Trustees in the spotlight

  • Author : Christian Hay
  • Author : Sam Dingle
  • Date : March 2010
ABOUT THE AUTHORS: Christian Hay TEP is a Partner and Sam Dingle is an Associate at Collas Day

There was a time, not so long ago, when a trustee could happily delegate its responsibility for investing the assets of a trust fund to an investment manager, without losing much sleep as to how said investment manager performed. By the summer of 2007, the bull market experienced around the globe was approaching its zenith; at this point in time it seemed as if any investment manager worth his salt could turn a profit without stretching himself. Equity markets were on a seemingly never ending upward march and the world seemed a much happier place to do business. As we are all too painfully aware, times have changed. Equity markets have experienced a torrid time since the heady days of the early ‘noughties’, with the FTSE 100, for example, shedding some 40 per cent of its total value between mid-2007 and March 2009. Despite a tentative recovery by some financial markets since this date, beneficiaries and investors generally continue to look for someone to blame for their reduced circumstances. Increasingly trustees are finding themselves in the crosshair.

Trustee’s duties and delegation to investment managers

The primary piece of legislation in Guernsey governing the operation of trusts is the Trusts (Guernsey) Law 2007 (the Law).

The Law states that a trustee shall ‘preserve and enhance, so far as is reasonable, the value of the trust property.’ Also, section 22 (1) of the Law states that ‘a trustee shall, in the exercise of his functions, observe the utmost good faith and act en bon père de famille.’ In broad terms this means that a trustee should look after the trust assets ‘as would a good father’ i.e. in a prudent, responsible fashion.

The Law also states that a trustee may delegate the management of trust property to investment managers that the trustee reasonably considers to be qualified to do so. The law states that a trustee who makes such a delegation will not (assuming that he has not breached section 22 (1)) be liable for any loss to the trust arising from such delegation.

As we are all too painfully aware, times have changed

However, any trustees who think that they can happily delegate their responsibilities away to an investment manager and ease themselves back into their comfy chair is very much mistaken. The Guidance Notes set out in the Code of Practice for Trust Service Providers (the Code), issued by the Guernsey Financial Services Commission, state that:

‘The Commission considers that the obligation to manage the investment and custody of trust assets professionally requires the TSP… to exercise, so far as required by the duties of trustees in each case, professional oversight of any company owned by the trust [and] to consider appointing competent agents and managers, including investment managers. If investment managers are appointed, to record the agreement, instructions, investment parameters and investment benchmarks and to require and review regular reports (at least quarterly unless that is inappropriate having regard to the nature of the trust assets) on performance, including a valuation and a schedule of assets bought and sold…’

A failure to comply with the Code does not automatically make a Trust Service Provider (TSP) liable to any sanction or proceedings, but the Court may, and the Commission will, take into account any breach of the Code which is relevant to any decision that either of them has to make. As such, a prudent trustee will need to pay close attention to any persons to whom responsibility for managing a trust’s assets has been delegated and will also need to take appropriate action where necessary (as highlighted below). In particular, a breach of the Code is likely to carry weight in any decision taken by the Commission to revoke a TSP’s licence, or impose conditions, sanctions or fines.

Monitoring of investment manager

A typical example of a simple trust structure would be that of a discretionary settlement declared by a corporate trustee, which holds assets appointed by a settlor to be held on trust for the benefit of beneficiaries. It might be that the liquid assets held on trust are transferred to an underlying company, which is wholly owned by the trustees on behalf of the trust. The directors of the corporate trustee and the underlying company may well be the same people. In accordance with the terms of the trust deed, the management of such assets (which might typically comprise a selection of equities, corporate bonds etc. might then be delegated to a professional investment manager, who would charge for the service, the idea being that the investment manager, having skill and experience in managing such assets, will be better placed than the trustee to do so.

In such circumstances, the trustee will need to record any agreements which it has entered into with the investment manager, its instructions to such manager and any investment parameters and investment benchmarks it has agreed with it. The trustee must then obtain and review regular reports on the performance of the investment manager, including a valuation and a schedule of assets that have been bought and sold.

If practical, the trustee would meet regularly with the investment manager and possibly also with the settlor and/or beneficiaries of the trust. This would allow a greater understanding between the parties as to what was required of the investment manager in terms of risk, investment parameters and performance generally.


In the event that a trustee feels that an investment manager is not performing satisfactorily, such underperformance should not be allowed to carry on unchecked. It might be the case that the trustee took on his or her role from a previous provider and has effectively inherited the structure, and the professional advisors and managers associated with it, without having had a say in their appointment.

There might be other factors to consider, such as those instances where the settlor and/or certain of the beneficiaries have strong familial (or other) ties with those professional persons advising the trustees. In such cases, the settlor and/or beneficiaries might feel loyalty or allegiance to such persons, to the extent that they would rather they remain in place than be disinstructed, irrespective of their poor performance. Indeed, it might be the case that the settlor and/or certain of the beneficiaries are themselves retained by the trustees to provide investment management (or other) services, and that they themselves may be underperforming and consequently prejudicing their own interests.

In any event, no matter what has gone before, a trustee owes a fiduciary duty to execute and administer the trust only in the interests of the beneficiaries and (subject to the terms of the trust) to preserve the value of the trust property. In the event that it is felt that an investment manager is underperforming, it might be necessary for the trustees to revisit the profile and strategy of any given investment portfolio. This is particularly likely to be the case during these volatile and uncertain times.

Liability for breach of trust

As stated above, the Law states that a trustee who delegates the management of trust property to investment managers, whom the trustee reasonably considers to be reputable, competent and qualified for such purpose, will not be liable for any loss to the trust arising from such delegation, as long as they have not breached s22(1) of the Law. As such, as long as a trustee acts in the utmost good faith and ‘en bon père de famille’ in appointing an investment manager, he or she cannot be held liable to the fund for any losses suffered due to the poor performance of such investment manager. Of course, a trustee who negligently appoints an incompetent or dishonest investment manager will not be protected from liability for losses arising from the manager’s incompetence or dishonesty.

A trustee also owes a duty of care in determining the terms on which an investment manager is to act and in doing so must consider any restrictions imposed by the trust instrument. For example, a trustee who agrees to pay extravagant remuneration to an investment manager will not thereby make himself liable for all the defaults of the investment manager, but will be liable for the excess remuneration.


The fact that some commentators are tentatively predicting that the worst of the financial crisis is behind us should be no reason for a Guernsey-based TSP to take its eye off the ball as far as the management of trust assets is concerned. It is equally important that investment returns are maximised in the good times, as it is that losses are mitigated during times of uncertainty. Of course the regulatory regime applies whatever the ‘financial weather’ and it is advisable for trustees to review their files to ensure that they not only comply with the letter of the Law, but also comply with the Code, when delegating responsibility to an investment manager.


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