The Gazette 1996

GAZETTE

NOVEMBER 1996

"No testator in the light of this example would choose this bank for the effective management of his investment"

A will trust was created in 1922 with an initial trust fund of £54,000. By 1986 the fund was worth £269,000. The plaintiff who by then was the only person entitled to benefit, claimed that if investments had been more regularly reviewed and diversified the fund would have been worth more than £1 million. Before 1961 the bank had wrongly believed, without taking legal advice, that it could only invest in bank and insurance company shares that were held by the estate on the date of his death or similar shares. (1) That the bank failed to appreciate the scope of the investment clause. (2) That it failed to conduct periodic reviews. (3) That if failed to diversify the equities even within the scope of the permitted investments. The alleged mismanagement of the trust funds sprang from three claims: What saved the bank from liability despite such symptoms of "incompetence or idleness" was the court's conclusion that the trustee had fulfilled the requisite standard of care. The test adopted was what... the ordinary prudent man ... would do and it involved two elements: (1) Consideration of what the trustee actually did (2) Proof that the trustee made decisions which it should not have made or failed to make decisions it should have made. In looking at the actions of the trustee an objective test was adopted without reference to the character of the trustee and its professional expertise. Despite the fact that the judges found for the defendant in this case, each member of the Court of Appeal took the opportunity to disparage the performance of the defendant bank as trustee. Most damaging of all Leggat J said that

instrument. It remains to be seen what happens in the medium to long term as CREST is certainly only the first step to a paperless society which will have serious consequences for all market participants - trustees or otherwise.

S UMMA RY

It would appear that while some reference was made to an element of acceptable risk in the Nestle case, the combined dicta of Bartlett in the UK and Stacey v Branch in this jurisdiction, would reasonably suggest that prudent investment of trust assets by professional trustees requires them to be as risk averse as is possible. This risk averse characteristic of trustees and their activities should be evident in all facets of the treatment of the trust assets. It is certainly the approach that should be adopted in the context of CREST and its impact on private client trusts. CREST is the new electronic settlement system for UK and Irish equities. It involves the dematerialisation of share certificates and the setting of trades by means of an advanced electronic transfer system. It raises two fundamental questions for trustees: (i) If you surrender the share certificates you hold in trust and accept a computer printout of the various holdings, will you still have "control"? (ii) Do you participate fully in this new settlement system on the basis that not to do same would potentially There is a "risk" for trustees in participation but there is likely to be a significant cost in staying out. In the circumstances it would seem that certainly in the short term the most prudent approach for trustees (in private client trust matters) in this jurisdiction may be to stay out of CREST unless specifically provided for and mandated by the trust incur a serious cost which will materially affect your ability to invest the trust assets.

CONCLU S I ON

It is interesting by way of conclusion to look at the evolution of trusts and settlements down through the years. • Jane Austen's novel Sense and sensibility was published in 1811. The novel deals with the removal of the family from the ancestral home (as the property was held in trust to pass down the male line only). The family in Sense and sensibility may have become poor but they retained their social position. Settlements/trusts of real land were an accepted part of the financial structure of that time. • In contrast, in the novels of Charles Dickens set against the backdrop of the Industrial Revolution, trust/ settlements took on a different reputation. Land which was entailed and held in trust became a burden and destructive influence on the proper management of estates. Industrialisation and the rise of wealth from manufacturing produced a less stable strata of wealth who were less content to allow generation to succeed generation in the same way of life. Ask the question how are trusts views now? Society is different and the present use of trusts is consequently different from their use in the past. Wealth is earned internationally and invested internationally. Perhaps the greatest difference in the uses of a modern trust is the time scale over which the assets will be held in trust has become shorter. Not many settlors intend their assets to be held for generations to preserve a way of life or the integrity of the assets. Modern day trusts are frequently inspired by a short term desire to take advantage of having the benefit of assets in jurisdictions with favourable tax regimes, or to provide for

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