Powers of Attorney and your Investments

21 Feb 2020

Powers of Attorney are useful documents to have and we would recommend that every client make one. If anything, these documents provide the donor with the peace of mind that their chosen representative (also known as an attorney) can manage their financial affairs should they lose capacity to do so at any point in the future.

What if I already have an Enduring Power of Attorney?

The old style Enduring Powers of Attorney (EPAs) are still legally valid despite a change in the law in 2007. Now it is only possible to create Lasting Powers of Attorney (LPAs) although there are still many valid EPAs in existence. It is important to note that any changes required to a valid EPA can only be made by revoking the EPA and creating a new LPA instead.

Following guidance from the Courts in 2015, It is now recommended to include in any document (EPA or LPA) a paragraph ensuring the attorney has full discretionary powers of investments , and if needs be, can delegate investment management decisions to an investment manager.

What does the investment manager do?

The investment manager builds and manages a portfolio of investments on the donor’s behalf, taking into account how much they want to invest, the level of risk they are prepared to take, their financial goals and their tax position.

The donor may already have an investment manager who manages their stocks and shares ISA for example and it is important to ensure that such an arrangement will continue once the donor loses capacity to manage their financial affairs.

Why wording is so important in an LPA

The general principle is that an attorney acting under an EPA or an LPA where the donor has lost capacity cannot delegate any decision-making to third parties unless expressly authorised in the document itself. Without express authority, the attorney must therefore make decisions in relation to the donor’s finances personally.

This means that without the relevant wording in the EPA/LPA, the attorney cannot open a new discretionary portfolio on behalf of the donor, nor can they instruct the investment manager to continue to manage the donor’s assets on a discretionary basis after the donor loses mental capacity to manage their financial affairs. In this instance, the attorney can only invest the donor’s assets through an advisory mandate rather than a discretionary mandate.

In practice, this means that every time the donor’s investment manager wants to buy/sell shares on the donor’s behalf, they will need to get in touch with the attorney first for authorisation to do so. This is often inconvenient and the donor may miss out on a good investment opportunity. This may also present a risk to the donor’s investments if they can’t be sold quickly enough.

Attorneys who have been delegating investment decisions without express instructions in the EPA/LPA will find that they have acted outside the scope of their powers and could be personally liable for any losses suffered by the donor as a result. Investment managers may run into compliance difficulties as they should only accept to act where the attorney has authority to appoint them. In most instances, they will refuse to act.

What can be done?

  • If there is no appropriate wording in the EPA/LPA and the donor has capacity, they will need to revoke the current EPA/LPA and make a new LPA with an express provision enabling the attorney to delegate investment management decisions
  • If there is no appropriate wording in the EPA/LPA and the donor has lost capacity, an application can be made to the Court of Protection for retrospective approval of the investments and permission for the attorney to delegate investment management decision. This should always be seen as an option of last resort as it is an expensive and lengthy process.

For more information regarding Lasting Powers of Attorney and investments, please contact Trethowans on 0800 2800 421, we would be more than happy to advise on your particular circumstances.

Author

Claire Radigois

Senior Associate