Category Archives: Fund Management

LPAs and clauses to enable discretionary management of funds

Are you able to continue to manage your clients’ assets in the event of their mental incapacity? Do you know what you should be looking for in a Lasting Power of Attorney (LPA) for Property & Finance in order to ensure that you and your client can avoid costly court applications?

What’s the problem?

Controversy currently surrounds whether express instructions need to be contained within a Property & Finance LPA where your client has (or may in the future have) funds managed by a discretionary fund manager (DFM).  A recent case involving HSBC has highlighted the problem and has led to guidance from professional commentators to say that, if the Bank can cause an issue with it, then there is every chance that we could have similar problems with other DFMs.

The issue is that an LPA without express provision carries the risk that DFMs may not be able to make discretionary investment decisions without an application to the Court of Protection.  This is because (in the absence of express power in an LPA) only attorneys can make these decisions and they cannot delegate them.

Action

We recommend a careful review of all existing LPAs to make sure that there is a clear basis for a DFM’s appointment.  The guidance we have had is that a DFM should only accept engagements where this is the case.

Some financial organisations have taken a formal line and have their own specific wording, which is fine if you know where the investments are at the time and also if you can be sure they will never be moved.   For example, HSBC came up with wording but it was very specific to them.

Our suggestion

Therefore, we are warned to be mindful to check with any current DFM to see if our proposed wording (below) will be sufficient or if they have other requirements.

Recommended wording is:

“My attorney(s) may transfer my investments into a discretionary management scheme, even though this means that investment decisions will be made by the managers of the scheme and my investments will be held in the name of the managers of the scheme or their nominees.  Alternatively, where prior to my loss of mental capacity to make financial decisions, I already had my investments managed in a discretionary management scheme, I want the discretionary management scheme to continue, even though this means that investment decisions will be made by the managers of the scheme and my investments will be held in the name of the managers of the scheme or their nominees.”

What if there is no relevant provision in your client’s LPA?

There are of course lots of LPAs out there with no such provisions about discretionary fund management.  The question therefore is will the DFM be able to continue to make decisions?  Different organisations have different approaches and it may be that some are not bothered by the absence of the express power (but if LPAs without express powers have been accepted by DFMs then we would suggest that it is more by luck than judgement!)  Worse still, an unhappy beneficiary of the donor’s estate may challenge the action of the attorney for not considering the risks.

If a DFM refuses to accept an LPA without sufficient powers, then the next steps depend entirely on whether or not your client still has mental capacity:-

  • If they do, they should be advised to revoke the earlier LPA and re-make it.  The downside is that there are additional fees for drafting the replacement as well as the additional registration fee (£110) payable to the Office of the Public Guardian (OPG) on registration.
  • If they don’t, a Court of Protection order will be needed.

Best practice

The reality is that we know about the case with HSBC and both the OPG and the Society of Trust and Estate Practitioners (STEP) have produced guidance, hence the profession should be alive to it.  Our point is that firms shouldn’t just draft the LPA blindly with nothing in the instructions paragraph – they should at least consider whether or not these kinds of clauses (and indeed any others) should be included.  This is where we add value in providing cost-effective, yet robust and bespoke services to your clients.  Making an effective and useful LPA is about more than simply typing in names and addresses.

Until more is known, ‘best practice’ for practitioners is to take a pragmatic approach and to follow such practice notes and guidance as are recommended by the OPG and STEP.

Conclusion

The risk with all of this is that if the LPA doesn’t contain the right powers the fund manager could reject it and then a Court of Protection order would then be needed – with the subsequent costs, delay and potential financial loss while the attorney is unable to delegate those functions to the DFM.  Without a prudent approach, lawyers, advisers and even attorneys could find themselves at risk of non-compliance and negligence.

If you have clients who you need assistance, we are happy to help.  Please contact us at legalmatters on 01243 216 900 or lucy.thomas@legalmatters.co.uk.