REPORT ON
INVESTING
RESERVE FUND MONIES
for
ANCHOR
TRUST
Anthony Collins Solicitors LLP
134 Edmund Street
Birmingham
B3 2ES
Executive
Summary
B. As trustee Anchor is required to act in the best interests of its beneficiaries (i.e. the residents). It is therefore inappropriate to seek to find an arrangement that offers a Òwin winÒ solution; by doing so Anchor would not be acting in the best interests on residents.
C. In our view, on the questions, Anchor could achieve its aims if it used depreciation rather than sinking funds. But we are well aware that though this does deal with the questions, there are wider issues that would in our view mean depreciation was not an answer.
To a large extent, the above answers AnchorÕs questions. Anchor should also note: -
D. Anchor needs to consider whether, as an exempt charity, it can undertake investments that are deemed not suitable for it to carry out as a trustee of the reserve fund.
E. Where Anchor holds the reserve funds money on trust, on the face of it Anchor could be involved in carrying on regulated activity under FSMA. Carve-outs or exemptions may apply but we would need AnchorÕs finalised proposals giving a closed list of the investment and activity types involved before being able to advise conclusively. A carve-out that could be of particular interest is a carve-out for trustees; for the avoidance of doubt, this in our view coverÕs AnchorÕs existing use of the reserve funds, but could not extend to its proposals.
F. Where Anchor holds the reserve funds on trust it is not entitled to charge a commission for investing those funds. However, it may recover its reasonable and proper expenses.
1. Introduction
1.1. Anchor Trust/Guardian Management Services (ÒAnchorÓ) has asked Anthony Collins Solicitors LLP (ÒweÓ or ÒusÓ) to prepare this report to assist it in reviewing how it can best manage money held in reserve funds to maximise its performance.
1.2. In particular, Anchor has asked us to:
1.2.1. advise it on whether there are any restrictions on the way in which it can invest money held in a reserve fund;
1.2.2. advise it on whether there are any financial services regulations, in addition to those that would apply where the monies were held in individual trust funds, it would have to comply with if it were to invest the reserve fund in a diverse portfolio rather than hold the money in individual trust funds; and
1.2.3. advise it whether it could take some form of commission or charge from the interest earned through investing the reserve fund monies in this way to cover management costs/overheads of managing the fund.
1.3. We understand:
1.3.1. residents pay Anchor a service charge in accordance with the terms of their lease for capital items and major works. The lease determines the amount of money payable by way of service charge;
1.3.2. that as an exempt landlord for the purposes of section 42 Landlord and Tenant Act 1987 (the Ò1987 ActÓ), Anchor is not obliged to hold the reserve fund in an individual (for each estate) trust fund which complies with the statutory requirements of section 42;
1.3.3. the reserve fund is held within AnchorÕs own central reserves but there is a nominal ledger showing both the contributions made by the various schemes and by individual tenants;
1.3.4. Anchor would like to invest the money contained in the reserve fund in a diverse portfolio to include stocks, shares, bonds and high interest accounts;
1.3.5. Anchor is fully aware of the risks involved in speculative investment and is prepared to guarantee the reserve fund (and interest payable on the reserve fund) from its own reserves; and
1.3.6. Anchor is aware that by holding the reserve fund within AnchorÕs own central reserves it doesnÕt currently comply with the Housing CorporationÕs recommended good practice.
1.4.
We
shall now address each question in turn.
2. Investing a reserve fund
2.1.
In this
section of our report we shall consider how Anchor may use the reserve
funds.
How does Anchor hold the reserve fund?
2.2.
In order
to answer AnchorÕs first question we need to establish in what capacity Anchor
holds the residents money and, in particular, whether it is acting as a trustee
(acknowledging that Anchor is an exempt landlord for the purposes of section 42
of 1987 Act).
2.3.
If the
reserve fund money is held by Anchor as trustee for the benefit of the tenants,
Anchor would have to comply with its duties as a trustee (we shall examine
these in more detail later in this section). However, if Anchor doesnÕt hold
the money in trust it will have far more flexibility in terms of what it can do
with the reserve fund.
2.4.
It is
very important to appreciate that simply because the statutory trust created by
section 42 of the 1987 Act doesnÕt apply to Anchor, it does not automatically
follow that Anchor doesnÕt hold the reserve fund in trust.
2.5.
There
are a variety of ways in which a trust can come into existence. In general terms, a trust is created
when a person(s) has property (for example, money or land) which they hold for
and on behalf of another person(s), or for the accomplishment of some
particular purpose(s).
2.6.
There
are numerous different types of trusts but all of them can be loosely classed
into four types:
2.6.1.
express
trusts;
2.6.2.
statutory
trusts;
2.6.3.
resulting
trusts; and
2.6.4.
constructive
trusts.
2.7.
Express
Trusts: an express
trust is created intentionally by a person exercising their powers of
ownership. They are usually created
in the form of a written document (for example, in a lease). We are instructed that AnchorÕs leases
(or any other documents) do not contain provisions which state (expressly or
impliedly) that the reserve fund monies will be held on trust by Anchor.
2.8.
Statutory
Trusts: a statutory
trust is one that exists automatically when a particular condition is
triggered, defined by a particular statute (for example, section 42 of the 1987
Act). As you are aware Anchor is an exempt landlord for the purposes of section
42 of the 1987 Act and therefore this statutory trust doesnÕt apply to Anchor.
2.9.
Resulting
Trusts: a resulting
trust arises by action of law despite the absence of any express
intention. Typically, a resulting
trust will arise because an attempt to create an express trust has failed. From
the information we have it is unlikely that a resulting trust exists in these
circumstances.
2.10.
Constructive
Trusts: whether or not
the reserve funds will be held on a constructive trust will depend on the
circumstances. The principle of a constructive trust is derived from the law of
equity. In very simple terms, a constructive trust is created where it is
unconscionable or contrary to fundamental equitable principles of fairness and
justice for the owner of particular property to hold it purely for themselves
(i.e. there is some element of holding the money for the benefit of others).
2.11.
In our
view, there are good arguments to support the position that Anchor holds the
reserve funds on a constructive trust. However, because the principle is based
on equitable principles only a court could determine the point conclusively.
2.12.
The
factors in support of such an interpretation are:
2.12.1.
residents
contribute to the reserve fund in order to meet likely future expenditure for
the benefit of their property;
2.12.2.
the
fact that the residents contribute to the reserve fund for a specific purpose
could be argued to raise a legitimate expectation that the money should only be
used for that purpose and therefore is held by Anchor for the benefit of
residents. Anchor is therefore not free to spend the money how it wishes;
2.12.3.
Anchor
should imagine the position if at any moment in time the reserve fund held more
monies than would be required to meet future anticipated costs. In these
circumstances, Anchor would not be free to spend the reserve fund monies how it
wished. It would need to either maintain the reserve fund or return the monies
to leaseholders (either by a one off payment or by crediting the amount against
the service charge). Whilst this is clearly a theoretical train of thought it
is helpful to demonstrate how Anchor may use the reserve fund.
2.13.
Whilst
we are unable to conclusively state that Anchor holds the reserve fund on a
constructive trust because only a court can determine this in our view there
are good reasons (set out above) why Anchor should act as if it is a
constructive trustee.
2.14.
Of
course just because Anchor holds the monies as a constructive trustee does not
mean it is caught by the obligations set out in section 42 of the 1987 Act.
2.15.
Given
the absence of any court ruling, Anchor could Ôtake a viewÕ, but this would be
against our advice.
AnchorÕs duties as a trustee
2.16.
Where a
constructive trust exists, Anchor, as trustee, will:
2.16.1.
be the
legal owner of the reserve funds; and
2.16.2.
will be
obliged to administer and manage the reserve fund in the best interests of
residents (as the beneficiaries of the constructive trust). In practice, this
means that Anchor couldnÕt claim for itself any increase in value of the
reserve fund or any profits earned by it (we shall consider this in more detail
at paragraph 3.24)
2.17.
Under
the Trustee Act 2000, Anchor has a general power to make any kind of investment
that it could make if it were absolutely entitled to the reserve fund monies.
2.18.
In
order to discharge its duties as a trustee, Anchor would need to ensure it
obtained and considered proper advice about the way in which exercised its
power to invest money should be exercised.
2.19.
Prior
to exercising this general power, Anchor must have regard to the standard
investment criteria as set out in the Trustee Act 2000 (Annex 1).
2.20.
Any
investments and/or interest earned belong to the fund collectively and should
be retained within the fund and used to defray service charge expenditure.
2.21.
Can
Anchor, as a constructive trustee, charge for acting as trustee and investing
the reserve fund? The answer to this question is the answer to AnchorÕs third
and final question and is therefore considered in detail at section 4 of this
report.
2.22.
In
addition to its duties as a trustee Anchor should also consider the following
issues prior to investing the reserve fund;
2.22.1.
as a
landlord, Anchor will need to comply with the lease provisions setting out the
way in which service charges and reserve funds are to be administered,
accounted for and managed;
2.22.2.
as a
registered charity, Anchor will need to comply with charity law when making
investments;
2.22.3.
as a
company limited by guarantee, Anchor will need to have the power to invest
money on the terms proposed in its constitution; and
2.22.4.
as an
RSL, Anchor will should have regard to Housing Corporation guidance and best
practice.
What would the position be if Anchor didnÕt hold the reserve fund on
trust?
2.23.
If it
is found, or Anchor takes a view, that Anchor is not holding the reserve fund
monies on trust for its tenants then Anchor can, subject to the terms of the
leases, utilise the money in the same way it can utilise its own reserves.
An alternative approach
2.24.
Before
considering the next question it is worth considering two alternative
approaches.
Depreciation
2.25.
As
Anchor will be aware there are two different ways in which a landlord can cover
future costs, it can either:
2.25.1.
operate,
as Anchor does, a reserve or sinking fund where residents contribute towards
future costs; or
2.25.2.
charge
residents depreciation for current assets under the service charge. The charge to depreciation would
typically be calculated by taking the cost of the installation divided by its
estimated life.
The distinction is subtle but important. A reserve fund is all about
future costs whereas depreciation is a charge by the landlord to tenants for
historic costs.
2.26.
So long
as the terms of the leases allow, Anchor would be able to collect allowances
for depreciation instead of holding monies in a reserve fund.
2.27.
Over
the years the courts have made a number of decisions that affect service
charges. In particular, the courts
have held that in determining a reasonable service charge, it is possible to
collect an allowance for depreciation of equipment in communal use (for
example, boilers, lifts, electrical wiring etc.), which should be the cost of
installation divided by estimated lifespan[1].
2.28.
In our
view, if Anchor makes a charge for depreciation it will have absolute ownership
of the money. This is because the tenants would be reimbursing Anchor for money
it has already spent. The arguments in support of a constructive trust in these
circumstances, would be much less likely to succeed than is the case with a
reserve fund.
2.29.
Clearly,
Anchor would be responsible for ensuring the depreciated equipment or assets
are replaced. How this is done and
how the monies are utilised in the meantime would be a matter for Anchor to
determine.
2.30.
As
Anchor may be aware, it would be expected to give credit for the depreciation
amount against the actual cost of replacement, if the equipment is actually
replaced during the term of the lease.
2.31.
Anchor
will also be aware of the difficulties of operating funds on that basis (for
example, not having sufficient monies to cover all the costs of any replacement
equipment).
2.32.
If
Anchor adopted this approach in the future the next two questions cease to be
relevant save for the treatment of the reserve funds built up to date.
Loan arrangement
2.33.
We have
also considered the viability of an arrangement where Anchor as trustee of the
reserve funds loan monies to Anchor in return for an agreed advantageous rate
of return. In the event Anchor achieved a higher rate of return that it was
required to pay to the reserved fund it would be retain those monies.
2.34.
In our
view, this arrangement would not succeed because there would be a clear
conflict of interests for Anchor as trustee, and Anchor acting for itÕs own
benefit.
3. Financial Services Regulations
3.1.
In this
section of the report we shall consider the position regarding financial
service regulations:
3.1.1.
first,
in the current scenario, where Anchor receives money from tenants and holds it
as cash in deposit accounts;
3.1.2.
secondly,
if Anchor holds the reserve funds on trust and invests it, for example in
shares, and
3.1.3.
thirdly, if Anchor holds the reserve funds free
from trust.
3.2.
For the
purposes of this section we have assumed that:
3.2.1.
by
Òindividual trust fundsÓ Anchor means holding the money on statutory trusts
under section 42 of the 1987 Act; and
3.2.2.
the
leases enable Anchor to operate either a reserve fund and/or charge
depreciation.
3.3.
We have
not been asked to review any of AnchorÕs leases. The unseen lease terms could
significantly affect our advice on FSMA, for example if they state Anchor acts
as agent or trustee or otherwise affect or determine the nature of the
relationship between the parties.
We would need to review leases for the relevant schemes before giving
conclusive advice.
3.4.
Before
we address the above points, we wish to set out some general law concerning
financial regulation.
Outline of applicable financial services
regulation
3.5.
The
provision of financial services to consumers in the UK is regulated by the
Financial Services and Markets Act 2000 (FSMA) and the Consumer Credit Act
1974. Anchor could no doubt earn a
return on reserve funds by running a credit business, but from our instructions
that does not seem to figure in AnchorÕs proposals. On that basis the financial service
regulation applicable on this occasion is FSMA plus regulations and the
regulatorÕs guidance issued under it.
The regulator under FSMA is the Financial Services Authority (FSA).
3.6.
We
would be pleased to advise generally on FSMA if required. We can do so in a pragmatic way by
directing Anchor to relevant free guidance published by the FSA. Alternatively we can provide tailored
advice in a format to suit Anchor, whether by written reports or guidance, or
training. In the meantime in Annex
2 of this report we set out a high level summary to provide context for our
advice in this report.
Current
position
3.7.
We
understand that Anchor effectively receives the reserve funds as a returnable
deposit and holds the money in a deposit account with a bank or building
society. As stated above, as it
happens the deposits are likely to be held by Anchor on trust.
3.8.
Receiving
money by way of deposit is regulated activity under FSMA where the deposit is
returnable and the deposit-holderÕs activity is funded wholly or to a material
extent by capital or interest on the deposit money. We understand that Anchor uses the money
to pay for scheme repairs and maintenance and in principle the money is held to
tenantsÕ account and is returnable to them, so the reserve funds fall within
the definition of ÒdepositÓ under FSMA.
3.9.
There
is, however, an exclusion that applies where the deposit is paid by way of
advance or part payment for the provision of goods or services under a contract. In our view there is a good argument
that Anchor can rely on the exclusion because Anchor uses the amounts deposited
to provide repair and maintenance services under the terms of leases. We note, however, that we have not
reviewed the relevant leases and their terms could affect AnchorÕs ability to
rely on this exclusion, for example if the terms do not expressly provide for
the provision of repair and maintenance services by Anchor, funded using the
reserve funds.
3.10.
With
reference to Anchor putting deposits it receives into bank or building society
accounts, in our view that is not regulated activity under FSMA. Dealing with a deposit account as
principal or agent is not regulated activity under FSMA.
Future investment of reserve funds held on trust:
general position
3.11.
Based
on AnchorÕs instructions to us, on the face of it AnchorÕs proposals for the
future seem likely to be so regulated.
In a little more detail:
3.11.1.
Receiving
deposits: The position
is as for the current position.
Anchor could seek to rely on the exclusion that applies where a deposit
is received by way of advance or part payment for goods or services.
3.11.2.
Other
investment activities: The
investment Anchor proposes ranges from receiving money on deposit and putting
it into a deposit account (as above) to investing in shares. Like deposits, shares are among the
types of investment regulated under FSMA.
See FSMA schedule 2 part II for a broad outline of investment types.
3.11.3.
The
activities Anchor proposes could involve Anchor:
¤ dealing as principal – Anchor acting
in its own name to invest the funds by way of providing an investment service
in return for a fee;
¤ dealing as agent– Anchor acting in the
name of the tenant to invest the funds;
¤ arranging – for example, Anchor using
a third party who will effect the investments under AnchorÕs instructions;
¤ managing investments – Anchor managing
the investments for tenants, on a discretionary basis;
¤ establishing and operating a collective
investment scheme (CIS) – AnchorÕs proposals could give rise to a CIS if
it is structured so that the tenants can be regarded as participants in an
arrangement that will give them profit or income. More mainstream examples include unit
trusts. CIS is defined by the FSA
at http://fsahandbook.info/FSA/html/handbook/Glossary/C.
3.11.4.
All
these activities are regulated under FSMA.
See FSMA schedule 2 part I for a high level list of regulated
activities.
3.12.
In
summary AnchorÕs current arrangements are likely to be covered by an exclusion
but on the face of it the future proposals would involve regulated
activity. It may be that AnchorÕs
proposals would involve a wider range of regulated investments and
activities. Our advice is necessarily
provisional and outline at this stage, when AnchorÕs proposals are in
outline. We would be pleased to
advise in detail on what regulated activities AnchorÕs proposals involve once
the investment proposals are firmer or finalised.
Trust scenario: exclusions and exemptions
relevant to AnchorÕs proposals
3.13.
Having
established that AnchorÕs proposals for future investment would on the face of
it involve regulated activity under FSMA, we turn to consider in broad terms
what exclusions and exemptions Anchor might seek to rely on in order to avoid
the need for FSA authorisation. If
all of AnchorÕs FSMA-regulated activities fall within the exclusions or
exemptions Anchor will not need to be FSA authorised to carry on those
activities.
3.14.
We
outline the following exclusions and exemptions because they are particularly
relevant to the trust scenario. They apply in one form or another to
shares and deposits, the main types of investment Anchor has indicated an
interest in. They also cover the
role of trustee.
Trust scenario: trustee exclusion
3.15.
A
trustee to carry on certain regulated activities where, in broad terms, the
trustee is acting in discharge of its obligations in the office of trustee or
for a beneficiary under the trust.
The exemption is a detailed exemption and we suggest Anchor should not
rely on it without obtaining further advice based on more detailed
instructions. The exemption is
subject to general conditions, which are that the trustee must not hold itself
out as providing services that consist of regulated activities under FSMA, and
must not be remunerated for the investment activity in addition to any
remuneration it receives for acting as trustee. So this exemption does permit charging,
but only for Anchor providing the trustee and other services it currently
provides and not for any investment service.
3.16.
This
exemption is only available for certain regulated activities. It does not apply to the activity of
receiving deposits of money. We can
advise further on how it applies to different investments and activities if
required.
3.17.
AnchorÕs
ability to rely on this exemption could be affected by the terms of leases and
particularly the terms of trust under leases. For example if the scope of AnchorÕs
obligations as trustee are stated in very narrow term it could prove difficult
to argue that AnchorÕs FSMA-regulated activities fall within the scope of its
trustee obligations.
Trust scenario: Appointed Representative
exemption
3.18.
One
valuable route to exemption to bear in mind is for a non-FSA authorised firm to
become the agent (Appointed Representative) of an authorised firm. This exemption can help where narrower
or less flexible exclusions/exemptions fall short. Whilst Anchor holds reserve funds on
trust in a bank/building society account the exemption is not needed but it
could become an important part of AnchorÕs strategy if Anchor decides to deal
in a wider range of investments.
Trust scenario: possible exclusions or
exemptions regarding deposits
3.19.
If
required Anchor could potentially be able to carry on regulated activity in
relation to deposits by becoming an Appointed Representative for the
purpose. The only other exclusions
that are available are not applicable because they only apply to certain public
bodies, international banks and lenders referred to in FSMA legislation (Anchor
is not in the list and nor are RSLs generally), solicitors, payments between
certain close relatives or group companies, FSA-authorised persons, persons who
receive sums for debt securities and non-UK deposit takers who operate in the
UK via the internet.
Trust scenario: possible exclusions or
exemptions regarding shares
3.20.
Apart
from the general trustee exclusion and Appointed Representative exemption
referred to above, in our initial review for the purposes of this report we
have not identified any other exclusions or exemptions that apply to shares and
could be relevant to Anchor. There
is a wide-ranging exclusion for investment in shares carried on by a person
whose main business is the provision of goods and services, but it does not
apply where the customer (as in AnchorÕs case) is an individual. We have not conducted an exhaustive
review at this stage but would be pleased to do so if Anchor decides that in
principle it will use the reserved funds to invest in shares.
Trust scenario: other possible exclusions or
exemptions
3.21.
We note
AnchorÕs proposals could involve other types of regulated investment or
activity besides deposits and shares.
There is a wide range of investments and activities and an even larger
number of exclusions and exemptions that apply, depending on the investment or
activity concerned, so it would not be cost effective for us to survey them all
at this stage. We would be pleased
to advise conclusively and in detail on what exclusions/exemptions are
available once AnchorÕs investment proposals are finalised.
Trust scenario: exemptions for RSLs
3.22.
None of
the existing exclusions or exemptions for RSLs are relevant to AnchorÕs
proposals. They only apply to
insurance and secured loan activity.
Trust scenario: restrictions on investment
activities
3.23.
In the
trust scenario if Anchor wants to invest the reserve funds without being FSA
authorised it will need to ensure all its investments and activities fit within
carve-outs or exemptions under FSMA.
We confirm on the basis set out above that there is a good argument that
AnchorÕs current activity of taking deposits fits within exclusions. We will need to advise on the position
for other types of investment on a case-by-case basis.
Trust scenario: AnchorÕs share of income and
accounting to residents for income
3.24.
In the
trust scenario this is primarily a trust law issue not a financial services
issue. Income accrued by investment
of funds held under trust will be held by trustees on the trusts. The basic position is that all income
will be held for residents, none will be held by Anchor on its own account
unless, exceptionally, trust law and the express terms of the trust allow. Financial services law does concern
itself with any remuneration or commission Anchor may receive (see below).
Trust scenario: charges
3.25.
In
general terms, the carve-outs and exemptions under FSMA will only apply if
Anchor provides the financial service without remuneration. For example, in the case of the trustee
exclusion outlined above, Anchor could only rely on the carve-out if it is not
separately remunerated for the financial activities it carries on.
3.26.
Trust
law is also relevant. The general
position is that trustees can only charge for their services (as distinct from
financial services they provide in addition) if, exceptionally, trust law and
the express terms of the trust allow.
Trust scenario: commission
3.27.
Commission
would become relevant if Anchor established itself as a broker for tenants who
contribute reserve funds. In the
context of the trust scenario it is difficult to see how Anchor could farm
commissions in its capacity as trustee.
3.28.
Trust
law is again relevant. Any
commission received by Anchor in its capacity as trustee of the funds would on
the face of it be income to the trust.
Non-trust money: Anchor solely entitled to
reserve funds
3.29.
In
broad terms FSMA regulates people who are providing financial services for
consumers, for a fee. In this
scenario Anchor would be in the position of investing its own money on its own
behalf and without offering any service to third parties and in broad terms
that is not regulated activity under FSMA.
3.30.
In this
scenario we assume Anchor would not be receiving money on deposit. Anchor would receive payment by way of
reimbursement for depreciation it has suffered, on terms that the money is
AnchorÕs in law and equity. The
money would not be returnable to the tenant so it would not constitute a
deposit.
3.31.
In fact
FSMA does regulate some investment activities even when the investor is acting
on his own behalf using his own money, and Anchor would need to fit within some
exclusions or become FSA authorised.
The exclusions are quite wide, however, and it is likely Anchor could
fit within them. In broad terms:
3.31.1.
Anchor
would be prohibited from holding itself out as being in the business of dealing
in certain investments, and could not regularly solicit members of the public
to deal; and
3.31.2.
Anchor
would have to use FSA-authorised persons to execute deals in certain
investments.
3.32.
The
following summarises the position for Anchor in the scenario where it invests
its own money, free from trust.
3.32.1.
General
position: In this scenario Anchor would not be
providing any financial service for tenants who contribute into the reserve
funds, so FSMA would not apply to Anchor as a financial services provider. AnchorÕs position would be based on
exclusions/exemptions. For example,
Anchor would need to avoid Ôholding outÕ (as described above). If Anchor wanted to deal in
contractually-based investments it would need to use an authorised person.
3.32.2.
Charges:
Anchor would have no grounds for imposing any charges on tenants for
investing the money. Anchor would
be acting on its own account and would have no grounds for imposing charges.
3.32.3.
Commission: It is difficult to see how arrangements
giving rise to commission could form part of the scheme. Anchor would have no reason to make
introductions or referrals of relevant tenants to any financial services
provider. Tenants would not be
involved because Anchor would be dealing with its own money.
3.33.
If all
AnchorÕs activities fit within exclusions or exemptions Anchor will avoid the
need for FSA authorisation. Any
stockbroker, independent financial adviser or insurance broker would be subject
to FSMA as providers and in dealing with such third parties Anchor would enjoy
the benefits FSMA provides for consumers.
4. Charging Commission for Managing Investments
4.1.
In the
final section of this report we consider whether Anchor can charge for
investing the reserve funds.
Position where a trust exists
4.2.
Where a
constructive trust exists, Anchor will have to act in accordance with the
duties imposed on them as a trustee.
4.3.
In
general terms, trustees cannot receive any benefit or payment for carrying out
their duties as a trustee unless they have express authority to do so. Clearly, in the case of a constructive
trust such an express authority is very unlikely to exist. However, AnchorÕs existing duties as a
trustee are for the most part the same as general management, and therefore we
would expect adequate wording to be in the leases to cover those charges. It is only if Anchor chooses to follow
its proposals does this become an issue.
4.4.
This
general prohibition on trustees receiving benefits does not apply to
reimbursing trustees for reasonable out of pocket expenses for trustees. Expenses are refunds by a trust of
payments that a trustee has needed to meet personally in order to carry out
trustee duties (Trustees Act 2000).
4.5.
Legitimate
expenses would include reasonable travelling costs incurred whilst on trust
business or the cost of postage or telephone calls whilst on trust
business. Expenses requiring an
express authority would include payment for specialist skills and services.
4.6.
Even if
the leases contain a power enabling Anchor to be paid for acting as trustee,
any payments should be proportionate to the needs of the trust and Anchor
should avoid creating a perception that its interests are put ahead of the
interests of the beneficiaries (i.e. the residents).
Position where no trust exists
4.7.
If no
trust is found to exist then Anchor two considerations apply:
4.8.
First,
as a matter of contract Anchor can only charge residents for a service that
they have agreed to pay for. We understand that there is no such agreement.
4.9.
Secondly,
whilst Anchor will be the legal owner of the reserve funds and entitled to use
the monies it will be required to fulfil its obligations under its various
leases (we have not been asked to comment on AnchorÕs obligations under its
leases and ha therefore not reviewed any of its leases).
Anthony
Collins Solicitors LLP
June
2007
30670.0007
Annex 1
1.
In exercising any power of investment, whether arising
under this Part or otherwise, a trustee must have regard to the standard
investment criteria.
2.
A trustee must from time to time review the investments
of the trust and consider whether, having regard to the standard investment
criteria, they should be varied.
3.
The standard investment criteria, in relation to a trust,
are:
3.1
the
suitability to the trust of investments of the same kind as any particular
investment proposed to be made or retained and of that particular investment as
an investment of that kind, and
3.2
the
need for diversification of investments of the trust, in so far as is
appropriate to the circumstances of the trust.
ANNEX 2
Outline of financial services regulation under FSMA
General prohibitions
1 Unless Anchor is FSA-authorised or exempt
FSMA prohibits it from carrying on:
1.2 a wide range of investment activities that
are detailed under FSMA; and
1.3
financial
promotion.
2 If Anchor wants to carry on prohibited
investment activities it will need either to seek FSA authorisation or fit
within exclusions (carve outs) or exemptions that are available under FSMA.
Enforcement
3 Breaching either of the prohibitions is a
criminal offence. The penalties are
up to 6 months in prison and/or a fine up to the statutory maximum (on summary
conviction) or up to two years in prison and/or a fine (on conviction on
indictment). The statutory maximum
is currently £5,000. Authorisation
is on a per-activity basis so even a FSA-authorised entity commits an offence
if it undertakes activity outside its authorisation. There are other criminal offences under
FSMA that could apply depending on what investments or activities Anchor wants
to carry on.
4 The FSA has other enforcement powers
including withdrawal of authorisation, information-gathering and investigatory
powers, and power to discipline authorised firms by public censure. See
http://fsahandbook.info/FSA/html/handbook/ENF
for a short list of enforcement measures.
The disciplinary power includes the ability for the FSA to impose fines
for breach of regulations by firms or key staff in the course of authorised
activity. The FSA is known to be
eager to impose large fines to make an example of firms and staff.
Authorisation
Route
5 The cost of FSA authorisation and on-going
compliance is potentially quite high.
Anchor can get an indication of the initial fees by using the fee
calculator at http://feecalc.fsa.gov.uk/FeeCalc.asp?fy=2007_2008&sc=Final.
6 Anchor would need to meet certain conditions
to obtain authorisation, which include Anchor having ÔfitÕ (ie suitable)
managers and systems to the required standards, pay annual fees to the FSA and
perhaps the Financial Ombudsman Service and comply with regulatory
inspections. Annual fees can run to
tens of thousands of pounds.
Exclusion/exemption
route, and FSA guidance
7 FSMA works by defining a broad swathe of
investment activities that are prohibited, then identifying narrow exclusions
or carve outs. If Anchor can fit
its activities within exclusions and carve outs it will not carry on regulated
activity and so will not need to be FSA authorised.
8 At this stage we suggest Anchor aim to fit
within exclusions/exemptions, and consider the pros and cons of authorisation
only if necessary. Likewise, in
this report where we advise that AnchorÕs proposals could involve regulated
investment activities we turn briefly to outline potentially relevant
exclusions and exemptions. This
report is intended only to give a flavour of how Anchor might use exclusions/exemptions,
and to indicate ones it may be worth looking at in detail later on. Which exclusions/ exemptions are
relevant depends on which regulated activities Anchor wants to carry on, so we
will need final proposals from Anchor before we can advise conclusively.
9 The FSA can give informal written guidance
about exclusions/exemptions on request.
Informal guidance does not amount to formal sign off or even ÔcomfortÕ
and the official line is that it cannot be relied on. The actual value of such letters is
unascertainable but realistically if the FSA approves
exclusions/exemptions-based proposals it would need a good reason to disown the
guidance later. The risks for the
FSA include judicial review or reputational damage.
10 It would be rash to bank on relying on
informal guidance, but if Anchor chooses the exemption/ exclusion route we
would recommend seeking a guidance letter on the basis it may have some
value. To maximise the value of
informal guidance Anchor could seek a comprehensive ÔapprovalÕ from the FSA
(based on a comprehensive summary of the proposals). Anchor would also need to pick up and
implement relevant changes in the law, and use monitoring/management systems to
ensure staff stay within the exclusions/exemptions.