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.
Why “Divorce Day” may come 3 months late in 2022
A guide to buying residential property in England
An overview of the conveyancing process when acquiring residential property as well as some key points to consider.
Piers Master named in eprivateclient’s 50 Most Influential 2022
We are delighted to announce that Piers Master, Head of Private Wealth, has been included in eprivateclient’s 50 Most Influential.
Environmental Land Management: Whose carbon is it anyway?
Everything you need to know about Environmental Land Management Schemes.
Philanthropy Insights – A discussion with John Pepin and Rennie Hoare of Philanthropy Impact
Join us as we discuss the current landscape of philanthropy in the UK and current trends, priorities and concerns amongst philanthropists.
Asian Legal Business, eprivateclient and Legal Monitor report on the firm's appointment of a new Family team in Hong Kong
The firm has added a new family team in Hong Kong, including the hire of Lisa Wong as Partner.
Charles Russell Speechlys welcomes new Family team in Hong Kong
We are delighted to welcome a new Family team in Hong Kong, including the hire of Lisa Wong as Partner.
Top 4 thoughts on Family Law in retrospect for 2021 and in prospect for 2022
What artists need to know about law
What should artists consider when entering contracts, whether with galleries, museums or other parties?
Stéphane de Lassus
Stéphane de Lassus interviewed by Le Figaro on the Paris office's ability to advise on both private and professional assets
Le Figaro featured an interview with Stéphane de Lassus titled “The entrepreneur for DNA” in a special wealth management edition.
eprivateclient and Circle2Success report on Felicity Chapman’s relocation to the Cheltenham office to expand the firm’s Family law offering
Felicity Chapman has relocated to the firm's Cheltenham office to deal with increased client demand.
Ingrid Saffin writes for eprivateclient on private capital, responsible business, and investing in the high street
The end of the moratorium could bring new gaps in retail space. But could this ultimately be good news?
What lessons can we take from the Britney Spears conservatorship case?
Rethinking Museum Governance
What are the legal responsibilities of museum trustees?
Family offices lead the way in engaging new generations
Sarah Jane Boon
Sarah Jane Boon writes for the Financial Times' Your Questions on whether financial claims can be pursued after an ex-spouse's death
Can financial claims be pursued after the death of an ex-spouse?
'Good Divorce Week' - Putting the children first
Trailblazing: how London became the highest ranked European city for private capital property investment
Saying "I don't" - raising the minimum age for marriage
Lisa-Jane Dupernex writes for eprivateclient on the need to review succession planning for French assets
Is it time to review succession planning for French assets following the introduction of a new law in France on 1 November 2021?