proposals regarding property and / or finances. Financial advice should be sought if there is more than £50,000 of moveable assets e.g. bank / building society accounts.
In Scotland, there are three types of power of attorney (POA) under the remit of the OPG (Scotland)
• Continuing POA – gives powers to deal with money and/or property
Continuing (financial) powers can be used by the attorney immediately after the POA document has been registered. If the POA is only to be used in the event of incapacity, it must clearly state that the powers are not to be used until this happens.
• Welfare POA – gives powers to make decisions around health or personal welfare matters
Welfare powers may only be acted upon after the POA has been registered and when the person has lost capacity to make decisions on matters to which the powers apply.
• Combined POA – gives continuing and welfare powers
The majority of POAs registered are a combination of continuing and welfare powers.
There is no specific format for a POA. Clearly the drafting of the POA is important to ensure that the attorney is given the necessary powers to act on the donor’s behalf. Certain details must exist in each document. For example, in addition to the specific powers given to the attorney, there will typically be a section for general powers. A general power could be seen as being a catch–all and could possibly be used by the attorney if a specific power had not been granted or has been missed out from the POA document.
Where someone loses mental capacity and there is no enduring power of attorney, then clearly it is no longer possible to make a power of attorney. In that situation it is possible to apply to the Office of Care and Protection for a decision to be made on a particular matter. However, if there is a continuing need to make decisions on the person’s behalf, then it is necessary to ask the Office of Care and Protection to appoint a controller. A controller can make decisions about a person’s property and financial affairs. If there’s no friend or family member who is suitable or willing to act as a controller, the Office of Care and Protection can appoint the Official Solicitor.
The controller will take control of the person’s financial affairs and property and act on their behalf. The controller will need to open a bank account in their name will need the permission of the Office of Care and Protection before making any decisions about capital, such as the incapacitated person’s home or other property. It will usually be necessary to present annual accounts of the person’s finances. The order appointing the Controller will give details of the specific powers conferred on the Controller, which are usually quite limited. It is a very important document as it provides the documentary evidence of that person’s authority to carry out various duties and to exercise the powers granted by the Court. It will be necessary to ask for specific authority when varying the Patient’s investments.
If the Court directs that the Patient’s assets be lodged in Court, then a letter of explanation and relevant forms will be sent to the Controller from the Court Funds Office giving advice on how to lodge funds and transfer investments into Court. Investments held in Court are registered in the name of the Accountant General of the Court of Judicature and credited to the Patient’s account. Having taken advice, the Court will direct how the funds are to be invested, taking into consideration the age of the Patient, the present annual income, the anticipated annual expenditure, the capital assets and any particular needs of the Patient or his dependents.
A Power of Attorney can be created to give someone else the authority to take actions or make decisions on the donor’s behalf regarding their property and affairs. A Power of Attorney will cease when the donor becomes mentally incapable, but an Enduring Power of Attorney will continue. To become effective, all Enduring Powers of Attorney need to be registered with the High Court (Office of Care and Protection) but registration is not required until the point where the attorney believes the donor is no longer capable of managing their affairs. Careful consideration should be given to the range of powers the donor wishes to give their attorney. The donor can for example limit the power to certain parts of their affairs, for example, the attorney can handle money but the donor might want to leave out the power to sell the home.
Case law guidance regarding investment (Court of Protection No. 12228697)
When Miss Buckley was 80 she moved into a nursing home and executed an LPA. Her niece was appointed to be her sole attorney. Following the receipt of a complaint about the way in which the attorney was handling Miss Buckley’s finances, the OPG opened a formal investigation into the matter.
The OPG’s investigator found that Miss Buckley’s house had been sold for £279,000 in April 2011. Between January and June 2011 the attorney had withdrawn £72,000 from Miss Buckley’s funds to set up a reptile breeding business. The attorney claimed that this was a short– term investment which would generate a 20% return over a two year period. Further investigations by the OPG suggested that nearly £88,000 had been invested in the reptile breeding business and over £43,000 misappropriated by attorney. The OPG asked the Court of Protection to cancel the LPA and appoint a new deputy. The attorney denied any wrongdoing.
The Senior Judge in the Court of Protection, Denzil Lush, stated that he wished to use this case to discuss the responsibilities of an attorney acting under an LPA when investing donor’s funds.
“There are two common misconceptions when it comes to investments. The first is that attorneys acting under an LPA can do whatever they like with the donors’ funds. And the second is that attorneys can do whatever the donors could – or would – have done personally, if they had the capacity to manage their property and financial affairs.”
“Managing your own money is one thing. Managing someone else’s money is an entirely different matter.
Attorneys hold a fiduciary position, which imposes a number of duties on them. Like trustees and other fiduciaries, they must exercise such care and skill as is reasonable in the circumstances when investing the donor’s assets and this duty of care is even greater where attorneys hold themselves out as having specialist knowledge or experience. Although it does not expressly apply to attorneys, the Trustee Act 2000, section 4, requires trustees to have regard to what are known as the “standard investment criteria” when exercising any power of investment. There are two standard criteria, namely:
(1) the suitability of the investments; and
(2) the need to diversify the investments, in so far as it is appropriate in the circumstances.
Trustees are also required to review the investments from time to time and consider whether,having regard to the standard investment criteria, they should be varied.
Section 5 of the Trustee Act requires trustees, before exercising any powers of investment or
reviewing the investments, to obtain and consider proper advice about the way in which, having
regard to the standard investment criteria, their power should be exercised. In this context,
“proper advice” means the advice of a person who is reasonably believed by the trustee to be
qualified to give it by his ability in and practical experience of financial and other matters
relating to the proposed investment. There is an exception to this general rule, and trustees need
not obtain such advice if they reasonably conclude that it is unnecessary or inappropriate to do
Two of the most important factors when considering the suitability of investments are the donor’s age and life expectancy. Judge Lush pointed out that most donors are older people. Their average age is 80 years and 11 months and, in this respect Miss Buckley, who was 81½, was a typical LPA donor.
Judge Lush further commented that that
“Short–term investment codes are generally more appropriate where an individual has an anticipated life expectancy of five years or less, and previous guidance to court staff suggested that, “without clear medical evidence it would be prudent to consider a life expectancy of less than five years for new patients aged 80 or over.”
Other factors to be considered are:
(a) whether any major items of expenditure are anticipated or should be planned for,
(b) whether any gifts or payments to dependants are likely to be made,
(c) the type of return required. For example, whether a high income is needed from the investments, or whether the capital can be left to grow, or whether a mixture of the two would be more appropriate,
(d) risk: whether absolute safety is required for the investment or whether some risk is
acceptable in exchange for the possibility of getting a better return,
(e) whether there is an existing portfolio and, if so, the tax and cost considerations that may affect decisions about whether to change it and how quickly,
(f) the interests of beneficiaries under the patient’s will or intestacy.
Judge Lush suggested a short term investment code as follows
For more technical help by Prudential’s experts visit the PruAdviser website where you can find generic articles and analysis of legislation and consultations.