LPAs discretionary management

With a growing elderly population, investment managers will find that they are operating discretionary portfolios on the instructions of an attorney acting under a Lasting Power of Attorney for Financial and Property Affairs (LPA) (or Enduring Power of Attorney) with increasing regularity. It might be the case that the attorney wishes to open a new discretionary portfolio on behalf of the principal, or the attorney wishes to instruct the investment manager to continue to manage the principal’s assets on a discretionary basis after the principal loses mental capacity. 

The powers and duties of an attorney, taken together with the regulatory and contractual obligations of investment managers, is a complex area. In this article we will explore one major pitfall that investment managers should be aware of in this context.

An attorney’s power to delegate

Absent an express power to delegate investment decisions contained in the LPA, the basic principle is that an attorney acting under an LPA where the principal has lost capacity may not delegate decision-making to third parties, including in relation to financial investments.  Further, an attorney is required to take proper advice to ensure that they are fulfilling their obligations towards their principals, but final decisions must lie with them. 

In the case of financial investments, in the view of the Office of the Public Guardian (the OPG) at least (as set out in their Guidance of September 2015), this would require an attorney to invest the principal’s assets through an advisory – not a discretionary – mandate, a prospect which is likely to sit uncomfortably with both investment managers and attorneys. The Mental Capacity Act 2005 (MCA) Code of Practice confirms this approach. 

The principal’s instructions

When preparing their LPA, the principal can include express wording permitting the delegation of investment management to an investment manager. The OPG has gone so far as to include precedent wording in their guidance for principals. 

In the case of existing LPAs without such wording, the attorney does not have the requisite power to delegate investment decisions and they would have to apply to the Court of Protection for an Order permitting them to transfer the principal’s assets to a discretionary portfolio, or continue to hold the assets on such a mandate.  This can be both an expensive and lengthy process. 

Contractual and regulatory issues for investment managers

This will inevitably raise contractual and regulatory issues for investment managers, who will be concerned that the attorney from whom they are taking instructions, or with whom they are entering into contracts, does not have the requisite power and authority. 

Strictly speaking, the obligations noted above are those of the affected attorneys and not investment managers. However, financial services firms will need to consider their contractual position with their clients – and their regulatory obligations – in light of the OPG’s guidance, in particular where they are on notice of the issue. It may be the case that some investment managers have been providing discretionary management services to attorneys (acting on behalf of a principal who lacks capacity) who do not have the power to instruct them, and the status of the contract between the attorney and the firm may be in doubt. 

It is not yet known what approach the FCA will take to this issue, but in its Occasional Paper No. 8: Consumer Vulnerability it guides firms to offer vulnerable consumers flexible outcomes, including help with powers of attorney. This seems somewhat at odds with the more restrictive approach of the OPG. 

Looking behind the attorney

A difficulty arises in that financial services firms will not necessarily know whether or not there is any deficiency with any given LPA, or whether a client has mental capacity.

Because registered LPAs take effect during the principal’s lifetime (and whilst he or she retains mental capacity) as general powers of attorney, it is quite proper to deal with the attorney in respect of discretionary portfolios whilst the principal retains capacity, whether or not the LPA contains express wording on the point. 

This means that any contracts entered into by the attorney whilst principal has capacity would be valid and no regulatory issues should arise.  However, upon the principal’s incapacity, this would no longer be the case and the attorney’s power to give instructions to a discretionary portfolio manager would cease (unless an express power to do so was included in the LPA or they obtained an Order of the Court of Protection). 

Investment managers may well not know the status of the principal’s capacity at any given time, and it is impractical for them repeatedly to check the point. This problem is compounded by the fact that capacity is no longer a binary test under the MCA, and whether or not a person has mental capacity is decision-specific. This is in contrast with the position under an EPA, when, once the EPA has been registered with the Court of Protection, the principal has to be treated as no longer having capacity. Investment managers may also not have detailed records of whether an express power to delegate investment management decisions has been included in each LPA under which they are accepting instructions from an attorney.

What action should investment managers take now?

In October last year, the Society of Trust and Estate Practitioners invited members to provide examples of how the OPG guidance may be difficult to apply in practice. STEP’s stated aim was to present a test case to the OPG and underline that the impact of this issue is potentially far-reaching. We have contributed to STEP’s review and it is to be hoped that STEP’s approach to the OPG goes some way to persuading the OPG to change its guidance. However, on the face of it, the basic principles will apply even if the OPG’s guidance is changed and an amendment to the MCA may be required to allow automatic delegation of investment management decisions to an investment manager.

One way of clarifying the position would be for a number of similarly affected attorneys to combine and bring a proper test case in the Court of Protection. Because of the impact of the OPG’s guidance on investment managers, this might be something that the wider investment management industry felt able to facilitate, perhaps through a representative body, both in the sense of bringing the right sort of attorneys together and by underwriting the costs.

In the meantime, investment managers should seek advice on how the OPG’s guidance affects their contractual position vis a vis its clients and its regulatory obligations to them. Firms should also consider writing to affected clients to take their instructions on this matter. 

We have been advising a number of firms on this issue, and would be delighted to advise you on how this matter affects your firm.

For more information please contact Suzanne Marriott on +44 (0)20 7203 5267 / suzanne.marriott@crsblaw.com or Sophie Coote on +44 (0)20 7203 5264 / sophie.coote@crsblaw.com.