Trusts exist in a variety of forms. A common feature of all trusts is an obligation, relating exclusively to property and based upon equity, that one person performs or forbears to do some act.

The due performance of this obligation which is laid at the door of the trustee indicates that the trustee must have some control over the trust property. Without a measure of control the trustee would be unable to deal with the property for the benefit of the beneficiaries. Whatever the nature of the trust this element of the control is of fundamental importance. Underhill and Hayton Law of Trusts and Trustees 15th Edition, p 27 states '... some scintilla of control is absolutely necessary to the existence of a trust ...'. This applies to Settled Land Act trustees where, even though the settled land is not vested in them, they may receive capital money in trust for persons entitled under the settlement.

This basic rule persists despite the attempts of many settlors to retain control themselves. The 'sham' trust doctrine arose to deny arrangements which would like to be regarded as a trust but where the so-called settlor does not give this element of control to the trustee, or where the property is not transferred to the trustees to allow them to exercise control over it.

This is control enough to constitute the trust. But the meagre power that this diminished control allows is concerned with the status of the arrangements - a trust or not a trust. It does not automatically follow through to diminish the size of the trustee's responsibilities.

This rule on control also applies where the trusts are used as a commercial security device or as a device to segregate assets from other persons, in trading trusts, employee trusts, pension funds and unit trusts. This latter type, unit trusts, is unique in many ways. The management of unit trusts has recently been the object of scrutiny even though the trust element in this form of investment has not yet been closely analysed to determine the ultimate responsibility for the trust assets.

Unit trusts are distinct from investment trusts. An investment trust is not a trust at all but a company in which shares are bought and sold in the normal way. The shareholders of an investment company have neither legal nor beneficial ownership in that company's investments. The participants (to use a neutral term) or unitholders in a unit trust are collectively the equitable owners of the investments made by the unit trusts' managers. They invest on behalf of the unitholders. The investors, the unitholders, are the beneficiaries. A unitholder may sell a holding of units to the managers for a price which directly corresponds to the holdings share of the total value of investments. This price has nothing to do with the demand for units in that collective investment scheme.

A unit trust is set up according to the terms of the trust deed by the managers of the unit trust, with the initial subscribers comprising the settlor. This role, as is normal, drops away and the role of the manager becomes all important. The manager, appointed by the trust deed to manage the investments and to promote the trust, finds investors and buys the shares or whatever other type of investment the unit trust has been set up to invest in.

It is clear that unitholders are more concerned with a unit trust as an investment vehicle under control of the managers than as a trust where the funds are under the control of a trustee. This is borne out by the whole conduct of the unit trust industry where the fund managers dominate and where their investment capabilities dictate the unit trust's performance and reputation.

The recent disaster which overcame a well known firm of unit trust's managers need not be repeated. It is, however, worth commenting that many of the enquiries by the financial press into how the investment houses monitor their fund managers has produced some interesting comments. The disaster was caused by one fund manager who unlawfully invested an excessive proportion of a unit trust's assets in unquoted companies. This was contrary to all regulatory requirements and the trust deed.

In the inevitable surveys of the practices adopted by fund managers the biggest investment houses explained their safeguards, and all placed considerable emphasis on their own in-house controls and the role of their compliance officer of fulfilling the terms of the Financial Services Act. Some have adopted computer controls used principally to check the value of the investments and the price of the units, the checking of share prices and other procedures which are as much for commercial management purposes as for the protection of the unitholders.

The trustees are not forgotten. Their role seems to be remotely supervisory and concerned with meeting the mechanical requirements of the fund. Frequently the trustee acts as a custodian of the securities of the unit trust and holds investors money and investments purchased. To that extent the trustee follows the instructions given by the manager. Where the unit trust is an authorised unit trust and open to public subscription the duties of the trustee go further. The trustee must take reasonable care to ensure that the manager acts within its powers. The trustee is liable, under s84 of the Financial Services Act 1986, for negligent breach of trust. Section 787 of the Act requires that the manager and the trustee should be companies incorporated under the rules of an EU member and should be independent of each other.

It appears, from the recent reviews, that the duties of the trustee in the current practice are fulfilled by quarterly or occasional meetings with the managers in addition to the custodial functions. Certainly, by requiring the trustee and the managers to be separate companies some of the dangers encountered by trading trusts, which are often under the control of trustee/managers, are avoided. The concept of a trust is versatile enough to accommodate this. If the control by the trustees is the minimum to allow a trust to pass the test that a trust is properly set up, then this scintilla of control is all that is required to allow the trust to be properly managed. Or is it? The question which arises, whether the degree and level of responsibility of trustees can also be equally reduced, is open to debate. A minimal degree of control is not simply translated into a minimum of responsibility. By requiring the managers and the trustees to be separate companies the law clearly envisages the separation of responsibility. It is doubtful whether the responsibility of the trustee is fulfilled by merely being a custodian of the investments and fulfilling a mere bookkeeping and registrar-type of operation. When the managers are well controlled under the provisions of Financial Services Act with appropriate internal controls, the separate responsibilities of the trustees can be overlooked. Fulfilling the compliance programme by the managers could be thought to be all that is required. The strength of the management controls and the legislative measures brought in could be used to justify the argument that the trustees' responsibility can be safely delegated and that all the trustee has to do is to delegate to a reputable manager and then conduct quarterly reviews of the situation. In most cases this is adequate or has been until recently. The trust is a very versatile instrument, but versatility can work in both ways. On one hand a minimum of control and delegated responsibility may be possible but on the other hand a court may easily assert a duty that the trustees should take a more positive role in making sure that the prudence required in the investment of trust assets is exercised by the managers. We might ignore this possibility at our peril.

Article by John Goldsworth

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