Trustees should be cautious about embarking on litigation and may require the approval of the Court to do so. Nonetheless they should generally pursue a good claim for losses to the trust so long as there are sufficient funds to pay for doing so. There are several targets of a potential claim: asset managers or financial advisers – and, indeed, if we are looking at claims by beneficiaries, the trustees (or former trustees) themselves.
Where a discretionary asset manager has been employed, there are at least two lines of enquiry:
- has the asset manager taken reasonable care? and
- has the asset manager complied with the trustees’ investment policy statement embodying the investment objectives?
Trustees are obliged to obtain investment advice (except in a few exceptional circumstances). Again, there are at least two potential lines of enquiry to determine if a potential claim may lie:
- the adviser is under a duty to take reasonable care in respect of their advice and if competent advice is not given then it is actionable;
- the trustees will generally have taken the initiative to provide the adviser with investment objectives. If they have not, both managers and advisers (if regulated by the FSA) are required to determine the client’s investment objectives. Even apart from regulatory issues, the adviser may have been negligent in failing to obtain such information.
Trustees and former Trustees
Trustees can get themselves into three kinds of difficulty with respect to the exercise of their investment power:
- they can make investments which are not authorised by either the trust deed or by statute;
- they can behave in a way which demonstrates infidelity or disloyalty; or
- they can make investments which are authorised but negligent.
As far as unauthorised investments are concerned, the beneficiary has a right of election, on an investment by investment basis: they may keep the good and complain about the bad. Neither honesty nor skill in making the investment is a defence. Causation, forseeability and remoteness are irrelevant to determining the liability or amount of compensation for a breach of this kind.
A disloyal or dishonest investment is treated similarly. The only improvement for the trustee is that causation now matters – but the burden of establishing want of causation is on the trustee.
Authorised but negligent investments are treated differently again. Causation, remoteness and forseeability are defences to such claims. However, the standard of care expected of a trustee in connection with investments is high.