“1 + 1 = 2” – Why this simple equation may have impact for fiduciaries

Facts

The facts of the case are relatively straightforward. It concerns PW, who lost capacity as an adult due to a hospital acquired infection. She won a significant damages award in a claim against the treating healthcare trust.

As a result, Irwin Mitchell Trust Corporation (IMTC) was appointed as property and affairs deputy by the court. Shortly afterwards, IMTC appointed Irwin Mitchell Asset Management (IMAM) as investment manager for a large part of PW’s damages award. Both IMTC and IMAM were part of the same corporate structure under Irwin Mitchell Holdings Ltd.

Later, IMTC made an application to the Court of Protection to execute a statutory will for PW. As is usual, the official solicitor was appointed to act for PW. In the course of the application, the official solicitor became aware of the appointment of IMAM as investment manager and IMTC was subsequently ordered by the court to make an application to seek retrospective authority to instruct IMAM.

Legal position

The relationship between a deputy and the person for whom the deputy is appointed is a fiduciary one. The courts have previously found that a fiduciary (in this case the deputy) isn't entitled to make a profit; he's not allowed to put himself in a position where his own interest and his fiduciary duty conflict. Human nature being what it is, there's a danger that a fiduciary will be swayed by interest rather than by duty.

As a consequence, transactions entered into where the fiduciary's duty conflicts with their own interests are capable of being set aside as of right by their principal, which in this case would be PW.

Case

In this case the two questions for Her Honour Judge Hilder on hearing the case were:

1. Would a reasonable person looking at the relevant facts and circumstances of this particular case think there was a real sensible possibility of conflict?
2. If so, whether the court should now authorise the appointment of IMAM, with retrospective effect?

Both the official solicitor and the public guardian contended that the court should not ratify IMTC’s decision to appoint IMAM.

IMTC’s position was that there was no real sensible possibility of conflict because any potential conflict had been effectively extinguished by the procedures it adopted in appointing IMAM. This included operating a panel of investment advisers, with three or four firms on the panel being selected to take part in a "beauty parade". If a family member was involved, their opinion would be taken into account. IMAM would only be included in the beauty parade if there was no objection from the family member.  Proposals were put forward by each of the beauty parade firms, which were scored by IMTC. IMTC pointed out that only 37% of IMTC’s clients had funds invested with IMAM and 45% had funds invested with another provider. IMTC also relied on the fact it had previously received guidance from the public guardian that the beauty parade process would be enough to mitigate the risk of a conflict, which had led it to implement the policy.

The Judge was not persuaded by IMTC.

She found that the existence of a conflict of interest was basic and unavoidable. First, IMTC had a fiduciary duty. Second, IMTC was better off if IMAM was appointed. There was therefore a conflict of interest. One plus one equals two.

The Judge concluded that the process adopted by IMTC could not remove the financial benefit it gained. IMTC’s argument that PW still got the best financial adviser so there was no conflict of interest could not be sustained as it was laden with value judgments, which were susceptible to the conflict between self-interest and fiduciary duty about which the court had previously warned. The family members of PW could offer no ratification to IMTC’s decision as only the court could ratify for PW in these circumstances.

Having found a conflict of interest, HHJ Hilder was not satisfied that there was sufficient evidence to determine whether the appointment of IMAM for PW should now be ratified.

Discussion

The full ramifications of this decision are still unclear, particuarly with whether existing appointments of linked investment managers will ever be ratified by the court, and whether fees already paid to these linked investment managers will have to be refunded.

Part of IMTC’s submission to the court was that it was certainly not alone in using a linked financial adviser or investment manager. The Judge said she was aware that the decision in respect of PW may have wider repercussions. IMAM alone has more than £1 billion under management. By the time the case was heard, IMTC had already stopped appointing IMAM in the wake of new guidance from the OPG and awaiting the outcome of the case. 

It's not just financial advisers and investment managers who may be affected. Deputies, attorneys, trustees and executors frequently instruct linked solicitors to manage or administer assets under their control. HHJ Hilder was sitting as the Senior Judge in the Court of Protection when hearing this case and there is a question as to what extent her decision will bind matters arising outside of the Court of Protection’s jurisdiction. Further,  the decision does not sit neatly with Re ACC [2020] EWCOP 9, in which the Court of Protection set out the required approach to addressing conflicts of interest where a deputy appoints its own firm for advice or conducting litigation, plainly acknowledging that such arrangements could be within the best interests of the person lacking capacity.

What do I need to do next?

Deputies and others will need to consider their existing arrangements carefully and watch and wait for the full consequences to emerge once the court has ruled in relation to the ratification question.