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POWERS OF ATTORNEY: UNDERSTANDING ITS IMPORTANCE
Vulnerability is a complex issue and one that advisers need to know how to identify and address. Since the introduction of Consumer Duty, you not only have a moral obligation to clients, but also a regulatory one.
As we advance in age, the likelihood that we will display signs of vulnerability increase. There may even come a time when we are no longer able to make sound decisions for ourselves and the term powers of attorney may become more common. If that is the case, who will look after our finances and how?
The term Power of Attorney is floated around fairly often, yet many advisers only truly understand what it means when one is required, either personally or professionally. By recommending clients put one in place, you can give them peace of mind that if they are unable to handle their finances, someone of their choosing can do it on their behalf. Leave it too late and it becomes an expensive and time-consuming problem for all involved.
What is a Power of Attorney?
A Power of Attorney (POA) is a legal document that can be put in place to allow a trusted individual to make decisions for us , if we are no longer able. It can be set up at any time – as long as the person has mental capacity – and is only activated at the point of need or in specific circumstances.
The document can prove temporarily useful if someone is hospitalised and unable to pay bills, or moves aboard and has assets they need to sell. It can also be employed on a longer-term basis, if the individual is diagnosed with dementia, for example.
When considering vulnerability, it is important to note that an official diagnosis of dementia doesn’t automatically render someone incapable. Needing more time to understand or communicate is not indicative of a loss of mental capacity. If you have a client in this situation, you should help them overcome these difficulties and make decisions for themselves.
There are three different Powers of Attorney:
- Ordinary Power of Attorney – this only covers decisions about financial affairs. The power can be restricted to certain assets and used on a temporary basis, to deal with one transaction or on an indefinite basis until it is revoked. Crucially, it is only valid whilst the individual has mental capacity. Should this change, it will come to an end. To establish an ordinary POA an individual simply confirms the attorney’s appointment in accordance with the Powers of Attorney Act 1971 and has the document witnessed. It can be used as soon as it has been signed.
- Lasting Power of Attorney (LPA) – this can be used in a similar way to an ordinary POA, but it remains valid if the individual loses mental capacity, as long as it is stated within the document that this is to be the case. There are two types, covering financial decisions and health and welfare respectively. They must be registered with the Office of the Public Guardian (OPG) at the outset. From your perspective, it is important to note that only a financial affairs LPA will cover your client’s assets and if a discretionary manager is being used, this needs to be specified in the LPA if they are to continue once it is invoked. In 2022, the Society of Trust and Estate Practitioners (STEP) said it was going to remove the express permission requirement on discretionary managers, but no formal update followed. STEP believes verbal confirmation from the OPG is sufficient, however, erring on the side of caution and including the permission may still be best.
- Enduring Power of Attorney – they were replaced by LPAs in October 2007, however, if your client put one in place prior to this date, it should still be valid. An Enduring POA only needs to be registered with the Court of Protection if the individual loses mental capacity, not from the outset. It can be used in the same way as an Ordinary POA and covers decisions about property and financial affairs. We see very few of these documents anymore, given they have not been available for 17 years.
Regardless of the type of POA in place, all attorneys have a duty to act in the donor’s best interests, even if they are a beneficiary of the estate. This means any financial decisions, including investments, must be justifiable. They must follow guidelines set out in the Mental Capacity Act 2005, which requires them to avoid conflicts of interest and take the donor’s wishes and preferences into account as much as possible.
What does a Power of Attorney do?
As advisers are most likely to come across a financial LPA, we will focus on the powers it provides.
An LPA can be used whilst a client still has mental capacity, but they can be written in such a way that they only come into force should capacity be lost. The attorney must keep accounts and ensure money belonging to their loved one is held separately from their own. It can cover decisions such as:
- Dealing with investments
- Paying a mortgage and/or bills
- Buying and selling property and arranging repairs
- Collecting pensions and benefits
- Liaising with HMRC regarding tax
There are, however, some limitations to what financial decisions an attorney can make. For example, they can’t:
- Make large financial gifts – they must be of a reasonable size and reflect past habits or expected behaviour. Larger gifts, made as part of inheritance tax planning, often require Court of Protection approval, especially if they will deplete the donor’s assets or affect future care needs
- Manage funds via a discretionary fund manager (unless specific permission is given within the LPA)
- Pay themselves a fee, unless it is authorised within the document
- Make decisions relating to health and welfare
- Use the position of attorney to benefit themselves or make a personal gain
- Purchase something from the individual at less than market value without Court of Protection approval
These limitations mean advising an attorney carries increased risk to your business, both from a compliance and a conflict-of-interest point of view. You must ensure your advice is not unduly influenced by the attorney’s personal interest as a beneficiary and that any action taken complies with the Mental Capacity Act.
To mitigate any risk, make sure any instructions from the attorney are clearly documented and that action taken is solely in the donor’s best interests. If there is any margin for doubt, it is worth asking a third party, such as another family member or solicitor, to provide independent oversight.
Your obligations
When a Power of Attorney is invoked, it is vital that you fully understand the financial situation, as well as your client’s needs and risk tolerance and advise accordingly.
It is essential you can differentiate between the interests of the donor and the attorney. For example, if your client’s normal risk profile is low, but the attorney is seeking advice on higher risk investments for inheritance tax purposes, you must carefully assess if these are appropriate.
Even if there are potential tax advantages, using higher risk investments might not align with the donor’s risk tolerance. In these situations, you must fully explain your recommendations, ensure they are understood by the attorney and document everything in full. You must ensure the donor’s financial wellbeing is not jeopardised by these transactions.
Significant departures from usual risk
Any significant departure from your client’s usual risk profile needs to be clearly justified and considered as part of the wider financial situation. You must also assess if the donor has the capacity to understand the risks and benefits of the investment. If not, you should work closely with the attorney, but still focus on what is best for your client.
Maintaining the delicate balance between client and attorney is not easy and whilst higher-risk investments could benefit both parties, they must be carefully assessed to ensure they are genuinely in the client’s best interests. If there is any doubt or potential conflict, don’t be afraid to involve the Court of Protection.
What to do next
If you are in the process of advising an attorney and would like further guidance on the compliance issues raised, don’t hesitate to contact us on (0161) 521 8641 or email: info@b-compliant.co.uk
