But when an attorney starts making decisions on someone’s behalf, how does this affect the advice relationship?
Attorneys acting for someone else – the donor – have to observe specific duties and responsibilities that are potentially set out in the power of attorney or in law, says Dave Robinson, a director at Centurion Chartered Financial Planners.
“Attorneys can’t just deal with somebody else’s money as they would deal with their own. They have to take into account what the instructions given to them are and what the law says about how they should do things.”
For example, attorneys appointed under a lasting power of attorney must consider the Mental Capacity Act Code of Practice when they act or make decisions on the donor’s behalf.
Once it has been established there is a power of attorney, an adviser should ask to see the document itself, says Alice Martin, of counsel at law firm Charles Russell Speechlys.
“You will be able to tell from looking at the lasting power of attorney if it has been registered. The first, important thing to know is that if it is not registered, it is not valid.
“This is unlike the old enduring powers of attorney, which could be valid the second they were signed without being registered.”
The next important detail, says Martin, is to ascertain who the attorney or attorneys are, and how they are appointed if there is more than one.
“Are they appointed jointly, which means that they must act unanimously, so you've got to report to all of them – you've got to get all of them to sign off and agree on everything?
“Or are they appointed jointly and severally, which means either one or any one of them can make decisions, so they can act independently?
“That should be clear from the document itself, so you're going to need to read the power of attorney.”
Robinson at Centurion adds an attorney will likely be a professional, such as a solicitor, or a friend or family member of the donor. “Dealing with a solicitor is very different to dealing with a family member,” says Robinson, where the latter may be affected by the donor’s lack of mental capacity.
David Gruenstein, a senior adviser at The Private Office, also notes the importance of supporting the attorney. “They could just be a lay person [and the donor] might have a more complicated financial situation than the attorney.”
Setting expectations
Where attorneys can act independently, Martin at Charles Russell Speechlys suggests it would be wise, although not legally necessary, for an adviser to have a written understanding on how decisions will be made; for example, if there is an agreement among attorneys that one of them will be the primary contact, or whether the adviser will correspond with all of them.
“I would recommend that a discussion is had with all attorneys, even if they're appointed jointly and severally, so the financial adviser has an understanding and that is recorded, as to who they will correspond with and take instructions.”
Another detail Martin says advisers should pay attention to is whether attorneys have permission to make decisions while donors still have mental capacity to make their own financial decisions.
“Many people will put in place a power of attorney and they want to keep it very flexible, so you might have a married couple who appoint a power of attorney to each other concurrently. So it doesn't require that either of them have lost capacity.
“Where that's the case, I strongly recommend that financial advisers – once they're aware of that, and they've seen the power of attorney – that they have a discussion, and it is recorded in writing, that their expectation is they will take instructions only from the donor while they have capacity.
“But do they want the attorney copied? And if the attorney were to contact the financial adviser with any instructions or requests, how would that be handled?”
Delegation and discretionary investment management
It is also important to be aware of any restrictions or limitations, which should be detailed in the power of attorney, Martin adds.
“One of the most important ones, which can get very easily overlooked, is that granting a power of attorney does not permit the attorney to delegate discretionary investment management, unless it specifically has wording in it that says you can.”
There are also restrictions on gifts during lifetime. “Small, regular gifts are generally permissible if they're part of a previous pattern for birthdays and Christmases, for example, but not significant gifts,” says Martin.
An attorney cannot usually make substantial gifts that often form part of estate planning strategies without approval by the Office of the Public Guardian or the relevant court.
The grey areas of mental capacity
A donor must have mental capacity when they make an LPA.
Something to consider is talking to clients before they potentially lose capacity, says Edward Grant, a director at support services business Technical Connection. “Agree upfront with your client, before they lose capacity, how they would like you to act, and for you to meet the attorney in advance,” he suggests.
Martin at Charles Russell Speechlys warns of “tricky grey areas” when there is a capacity issue that is in the early stages, such as someone with early stage Alzheimer’s.
“How is the financial adviser going to ensure they're taking instructions from the right person? Because they would be potentially at risk if they are taking instructions from someone who's lost capacity.
“I think having a clear dialogue between the donor, the attorney and the financial adviser is very important here. So where things are in a slightly grey area, the financial adviser might agree that they will communicate with both the donor and attorneys, or emails go to both or they're both in phone calls.
“And the financial adviser should be alive to requests or decisions which ring alarm bells and give them cause for concern about whether the donor actually has capacity.”
But someone making an unwise decision does not mean they lack capacity, says Martin.
“So if [the donor] says, ‘I've decided I'm going to buy a pink sports car because I've always wanted a pink sports car, and yes, it might cost £100,000 and that might represent 10 per cent of my net worth, but this is really what I want,’ it might be an unwise decision but that doesn't mean he doesn’t have capacity to make that decision.
“However, if [the donor] has forgotten that last week he bought a blue sports car and there’s already one in the garage, then clearly that would ring alarm bells, and you’d think, ‘You had forgotten this important information that you've already got a sports car, and how much it cost, and how much money you've got left.’”
While Martin says the responsibility in assessing capacity in the first instance falls on the attorney, as well as the responsibility of when they should get involved, she adds that an adviser has a crucial role to play.
“The professional obligations that the financial adviser has, I would certainly think would extend to being alive to these issues when they arise. So [this means] asking questions and having the contact details of attorneys and having that dialogue open.”
Safeguarding donors
If an attorney is potentially not acting in the donor’s best interest, concerns should be reported to the Office of the Public Guardian.
Robinson at Centurion says advisers who work with attorneys should be prepared to “stand up to people”, recounting two instances where he has reported attorneys due to concerns about how they were managing the donor’s finances.
“Understand that although the attorney might be giving you instructions, you’ve also got an ultimate client, and your duty is to both of those two people.”
Robinson adds: “If you’re going to get involved with attorneys, you need to build your knowledge of the regime that applies. There’s more to this than giving financial advice.”
Chloe Cheung is a features writer at FTAdviser
