There is no doubt more and more advisers are using a discretionary fund manager (DFM) as a solution for their clients, whether on- or off-platform.
One of the questions we are being asked a lot by advisers is whether we have any guidance on the use of a DFM where the client has a power of attorney (POA) in place.
It's an issue that's also made its way into the trade press, with recent articles highlighting the need to exercise caution when arranging discretionary investment management where a POA is in place.
Based on guidance we received from the Office of the Public Guardian (OPG) in 2017, we were of the view that advisers could recommend the use of a DFM without requiring any specific clause within the POA to this effect.
So what’s changed?
Since we last looked at this issue, the OPG has amended its guidance to suggest that a specific POA clause will now be needed in order for discretionary management to be provided.
The guidance states attorneys should “not delegate decisions to an investment fund manager unless you have permission within the lasting power of attorney (LPA), the enduring power of attorney or court order."
It adds: "You can take advice, but if you want them to make decisions, you may need to apply to the Court of Protection."
The guidance notes on making and registering a lasting power of attorney now include the following statement:
“The only circumstances in which you must write an instruction is in a financial LPA if: you have investments managed by a bank and want that to continue, or you want to allow your attorney to let a bank manage your investments.
"In these cases, you should use the wording like this:
'My attorney(s) may transfer my investments into a discretionary management scheme. Or if I already had investments in a discretionary management scheme before I lost the capacity to make financial decisions, I want the scheme to continue.
'I understand in both cases that managers of the scheme will make investment decisions and my investments will be held in their names or the names of their nominees'.”
The guidance goes on to say that there's no guarantee a bank will accept this wording, and that people must ask their bank to confirm in writing that they’ll accept the wording before they register the LPA.
The OPG add this will minimise any difficulties in using the LPA if the individual loses mental capacity, before reminding people of the option to seek legal advice.
What does this mean for advisers?
The OPG guidance is very much directed towards discretionary fund management by high street banks.
Where an attorney first seeks advice from a regulated financial adviser who subsequently recommends a DFM service, our view remains that the OPG wording should not be required in the LPA document.
But there is a continuing debate among the legal profession and DFM firms whether the wording is required in all cases. It's entirely possible a recommended DFM will refuse to accept LPA instructions unless the document contains the appropriate wording.
The Society of Trust and Estate Practitioners was bringing a legal case in a bid to bring some clarity to the matter, but it appears this case has either been suspended or outright abandoned.
So a proper resolution looks unlikely in the near future. And until we get this clarity, the issue will continue to present challenges to advice firms.
In the meantime, we recommend firms who are involved in giving advice where POAs are in place to make sure that a clear discretionary management statement is included in any new LPA document.
Where an existing LPA document is presented, we recommend contacting the nominated DFM to confirm they will continue to act under POA instruction.
If the donor still has mental capacity, the existing POA document should be amended to include the DFM statement.
It may be the case that a DFM refuses to continue with an existing POA document and the donor no longer has mental capacity.
In this situation attorneys may need to apply to the Court of Protection for retrospective approval of previous investment activity and approval for continuing or future DFM services.