The Law Commission and the Scottish Law Commission (LAW COM No 260) (SCOT LAW COM No 172)

The Law Commission and The Scottish Law Commission (LAW COM No 260) (SCOT LAW COM No 172) TRUSTEES’ POWERS AND DUTIES The Law Commission and the Scottish Law Commission were set up by the Law Commissions Act 1965 for the purpose of promoting the reform of the law. The Law Commissioners are: The Honourable Mr Justice Carnwath CVO, Chairman Professor Andrew Burrows Miss Diana Faber Mr Charles Harpum Mr Stephen Silber, QC The Secretary of the Law Commission is Mr Michael Sayers and its offices are at Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ. The Scottish Law Commissioners are: The Honourable Lord Gill, Chairman Professor E M Clive CBE Mr P S Hodge, QC Professor K G C Reid Mr N R Whitty The Secretary of the Scottish Law Commission is Mr N Raven and its offices are at 140 Causewayside, Edinburgh EH9 1PR. This report was approved by the Law Commission and the Scottish Law Commission on 12 May 1999. The text of this report is available on the Internet at: http://www.open.gov.uk/lawcomm/ ii EXECUTIVE SUMMARY This Report recommends reform of the law in England and Wales and in Scotland governing trustees’ powers to invest trust funds in default of the inclusion of express powers of investment in the will or trust instrument. The Report also recommends for England and Wales a range of reforms, intended to facilitate more effective trust administration, on issues including— ¨ collective delegation by trustees; ¨ the use of nominees and custodians; ¨ powers of insurance; and ¨ remuneration of professional trustees. WHO WILL BENEFIT FROM THE REFORMS? The beneficiaries of the proposed reforms would be trusts whose trustees have inadequate express investment and other powers. There are many such trusts (particularly older charitable trusts) in existence. Consequently, the proposed reforms would— ¨ enable many charitable trusts to acquire and hold investments which are likely to produce a better return for the charity than the investments to which they are presently restricted; ¨ facilitate the use of modern investment services by such trusts; ¨ lessen the administrative burden and associated costs of maintaining the regime presently required by the Trustee Investments Act 1961; and ¨ bring similar benefits for many family trusts, “home-made” trusts and wills and, in England and Wales, trusts arising on intestacy. WHAT ARE THE PRINCIPAL RECOMMENDATIONS? ¨ The Trustee Investments Act 1961 (which is widely regarded as out-dated and unduly restrictive) should no longer govern trustees’ powers of investment. Instead, trustees should have power to make an investment of any kind as if they were absolutely entitled to the assets of the trust. ¨ Trustees in England and Wales should have wider powers of collective delegation, new powers to employ nominees and custodians and to insure trust property. There should also be better provision for remunerating professional trustees. ¨ These powers should be subject to appropriate safeguards, including a duty to take proper advice in relation to investments and, in England and Wales, a statutory duty of care. iii iv LAW COMMISSION SCOTTISH LAW COMMISSION TRUSTEES’ POWERS AND DUTIES CONTENTS ParagraphPage PART I: INTRODUCTION 1 ISSUES — THE MODERN TRUST 1.1 1 BACKGROUND AND SCOPE Trustee investment 1.4 2 Trustees’ powers and duties 1.8 3 Scope of this Report The subject-matter of the Report 1.13 4 The Law Commission and the Scottish Law Commission 1.14 4 DEFECTS IN THE PRESENT LAW AND APPROACH TO REFORM 1.17 5 APPLICATION OF PROPOSALS FOR REFORM 1.20 7 OVERVIEW AND STRUCTURE OF REPORT Introduction 1.21 8 Matters applicable to England, Wales and Scotland 1.22 8 Matters applicable to England and Wales only 1.23 8 SUMMARY OF PRINCIPAL RECOMMENDATIONS 1.33 9 ACKNOWLEDGEMENTS 1.34 10 PART II: TRUSTEES’ POWERS OF INVESTMENT 12 INTRODUCTION 2.1 12 THE PRESENT LAW 2.3 13 Purpose and effect of the Trustee Investments Act 1961 2.4 13 Duty of care at common law 2.13 15 Criticisms of the Trustee Investments Act 1961 2.16 16 PROPOSALS FOR REFORM Approach to reform 2.19 17 Proposals applicable to England and Wales and to Scotland General power of investment 2.24 19 Appropriate safeguards 2.30 22 Duty to have regard to the need for diversification and suitability of investments 2.31 23 Duty to obtain and consider proper advice 2.32 23 v ParagraphPage Additional proposals applicable to England and Wales only Codification of the common law duty of care 2.35 25 Trustees’ powers to purchase land — England and Wales 2.39 26 Trustees’ powers to purchase land — Scotland 2.45 29 Scope and application 2.49 30 PART III: DUTIES OF CARE 33 INTRODUCTION 3.1 33 THE PRESENT LAW Duties of trustees generally 3.2 33 Duties of care 3.4 34 PROPOSALS FOR REFORM Approach to reform — a uniform duty of care 3.8 36 Ambit of the new statutory duty 3.11 37 Powers of investment 3.14 37 Powers of collective delegation and powers to employ nominees and custodians 3.18 39 Powers of insurance 3.21 40 The standard of care 3.22 40 PART IV: TRUSTEES’ POWERS OF DELEGATION 44 INTRODUCTION 4.1 44 GENERAL POWERS OF COLLECTIVE DELEGATION The present law 4.4 45 Proposals for reform 4.7 46 The exception for foreign property 4.12 47 CONTROL OF COLLECTIVE DELEGATION — SAFEGUARDS FOR BENEFICIARIES 4.14 48 Duty of care 4.15 48 Restrictions on the delegation of asset management functions 4.16 49 Controls on the payment of fees and expenses 4.23 51 SPECIFIC POWERS OF COLLECTIVE DELEGATION 4.24 51 Sub-delegation and limitation of agents’ liability 4.25 52 Conflicts of duty and interest 4.27 52 Delegation to one or more co-trustees 4.30 53 APPLICATION OF POWERS OF COLLECTIVE DELEGATION4.35 55 CHARITABLE TRUSTS The need for reform and the problems associated with it 4.37 56 Proposals for reform 4.39 56 PENSION TRUSTS 4.44 58 vi ParagraphPage PART V: TRUSTEES’ POWERS TO EMPLOY NOMINEES AND CUSTODIANS 60 INTRODUCTION 5.1 60 THE PROPOSED POWERS 5.4 60 PROTECTION FOR BENEFICIARIES 5.14 65 APPLICATION OF POWERS TO EMPLOY NOMINEES AND CUSTODIANS 5.20 66 PART VI: TRUSTEES’ POWERS TO INSURE THE TRUST PROPERTY 68 THE PRESENT LAW AND ITS DEFECTS 6.2 68 PROPOSALS FOR REFORM Power to insure 6.4 69 Duty to insure 6.7 70 APPLICATION OF POWER TO INSURE 6.11 71 PART VII: PROFESSIONAL CHARGING CLAUSES 72 BACKGROUND TO REFORM 7.2 72 PROPOSALS FOR REFORM 7.6 73 Statutory charging clause for professional trustees Application 7.8 74 Scope 7.13 76 The special position of trust corporations 7.17 77 Other reforms 7.18 78 Pension trusts 7.20 79 Charitable trusts 7.21 79 PART VIII: SUMMARY OF RECOMMENDATIONS 81 APPLICATION OF RECOMMENDATIONS 8.1 81 TRUSTEES’ POWERS OF INVESTMENT 8.2 81 DUTIES OF CARE 8.13 83 TRUSTEES’ POWERS OF DELEGATION 8.15 84 TRUSTEES’ POWERS TO EMPLOY NOMINEES AND CUSTODIANS 8.29 87 TRUSTEES’ POWERS TO INSURE THE TRUST PROPERTY 8.37 89 PROFESSIONAL CHARGING CLAUSES 8.41 89 APPENDIX A: DRAFT TRUSTEE BILL 93 APPENDIX B: DRAFT CLAUSES FOR SCOTLAND 139 vii ParagraphPage APPENDIX C: SUMMARY OF THE PRESENT LAW 151 SECTION 1 — TRUSTEES’ POWERS OF DELEGATION The functions that may be delegated 2 151 The circumstances in which trustees may delegate 5 152 Collective delegation: Trustee Act 1925, section 23(1) and (2) 6 152 Collective delegation: Trustee Act 1925, section 23(3) 8 154 Delegation by individual trustees: Trustee Act 1925, section 259 154 The position of charitable trusts 12 156 The position of pension trusts 14 156 The standard of care required of trustees in delegating their functions17 157 Trustee Act 1925, section 23(1) 18 157 Trustee Act 1925, section 23(2) 19 157 Trustee Act 1925, section 23(3) 20 158 Trustee Act 1925, section 30(1) 21 158 The interpretation of the statutory provisions — Re Vickery 22 158 Proposition 1 23 158 Proposition 2 25 158 Propositions 3 and 4 27 159 SECTION 2 — TRUSTEES’ POWERS TO EMPLOY NOMINEES AND CUSTODIANS The position at common law 30 160 Statutory exceptions to the common law rule 32 161 Where the trustees act collectively 33 161 Where a trustee acts individually 36 161 The special position of charitable trusts 37 162 SECTION 3 — TRUSTEES’ POWERS TO INSURE TRUST PROPERTY The position at common law 41 162 Statutory powers of insurance Trustees of land 43 163 Trustees of personalty 44 163 Persons having the powers of the tenant for life in respect of a settlement under the Settled Land Act 1925 45 164 SECTION 4 — TRUSTEE REMUNERATION The general rule against trustee remuneration 46 164 Express charging clauses 47 164 Other exceptions to the general rule 48 165 APPENDIX D: LIST OF RESPONDENTS TO CONSULTATION PAPER NO 146 167 viii THE LAW COMMISSION AND THE SCOTTISH LAW COMMISSION TRUSTEES’ POWERS AND DUTIES To the Right Honourable the Lord Irvine of Lairg, Lord High Chancellor of Great Britain, the Right Honourable Dr John Reid, Secretary of State for Scotland, and Mr Jim Wallace QC MSP, Minister for Justice PART I INTRODUCTION ISSUES — THE MODERN TRUST 1.1 Trust law is of wider application than is perhaps commonly appreciated. Trusts are not confined to the world of wills and family settlements (although they are clearly very important in those contexts). They also have considerable, and increasing, relevance to many commercial enterprises from international financial transactions to the management of pension and other investment funds. Trust law is also of major significance to charities.

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