Second Reading Committee
Tuesday 11 July 2000
[Mr. Edward O'Hara in the Chair]
4.30 pm
Motion made, and Question proposed,
That, during the proceedings on the Trustee Bill [Lords], the Committee do meet on Tuesdays at half-past Ten o'clock and at half-past four o'clock and on Thursdays at Nine o'clock.—[Mr. Lock.]
Mr. Edward Garnier (Harborough): May I, in endorsing the sittings motion, welcome you to the Chair, Mr. O'Hara, and trust that you will not be troubled on any day other than this?
Mr. John Burnett (Torridge and West Devon): May I also welcome you, Mr. O'Hara? The Bill received considerable attention in the other place, and I expect that, although it will be considered carefully here, proceedings will be reasonably swift.
Question put and agreed to.
4.31 pm
Mr. Lock: I beg to move,
That the Chairman do now report to the House that the Committee recommends that the Trustee Bill [Lords] ought to be read a Second time.
I welcome you to the Chair, Mr. O'Hara. Because we are in a Second Reading Committee, as the Bill is a Law Commission Bill, I am obliged to say slightly more than would be usual in Committee, but shall endeavour to keep my remarks as brief as possible. However, if hon. Members want further detail on any point that I cover sketchily, I shall be happy to respond, with the leave of the Committee.
The creation of the legal concept of a trust is one of the great achievements of the common law. To quote Maitland, and with apologies to Welsh and Scottish members of the Committee,
If we were asked what is the greatest and most distinctive achievement performed by Englishmen in the field of jurisprudence I cannot think that we should have any better answer to give than this, namely, the development from century to century of the trust idea.
The essence of a trust is that the legal owners of property are obliged to deal with that property not as beneficial owners but for the benefit of other people or for other purposes.
There may be some who think the idea of a trust is a dry legal concept with no relation to everyday life. They are wrong. Almost every local or national charity takes life as a trust, and thus has trustees who are affected by this Bill. Everything from village halls, millennium greens and playing fields through to the largest charitable trusts or pension funds and a host of other local and national organisations operate as trusts. Every relative who takes on the position of executor or administrator of a will holds property in trust and acts as a trustee. The Bill has been widely welcomed and it is estimated that it will boost the income of the charity sector by up to £40 million a year.
Trusts have existed in one form or another for centuries. The law governing the proper objects of charities is still broadly that laid down in a statute of Elizabeth I. The bulk of the law of trusts operating today dates from 1925 and mention will be made several times in Committee of the Trustee Investments Act 1961. Despite the extent of the growth of the trust in the modern world, the law relating to the powers and duties of trustees has not kept pace with their evolving social and economic role. That has become particularly clear in the field of investments, which has changed, quite fundamentally, with the introduction of new technology. As a result, trustees who derive their authority from, usually older, trust documents that make either no provision or insufficient provision for handling trust investments, are finding it increasingly difficult to satisfy their primary duty of acting in the best interests of their beneficiaries. The Bill will, with significant modification, implement changes to the law in England and Wales that were recommended by the Law Commission and the Scottish Law Commission in their joint report ``Trustees' Powers and Duties'', which was published a year ago this month. The report was the result of the commissions' usual rigorous research and consultation that was carried out partly in conjunction with the Treasury. The Bill has also been subject to constructive and helpful debate in another place.
The principal change will be to create a wider statutory power of investment that can be used in default of any, or sufficient, power in the trust instrument. The new power of investment will replace the existing limited power in the Trustee Investments Act 1961 and will be supported by a range of powers. It will be possible to appoint agents, nominees and custodians, to insure trust property and to pay professional trustees. The measures aim to facilitate the better administration of trusts and enable trustees to take full advantage of the wider investment opportunities now open to them while protecting the interests of beneficiaries against abuse of the new powers. As I said, the new powers will apply only if, and to the extent that, the trust instrument does not provide otherwise.
Hon. Members may be aware that when the Bill passed through its stages in another place, my right hon. and learned Friend the Lord Chancellor was assisted by an atmosphere of constructive support. That was engendered partly by his and our Department's openness to considering representations made on both sides and partly by the positive approach of their Lordships to this undoubtedly good and worthwhile Bill. Indeed, Lord Dahrendorf, a trustee of the Charities Aid Foundation, spoke very kindly of the way in which the Bill was handled by the Lord Chancellor. He suggested that other people might usefully regard that handling as a model. It is satisfying to hear words of commendation from so respected a source. I hope that Opposition Members and their right hon. and hon. Friends will approach stages in this House in the same constructive and helpful way.
Although we are meeting in Committee, this is a Second Reading debate on a technical and complex Bill. It falls to me to take us through it in detail and to explain to hon. Members who are here today and who read our debates in Hansard the Government's thinking.
Part I introduces the duty of care that will apply, subject to schedule 1, to the exercise of new powers by trustees. The clauses create a precisely defined statutory duty of care applicable to trustees when they carry out their functions under the Bill or equivalent functions under the trust instrument. As in the law generally, the phrase ``duty of care'' means a duty to take care to avoid causing injury or loss. The new duty will bring certainty and consistency to the standard of competence and behaviour expected of trustees. That codifies common law in which there is a duty of care. It removes uncertainty and highlights that requirement as being a key duty of the trustees. The duty is a default provision. It may be excluded or modified by the terms of the trust and will apply to the way in which trustees exercise their discretionary powers. It will not apply to a decision by the trustees as to whether the discretionary power should be exercised in the first place.
Clause 1 defines the new statutory duty of care. The circumstances in which it will apply are defined by clause 2, which gives effect to schedule 1. It will not apply outside those circumstances. To comply with the new duty, a trustee must show a degree of skill and care that is reasonable in the circumstances of the case and that makes allowances for his or her special knowledge, experience or professional status.
Part II implements the most important part of the commissions' report. It establishes a new regime for investment by trustees who have no powers of investment—or whose powers of investment are not wide enough—under the terms of the trust documents, another statute or subordinate legislation and who are not prevented by their trust documents from using such powers. Most modem trust instruments expressly confer wide investment powers. Older trust instruments frequently do not.
In the absence of express powers under the trust instrument, the trustees must rely on legislation to define their powers. At the moment, they are restricted to the use of default powers contained in the Trustee Investments Act 1961. The powers, though generous when enacted, are now considered too narrow. The controls in that Act are considered to have worked against the best interests of beneficiaries, to have been too restrictive and to have been too expensive to administer. The powers will continue to be default powers, and they are expected to be of greatest utility to older trusts, including many charities, and to trusts arising from home-made wills or on intestacy.
Clause 3 gives trustees the power to invest trust assets as though they were the absolute owners—a significant shift away from the present position. The new power is to be known as the general power of investment. However, the power granted by the clause is not quite carte blanche. Perhaps most importantly, it does not allow for investment in land other than by way of loans secured on land. However, such a power is granted by clause 8, to which I will refer.
Clauses 4 and 5 impose specific duties on trustees to keep in mind the need for diversification and the suitability of investments, and to obtain and consider proper advice where appropriate. Those duties will apply to trustees in the exercise of a power of investment. Clause 6 provides that the new general power of investment is a default provision. It specifies that, subject to clause 7, relating to trusts in existence when the Bill is brought into force, the new power will be available to all trustees in addition to any limited express power of investment that they might have already, but subject to any limitation imposed by the trust instrument or by primary or subordinate legislation. Clause 7 provides for the application of part II to existing trusts of the relevant types.
The new general power of investment has only limited application to land and is, in any event, restricted to investment. Part III therefore makes separate provision to remedy the disparity between the powers of different types of trustees in relation to the purchase of land. Clause 8 gives trustees the power to acquire freehold or leasehold land in the United Kingdom as an investment, for occupation by a beneficiary or for any other reason. Clauses 9 and 10 act on the part in much the same way as clauses 6 and 7 act on part II.
Part IV deals with the use by trustees of agents, nominees and custodians. Clauses 11 to 15 set out the powers of collective delegation that trustees will have in default of express powers being conferred on the trust instrument. Clause 11(1) provides that, subject to the provisions of part IV, trustees may delegate any or all of their delegable functions to an agent. In the case of non-charitable trusts, to which clause 11 applies, subsection (2) provides that the trustees may delegate any function except, first, a function relating to whether or in what way trust assets should be distributed; secondly, a power to allocate fees or other payments to capital or income; thirdly, a power to appoint a trustee and, fourthly, a power conferred by the trust instrument or an enactment either to delegate a trustee function or to appoint a nominee or custodian. Subsection (3) sets out the functions that a trustee of a charitable trust may delegate.
Clause 12 sets out those who may and may not be appointed as agents. Subject to it not being possible to appoint a beneficiary, there are no other restrictions. Clause 13 makes it clear that, although an agent is not subject to the duty of care under clause 1, which applies only to trustees, the exercise of a delegated function by an agent is subject to any specific duties or restrictions attached to the function. Agents will be subject to the common law duty of care, but the majority of agents will be held to a duty of care made explicit in the contract by which the trustees appointed them as agents. Under clause 14, trustees will be free to agree the terms for the appointment of an agent subject to the limitation imposed by subsection (2). The basis on which the agency will have effect will be governed by the general law of agency.
Clause 15 provides for special restrictions on the delegation of the asset management functions of trustees, none of which has previously been capable of being delegated unless the trustees have been given express power to do so in the trust instrument. Before trustees may delegate any of their asset management functions, they must prepare a policy statement giving guidance as to how the functions ought to be exercised to ensure that the functions will be exercised in the best interests of the trust. For ethical investment trusts, for example, those criteria should be set out in the policy statement.
Clauses 16 to 20 govern the powers of trustees to appoint nominees and custodians in cases where the trust instrument contains no express powers to do so. Clauses 16 and 17 provide for the appointment of nominees and custodians respectively. Whereas clause 17 provides a power to appoint a custodian, clause 18 imposes a duty to do so in respect of any securities payable to bearer that are held on behalf of the trust.
Clause 19 makes it clear that to be eligible for appointment as a nominee or custodian, a person must normally carry on a business that consists of or includes acting as a nominee or custodian. However, there is an alternative to that requirement in subsection (2), so that trustees may use special purpose vehicles for nominee or custodianship purposes. Clause 20 has an effect in relation to the appointment of nominees and custodians similar to that in clause 14 on the appointment of agents.
Clauses 21 to 23 provide for the review by trustees of the appointments of agents, nominees and custodians, and the liability of the trustees for such persons. Clause 21 defines when clauses 22 and 23 will apply. Clause 22(1) imposes on trustees a single duty that has three elements during any agency, nominineeship or custodianship. Those elements are: first, to keep under review the terms of the appointment performance; secondly, to consider whether to exercise any power of intervention that they have; and, thirdly, to exercise their power of intervention if necessary.
Clause 23 sets out the criteria governing trustees' liability for agents, nominees and custodians. Clauses 24 to 27 make certain supplementary general provisions in relation to the use of agents, nominees and custodians by trustees.
Part V makes provision for remuneration of certain trustees in certain circumstances. It does so by setting down rules of construction for express charging clauses in trust instruments and by providing a power to remunerate certain trustees in default of such express provision in the trust instrument.
Clause 28 introduces new rules for the construction of express charging clauses. The rules apply whenever trusts are created, provided that their application is not inconsistent with the terms of the trust instrument. However, they apply only in relation to services provided on or after the legislation's commencement. The clause provides that the services for which a trust corporation or a trustee acting in a professional capacity may be entitled to payment include services that are capable of being provided by a lay trustee. However, as it is widely agreed that charitable trustees should be treated more strictly than other trustees in such circumstances, because of the nature of their responsibilities, where a charitable trustee who is not a trust corporation fulfils the other requirements that would entitle him to payment under the trust instrument, he must scale further obstacles; he may not be a sole trustee and must have the agreement of the majority of the other trustees.
Clause 29 effectively inserts a professional charging clause into any trust instrument that does not contain express provision either for or against remuneration of the trustee in question, and where the entitlement to remuneration of the trustee is not subject to provisions in another statute or subordinate legislation.
Clause 30 confers a power on the Secretary of State to make provision by statutory instrument, in due course, for the remuneration of charitable trustees. Because of the significant nature of that potential change, any order made by the Secretary of State will be made by affirmative resolution.
Clauses 31 and 32 make provision for the reimbursement of trustees' expenses and for the payment of remuneration and expenses to agents, nominees and custodians who are not trustees. Those provisions apply to services provided or expenses incurred on or after the commencement of the legislation on behalf of trusts, whenever created.
Part VI deals with miscellaneous and supplementary matters with which I shall not weary the Cttee in any detail, as they are covered in the Bill's explanatory notes, but I will draw the Committee's attention briefly to clause 41, which is a Henry VIII clause. It is included to allow those whose investment powers are governed by the 1961 Act, but who wish to take advantage of the new powers granted by parts II and III to apply to the Minister to be enabled to do so by the amendment of their governing statute. The Minister will be required to consult anyone who seems to him likely to be affected by the proposed amendment of a local, personal or private Act.
Subsection (1) gives a Minister of the Crown power to make such amendments to any Act, including Acts extending to places outside England and Wales, as appears to him to be appropriate in consequence of or in connection with parts II or III. The reason for the extension of that power to Acts that operate beyond England and Wales is that, where a provision has UK-wide application, it may be anomalous to amend it in relation to England and Wales but not otherwise.
Over many years, the statutory investment powers of many organisations that are not trusts have none the less been defined in terms of the default powers contained in the 1961Act. Many of those are thought to be governed by local, personal or private Acts, and not all of them are amenable to identification by the usual methods such as LEXIS searches.
I shall now deal with the schedules to the Bill. Schedule 1 specifies the circumstances in which the new statutory duty of care will apply. Schedule 2 makes minor and consequential amendments. Schedule 3 makes transitional provisions and savings. Schedule 4 deals with repeals.
This is a relatively substantial and complex Bill, which I hope will receive a warm welcome from both sides of the House. I hope that I have struck a reasonable balance between brevity and detail, and that hon. Members will be content to make up for any deficiency of illustrative detail from the explanatory notes.
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