Given the current volatility of a whole spectrum of investments, it seems inevitable that trustees will face an increasing number of complaints and claims in relation to decisions they have taken in connection with investment. This article explains what can be done.

Economic volatility and the likelihood of recession will hit the portfolios of wealth management clients, including beneficiaries of trusts. What sort of steps can and should trustees take? In this article, Sinead O’Callaghan and Yajur Mittal, partner and associate, respectively, at Cooke, Young and Keidan, set out what is at stake. The editors are pleased to share these insights. The usual editorial disclaimers apply. Jump into the conversation! Email tom.burroughes@wealthbriefing.com

With sterling at record lows against the dollar, the market plummeting with the announcement of the mini budget in September, and with inflation now over 10 per cent, the current economic outlook looks fairly bleak, and the consequences in terms of investments are reported almost daily. By way of example, investments in China-focused equities and funds have recently faced, as experts put it, “jaw-dropping losses” following the brutal sell off last month. Similarly, the imposition of restrictions on withdrawals from prominent UK property funds based on liquidity concerns (given the fall of prices in British housing and rising interest rates), have given rise to concern.  

A question frequently asked by beneficiaries, amidst periods of economic turmoil and instability, is whether the law adequately safeguards their interests in respect of any significant diminution in value of trust investments. This article examines questions such as whether beneficiaries have the right to sue their trustees for having failed to review their investment strategy and implement changes in turbulent times.

Duty of care
A trustee holds the legal title to assets of a trust for the trust’s beneficiaries. The position is fiduciary in nature and comes with a set of duties, which, if breached, can attract personal liability. 

Trustees are of course subject to the common law duty of care to exercise care and skill while dealing with trust property – in effect a trustee ought to conduct the business of the trust in the same manner as an “ordinary prudent man of business” would conduct his own.   Separately, the Trustee Act 2000 (the “Act”) enshrines the statutory duty on the part of trustees by reference to what is “reasonable”.  Section 1 of the Act defines the duty as:

“to exercise such care and skill as is reasonable in the circumstances, having regard in particular -

a.    to any special knowledge or experience that he has or holds himself out as having; and

b.    if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.”

The standard under the Act is therefore objective in nature i.e., trustees who are acting in a professional capacity will owe a higher standard of duty of care as compared with a lay trustee, given their level of expertise. 

Power to invest
In exercising any power of investment, a trustee must have regard to the standard investment criteria as set out in section 4 of the Act, being: 

a.    the suitability to the trust of investments of the same kind as any particular investment proposed to be made or retained and of that particular investment as an investment of that kind; and

b.    the need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust

Further, section 2 of the Act requires trustees to review the investments of the trust from time to time and consider whether, having regard to the standard investment criteria, they should be varied. In other words, not only are trustees confined to investing in asset classes within the scope prescribed by the relevant trust instrument, they must also actively consider whether they should be retaining or divesting the trust of specific investments.   

Advice for trustees: review and record
Given the current volatility of a whole spectrum of investments, it seems inevitable that trustees will face an increasing number of complaints and claims in relation to decisions they have taken in connection with investments which have plummeted in value.   

As explained above, decisions that a “prudent man of business” or that are “reasonable in the circumstances” will depend on the economic and financial climate at the time. One cannot expect a trustee to have prophetic vision. However, what once appeared a fruitful, prudent, and reasonable investment decision, may not be so in the current market. Accordingly, any trustee with a power of investment must undertake regular periodic reviews of the investments held by the trust. If a trustee has delegated such power of investment to a professional, it would be prudent to have the professional carry out regular periodic reviews. It goes without saying that the most important safeguard for trustees in respect of allegations of mismanagement, is to ensure that all decisions and actions taken are carefully examined, reasoned and documented (and that professional advice is taken and recorded where appropriate).  

Options for beneficiaries
From a beneficiary’s perspective, trustees obviously have a duty to account to beneficiaries for their administration of the trust and to provide financial information demonstrating how the trust has been managed. If a beneficiary suspects that there has been mismanagement and/or breach of the statutory or common law duty of care, they should request the relevant financial information (a red flag in this scenario may well be an absence of any such information having been regularly provided). If the trustee refuses any such request, a beneficiary can, in principle, apply to court for an order compelling the trustee to produce it.  

As a last resort, action can be taken by beneficiaries by filing claims for compensation for breach of duty and/or trust or even seeking to remove trustees from their position. However, in the event that there has been mismanagement, both trustees and beneficiaries would be well advised to see if the dispute can be resolved without recourse to court proceedings. One only need look at the sheer level of time (and costs) which it takes to litigate such cases to understand why.