REPORT ON

 

INVESTING RESERVE FUND MONIES

 

for

 

ANCHOR TRUST

 

 

 

 

 

 

 

 

 

Anthony Collins Solicitors LLP

134 Edmund Street

Birmingham

B3 2ES


 

Executive Summary

 

A.    There are strong arguments in support of the position that Anchor holds the reserve funds on trust for its residents.

 

B.    As trustee Anchor is required to act in the best interests of its beneficiaries (i.e. the residents). It is therefore inappropriate to seek to find an arrangement that offers a Òwin winÒ solution; by doing so Anchor would not be acting in the best interests on residents.

 

C.    In our view, on the questions, Anchor could achieve its aims if it used depreciation rather than sinking funds.  But we are well aware that though this does deal with the questions, there are wider issues that would in our view mean depreciation was not an answer.

 

To a large extent, the above answers AnchorÕs questions.  Anchor should also note: -

 

D.    Anchor needs to consider whether, as an exempt charity, it can undertake investments that are deemed not suitable for it to carry out as a trustee of the reserve fund.

 

E.     Where Anchor holds the reserve funds money on trust, on the face of it Anchor could be involved in carrying on regulated activity under FSMA.  Carve-outs or exemptions may apply but we would need AnchorÕs finalised proposals giving a closed list of the investment and activity types involved before being able to advise conclusively.  A carve-out that could be of particular interest is a carve-out for trustees; for the avoidance of doubt, this in our view coverÕs AnchorÕs existing use of the reserve funds, but could not extend to its proposals.

 

F.     Where Anchor holds the reserve funds on trust it is not entitled to charge a commission for investing those funds. However, it may recover its reasonable and proper expenses.

 


1.   Introduction

 

1.1.                  Anchor Trust/Guardian Management Services  (ÒAnchorÓ) has asked Anthony Collins Solicitors LLP (ÒweÓ or ÒusÓ) to prepare this report to assist it in reviewing how it can best manage money held in reserve funds to maximise its performance.

 

1.2.                  In particular, Anchor has asked us to:

 

1.2.1.           advise it on whether there are any restrictions on the way in which it can invest money held in a reserve fund;

 

1.2.2.           advise it on whether there are any financial services regulations, in addition to those that would apply where the monies were held in individual trust funds, it would have to comply with if it were to invest the reserve fund in a diverse portfolio rather than hold the money in individual trust funds; and

 

1.2.3.           advise it whether it could take some form of commission or charge from the interest earned through investing the reserve fund monies in this way to cover management costs/overheads of managing the fund.

 

1.3.                  We understand:

 

1.3.1.           residents pay Anchor a service charge in accordance with the terms of their lease for capital items and major works.  The lease determines the amount of money payable by way of service charge;

 

1.3.2.           that as an exempt landlord for the purposes of section 42 Landlord and Tenant Act 1987 (the Ò1987 ActÓ), Anchor is not obliged to hold the reserve fund in an individual (for each estate) trust fund which complies with the statutory  requirements of section 42;

 

1.3.3.           the reserve fund is held within AnchorÕs own central reserves but there is a nominal ledger showing both the contributions made by the various schemes and by individual tenants;

 

1.3.4.           Anchor would like to invest the money contained in the reserve fund in a diverse portfolio to include stocks, shares, bonds and high interest accounts;

 

1.3.5.           Anchor is fully aware of the risks involved in speculative investment and is prepared to guarantee the reserve fund (and interest payable on the reserve fund) from its own reserves; and

 

1.3.6.           Anchor is aware that by holding the reserve fund within AnchorÕs own central reserves it doesnÕt currently comply with the Housing CorporationÕs recommended good practice. 

 

1.4.                  We shall now address each question in turn.

 

2.     Investing a reserve fund

 

2.1.                  In this section of our report we shall consider how Anchor may use the reserve funds. 

 

How does Anchor hold the reserve fund?

 

2.2.                  In order to answer AnchorÕs first question we need to establish in what capacity Anchor holds the residents money and, in particular, whether it is acting as a trustee (acknowledging that Anchor is an exempt landlord for the purposes of section 42 of 1987 Act).

 

2.3.                  If the reserve fund money is held by Anchor as trustee for the benefit of the tenants, Anchor would have to comply with its duties as a trustee (we shall examine these in more detail later in this section). However, if Anchor doesnÕt hold the money in trust it will have far more flexibility in terms of what it can do with the reserve fund.

 

2.4.                  It is very important to appreciate that simply because the statutory trust created by section 42 of the 1987 Act doesnÕt apply to Anchor, it does not automatically follow that Anchor doesnÕt hold the reserve fund in trust.

 

2.5.                  There are a variety of ways in which a trust can come into existence.  In general terms, a trust is created when a person(s) has property (for example, money or land) which they hold for and on behalf of another person(s), or for the accomplishment of some particular purpose(s).

 

2.6.                  There are numerous different types of trusts but all of them can be loosely classed into four types:

 

2.6.1.           express trusts;

 

2.6.2.           statutory trusts;

 

2.6.3.           resulting trusts; and

 

2.6.4.           constructive trusts.

 

2.7.                  Express Trusts: an express trust is created intentionally by a person exercising their powers of ownership.  They are usually created in the form of a written document (for example, in a lease).  We are instructed that AnchorÕs leases (or any other documents) do not contain provisions which state (expressly or impliedly) that the reserve fund monies will be held on trust by Anchor.

 

2.8.                  Statutory Trusts: a statutory trust is one that exists automatically when a particular condition is triggered, defined by a particular statute (for example, section 42 of the 1987 Act). As you are aware Anchor is an exempt landlord for the purposes of section 42 of the 1987 Act and therefore this statutory trust doesnÕt apply to Anchor. 

 

2.9.                  Resulting Trusts: a resulting trust arises by action of law despite the absence of any express intention.  Typically, a resulting trust will arise because an attempt to create an express trust has failed. From the information we have it is unlikely that a resulting trust exists in these circumstances. 

 

2.10.               Constructive Trusts: whether or not the reserve funds will be held on a constructive trust will depend on the circumstances. The principle of a constructive trust is derived from the law of equity. In very simple terms, a constructive trust is created where it is unconscionable or contrary to fundamental equitable principles of fairness and justice for the owner of particular property to hold it purely for themselves (i.e. there is some element of holding the money for the benefit of others).

 

2.11.               In our view, there are good arguments to support the position that Anchor holds the reserve funds on a constructive trust. However, because the principle is based on equitable principles only a court could determine the point conclusively. 

 

2.12.               The factors in support of such an interpretation are:

 

2.12.1.        residents contribute to the reserve fund in order to meet likely future expenditure for the benefit of their property;

 

2.12.2.        the fact that the residents contribute to the reserve fund for a specific purpose could be argued to raise a legitimate expectation that the money should only be used for that purpose and therefore is held by Anchor for the benefit of residents. Anchor is therefore not free to spend the money how it wishes;

 

2.12.3.        Anchor should imagine the position if at any moment in time the reserve fund held more monies than would be required to meet future anticipated costs. In these circumstances, Anchor would not be free to spend the reserve fund monies how it wished. It would need to either maintain the reserve fund or return the monies to leaseholders (either by a one off payment or by crediting the amount against the service charge). Whilst this is clearly a theoretical train of thought it is helpful to demonstrate how Anchor may use the reserve fund.

 

2.13.               Whilst we are unable to conclusively state that Anchor holds the reserve fund on a constructive trust because only a court can determine this in our view there are good reasons (set out above) why Anchor should act as if it is a constructive trustee.

 

2.14.               Of course just because Anchor holds the monies as a constructive trustee does not mean it is caught by the obligations set out in section 42 of the 1987 Act.

 

2.15.               Given the absence of any court ruling, Anchor could Ôtake a viewÕ, but this would be against our advice.

 

AnchorÕs duties as a trustee

 

2.16.               Where a constructive trust exists, Anchor, as trustee, will:

 

2.16.1.        be the legal owner of the reserve funds; and

 

2.16.2.        will be obliged to administer and manage the reserve fund in the best interests of residents (as the beneficiaries of the constructive trust). In practice, this means that Anchor couldnÕt claim for itself any increase in value of the reserve fund or any profits earned by it (we shall consider this in more detail at paragraph 3.24)

 

2.17.               Under the Trustee Act 2000, Anchor has a general power to make any kind of investment that it could make if it were absolutely entitled to the reserve fund monies.

 

2.18.               In order to discharge its duties as a trustee, Anchor would need to ensure it obtained and considered proper advice about the way in which exercised its power to invest money should be exercised.

 

2.19.               Prior to exercising this general power, Anchor must have regard to the standard investment criteria as set out in the Trustee Act 2000 (Annex 1).

 

2.20.               Any investments and/or interest earned belong to the fund collectively and should be retained within the fund and used to defray service charge expenditure.

 

2.21.               Can Anchor, as a constructive trustee, charge for acting as trustee and investing the reserve fund? The answer to this question is the answer to AnchorÕs third and final question and is therefore considered in detail at section 4 of this report.

 

2.22.               In addition to its duties as a trustee Anchor should also consider the following issues prior to investing the reserve fund;

 

2.22.1.        as a landlord, Anchor will need to comply with the lease provisions setting out the way in which service charges and reserve funds are to be administered, accounted for and managed;

 

2.22.2.        as a registered charity, Anchor will need to comply with charity law when making investments;

 

2.22.3.        as a company limited by guarantee, Anchor will need to have the power to invest money on the terms proposed in its constitution; and

 

2.22.4.        as an RSL, Anchor will should have regard to Housing Corporation guidance and best practice.

 

What would the position be if Anchor didnÕt hold the reserve fund on trust?

 

2.23.               If it is found, or Anchor takes a view, that Anchor is not holding the reserve fund monies on trust for its tenants then Anchor can, subject to the terms of the leases, utilise the money in the same way it can utilise its own reserves.

 

An alternative approach

 

2.24.               Before considering the next question it is worth considering two alternative approaches.

Depreciation

 

2.25.               As Anchor will be aware there are two different ways in which a landlord can cover future costs, it can either:

 

2.25.1.        operate, as Anchor does, a reserve or sinking fund where residents contribute towards future costs; or

 

2.25.2.        charge residents depreciation for current assets under the service charge.  The charge to depreciation would typically be calculated by taking the cost of the installation divided by its estimated life.

 

The distinction is subtle but important. A reserve fund is all about future costs whereas depreciation is a charge by the landlord to tenants for historic costs.

 

2.26.               So long as the terms of the leases allow, Anchor would be able to collect allowances for depreciation instead of holding monies in a reserve fund.

 

2.27.               Over the years the courts have made a number of decisions that affect service charges.  In particular, the courts have held that in determining a reasonable service charge, it is possible to collect an allowance for depreciation of equipment in communal use (for example, boilers, lifts, electrical wiring etc.), which should be the cost of installation divided by estimated lifespan[1].

 

2.28.               In our view, if Anchor makes a charge for depreciation it will have absolute ownership of the money. This is because the tenants would be reimbursing Anchor for money it has already spent. The arguments in support of a constructive trust in these circumstances, would be much less likely to succeed than is the case with a reserve fund.

 

2.29.               Clearly, Anchor would be responsible for ensuring the depreciated equipment or assets are replaced.  How this is done and how the monies are utilised in the meantime would be a matter for Anchor to determine.

 

2.30.               As Anchor may be aware, it would be expected to give credit for the depreciation amount against the actual cost of replacement, if the equipment is actually replaced during the term of the lease.

 

2.31.               Anchor will also be aware of the difficulties of operating funds on that basis (for example, not having sufficient monies to cover all the costs of any replacement equipment).

 

2.32.               If Anchor adopted this approach in the future the next two questions cease to be relevant save for the treatment of the reserve funds built up to date.

 

Loan arrangement

 

2.33.               We have also considered the viability of an arrangement where Anchor as trustee of the reserve funds loan monies to Anchor in return for an agreed advantageous rate of return. In the event Anchor achieved a higher rate of return that it was required to pay to the reserved fund it would be retain those monies.

 

2.34.               In our view, this arrangement would not succeed because there would be a clear conflict of interests for Anchor as trustee, and Anchor acting for itÕs own benefit.

 

3.     Financial Services Regulations

 

3.1.                  In this section of the report we shall consider the position regarding financial service regulations:

 

3.1.1.           first, in the current scenario, where Anchor receives money from tenants and holds it as cash in deposit accounts;

 

3.1.2.           secondly, if Anchor holds the reserve funds on trust and invests it, for example in shares, and

 

3.1.3.           thirdly,  if Anchor holds the reserve funds free from trust.

 

3.2.                  For the purposes of this section we have assumed that:

 

3.2.1.           by Òindividual trust fundsÓ Anchor means holding the money on statutory trusts under section 42 of the 1987 Act; and

 

3.2.2.           the leases enable Anchor to operate either a reserve fund and/or charge depreciation.

 

3.3.                  We have not been asked to review any of AnchorÕs leases.  The unseen lease terms could significantly affect our advice on FSMA, for example if they state Anchor acts as agent or trustee or otherwise affect or determine the nature of the relationship between the parties.  We would need to review leases for the relevant schemes before giving conclusive advice.

 

3.4.                  Before we address the above points, we wish to set out some general law concerning financial regulation.

 

Outline of applicable financial services regulation

 

3.5.                  The provision of financial services to consumers in the UK is regulated by the Financial Services and Markets Act 2000 (FSMA) and the Consumer Credit Act 1974.  Anchor could no doubt earn a return on reserve funds by running a credit business, but from our instructions that does not seem to figure in AnchorÕs proposals.  On that basis the financial service regulation applicable on this occasion is FSMA plus regulations and the regulatorÕs guidance issued under it.  The regulator under FSMA is the Financial Services Authority (FSA).

 

3.6.                  We would be pleased to advise generally on FSMA if required.  We can do so in a pragmatic way by directing Anchor to relevant free guidance published by the FSA.  Alternatively we can provide tailored advice in a format to suit Anchor, whether by written reports or guidance, or training.  In the meantime in Annex 2 of this report we set out a high level summary to provide context for our advice in this report.

Current position

 

3.7.                  We understand that Anchor effectively receives the reserve funds as a returnable deposit and holds the money in a deposit account with a bank or building society.  As stated above, as it happens the deposits are likely to be held by Anchor on trust.

 

3.8.                  Receiving money by way of deposit is regulated activity under FSMA where the deposit is returnable and the deposit-holderÕs activity is funded wholly or to a material extent by capital or interest on the deposit money.  We understand that Anchor uses the money to pay for scheme repairs and maintenance and in principle the money is held to tenantsÕ account and is returnable to them, so the reserve funds fall within the definition of ÒdepositÓ under FSMA.

 

3.9.                  There is, however, an exclusion that applies where the deposit is paid by way of advance or part payment for the provision of goods or services under a contract.  In our view there is a good argument that Anchor can rely on the exclusion because Anchor uses the amounts deposited to provide repair and maintenance services under the terms of leases.  We note, however, that we have not reviewed the relevant leases and their terms could affect AnchorÕs ability to rely on this exclusion, for example if the terms do not expressly provide for the provision of repair and maintenance services by Anchor, funded using the reserve funds.

 

3.10.               With reference to Anchor putting deposits it receives into bank or building society accounts, in our view that is not regulated activity under FSMA.  Dealing with a deposit account as principal or agent is not regulated activity under FSMA.

 

Future investment of reserve funds held on trust: general position

 

3.11.               Based on AnchorÕs instructions to us, on the face of it AnchorÕs proposals for the future seem likely to be so regulated.  In a little more detail:

 

3.11.1.        Receiving deposits: The position is as for the current position.  Anchor could seek to rely on the exclusion that applies where a deposit is received by way of advance or part payment for goods or services.

 

3.11.2.        Other investment activities: The investment Anchor proposes ranges from receiving money on deposit and putting it into a deposit account (as above) to investing in shares.  Like deposits, shares are among the types of investment regulated under FSMA.  See FSMA schedule 2 part II for a broad outline of investment types.

 

3.11.3.        The activities Anchor proposes could involve Anchor:

 

¤  dealing as principal – Anchor acting in its own name to invest the funds by way of providing an investment service in return for a fee;

¤  dealing as agent– Anchor acting in the name of the tenant to invest the funds;

¤  arranging – for example, Anchor using a third party who will effect the investments under AnchorÕs instructions;

¤  managing investments – Anchor managing the investments for tenants, on a discretionary basis;

¤  establishing and operating a collective investment scheme (CIS) – AnchorÕs proposals could give rise to a CIS if it is structured so that the tenants can be regarded as participants in an arrangement that will give them profit or income.  More mainstream examples include unit trusts.  CIS is defined by the FSA at http://fsahandbook.info/FSA/html/handbook/Glossary/C. 

 

3.11.4.        All these activities are regulated under FSMA.  See FSMA schedule 2 part I for a high level list of regulated activities.

 

3.12.               In summary AnchorÕs current arrangements are likely to be covered by an exclusion but on the face of it the future proposals would involve regulated activity.  It may be that AnchorÕs proposals would involve a wider range of regulated investments and activities.  Our advice is necessarily provisional and outline at this stage, when AnchorÕs proposals are in outline.  We would be pleased to advise in detail on what regulated activities AnchorÕs proposals involve once the investment proposals are firmer or finalised.

 

Trust scenario: exclusions and exemptions relevant to AnchorÕs proposals

 

3.13.               Having established that AnchorÕs proposals for future investment would on the face of it involve regulated activity under FSMA, we turn to consider in broad terms what exclusions and exemptions Anchor might seek to rely on in order to avoid the need for FSA authorisation.  If all of AnchorÕs FSMA-regulated activities fall within the exclusions or exemptions Anchor will not need to be FSA authorised to carry on those activities.

 

3.14.               We outline the following exclusions and exemptions because they are particularly relevant to the trust scenario.  They apply in one form or another to shares and deposits, the main types of investment Anchor has indicated an interest in.  They also cover the role of trustee.

 

Trust scenario: trustee exclusion

 

3.15.               A trustee to carry on certain regulated activities where, in broad terms, the trustee is acting in discharge of its obligations in the office of trustee or for a beneficiary under the trust.  The exemption is a detailed exemption and we suggest Anchor should not rely on it without obtaining further advice based on more detailed instructions.  The exemption is subject to general conditions, which are that the trustee must not hold itself out as providing services that consist of regulated activities under FSMA, and must not be remunerated for the investment activity in addition to any remuneration it receives for acting as trustee.  So this exemption does permit charging, but only for Anchor providing the trustee and other services it currently provides and not for any investment service.

 

3.16.               This exemption is only available for certain regulated activities.  It does not apply to the activity of receiving deposits of money.  We can advise further on how it applies to different investments and activities if required.

 

 

3.17.               AnchorÕs ability to rely on this exemption could be affected by the terms of leases and particularly the terms of trust under leases.  For example if the scope of AnchorÕs obligations as trustee are stated in very narrow term it could prove difficult to argue that AnchorÕs FSMA-regulated activities fall within the scope of its trustee obligations.

 

Trust scenario: Appointed Representative exemption

 

3.18.               One valuable route to exemption to bear in mind is for a non-FSA authorised firm to become the agent (Appointed Representative) of an authorised firm.  This exemption can help where narrower or less flexible exclusions/exemptions fall short.  Whilst Anchor holds reserve funds on trust in a bank/building society account the exemption is not needed but it could become an important part of AnchorÕs strategy if Anchor decides to deal in a wider range of investments.

 

Trust scenario: possible exclusions or exemptions regarding deposits

 

3.19.               If required Anchor could potentially be able to carry on regulated activity in relation to deposits by becoming an Appointed Representative for the purpose.  The only other exclusions that are available are not applicable because they only apply to certain public bodies, international banks and lenders referred to in FSMA legislation (Anchor is not in the list and nor are RSLs generally), solicitors, payments between certain close relatives or group companies, FSA-authorised persons, persons who receive sums for debt securities and non-UK deposit takers who operate in the UK via the internet.

 

Trust scenario: possible exclusions or exemptions regarding shares

 

3.20.               Apart from the general trustee exclusion and Appointed Representative exemption referred to above, in our initial review for the purposes of this report we have not identified any other exclusions or exemptions that apply to shares and could be relevant to Anchor.  There is a wide-ranging exclusion for investment in shares carried on by a person whose main business is the provision of goods and services, but it does not apply where the customer (as in AnchorÕs case) is an individual.  We have not conducted an exhaustive review at this stage but would be pleased to do so if Anchor decides that in principle it will use the reserved funds to invest in shares.

 

Trust scenario: other possible exclusions or exemptions

 

3.21.               We note AnchorÕs proposals could involve other types of regulated investment or activity besides deposits and shares.  There is a wide range of investments and activities and an even larger number of exclusions and exemptions that apply, depending on the investment or activity concerned, so it would not be cost effective for us to survey them all at this stage.  We would be pleased to advise conclusively and in detail on what exclusions/exemptions are available once AnchorÕs investment proposals are finalised.

 

Trust scenario: exemptions for RSLs

 

3.22.               None of the existing exclusions or exemptions for RSLs are relevant to AnchorÕs proposals.  They only apply to insurance and secured loan activity.

 

Trust scenario: restrictions on investment activities

 

3.23.               In the trust scenario if Anchor wants to invest the reserve funds without being FSA authorised it will need to ensure all its investments and activities fit within carve-outs or exemptions under FSMA.  We confirm on the basis set out above that there is a good argument that AnchorÕs current activity of taking deposits fits within exclusions.  We will need to advise on the position for other types of investment on a case-by-case basis.

 

Trust scenario: AnchorÕs share of income and accounting to residents for income

 

3.24.               In the trust scenario this is primarily a trust law issue not a financial services issue.  Income accrued by investment of funds held under trust will be held by trustees on the trusts.  The basic position is that all income will be held for residents, none will be held by Anchor on its own account unless, exceptionally, trust law and the express terms of the trust allow.  Financial services law does concern itself with any remuneration or commission Anchor may receive (see below).

 

Trust scenario: charges

 

3.25.               In general terms, the carve-outs and exemptions under FSMA will only apply if Anchor provides the financial service without remuneration.  For example, in the case of the trustee exclusion outlined above, Anchor could only rely on the carve-out if it is not separately remunerated for the financial activities it carries on.

 

3.26.               Trust law is also relevant.  The general position is that trustees can only charge for their services (as distinct from financial services they provide in addition) if, exceptionally, trust law and the express terms of the trust allow.

 

Trust scenario: commission

 

3.27.               Commission would become relevant if Anchor established itself as a broker for tenants who contribute reserve funds.  In the context of the trust scenario it is difficult to see how Anchor could farm commissions in its capacity as trustee. 

 

3.28.               Trust law is again relevant.  Any commission received by Anchor in its capacity as trustee of the funds would on the face of it be income to the trust.

 

Non-trust money: Anchor solely entitled to reserve funds

 

3.29.               In broad terms FSMA regulates people who are providing financial services for consumers, for a fee.  In this scenario Anchor would be in the position of investing its own money on its own behalf and without offering any service to third parties and in broad terms that is not regulated activity under FSMA.

 

3.30.               In this scenario we assume Anchor would not be receiving money on deposit.  Anchor would receive payment by way of reimbursement for depreciation it has suffered, on terms that the money is AnchorÕs in law and equity.  The money would not be returnable to the tenant so it would not constitute a deposit.

3.31.               In fact FSMA does regulate some investment activities even when the investor is acting on his own behalf using his own money, and Anchor would need to fit within some exclusions or become FSA authorised.  The exclusions are quite wide, however, and it is likely Anchor could fit within them.  In broad terms:

3.31.1.        Anchor would be prohibited from holding itself out as being in the business of dealing in certain investments, and could not regularly solicit members of the public to deal; and

 

3.31.2.        Anchor would have to use FSA-authorised persons to execute deals in certain investments.

 

3.32.               The following summarises the position for Anchor in the scenario where it invests its own money, free from trust.

 

3.32.1.        General position:  In this scenario Anchor would not be providing any financial service for tenants who contribute into the reserve funds, so FSMA would not apply to Anchor as a financial services provider.  AnchorÕs position would be based on exclusions/exemptions.  For example, Anchor would need to avoid Ôholding outÕ (as described above).  If Anchor wanted to deal in contractually-based investments it would need to use an authorised person.

 

3.32.2.        Charges:  Anchor would have no grounds for imposing any charges on tenants for investing the money.  Anchor would be acting on its own account and would have no grounds for imposing charges.

 

3.32.3.        Commission:  It is difficult to see how arrangements giving rise to commission could form part of the scheme.  Anchor would have no reason to make introductions or referrals of relevant tenants to any financial services provider.  Tenants would not be involved because Anchor would be dealing with its own money.

 

3.33.               If all AnchorÕs activities fit within exclusions or exemptions Anchor will avoid the need for FSA authorisation.  Any stockbroker, independent financial adviser or insurance broker would be subject to FSMA as providers and in dealing with such third parties Anchor would enjoy the benefits FSMA provides for consumers.

 

4.     Charging Commission for Managing Investments

 

4.1.                  In the final section of this report we consider whether Anchor can charge for investing the reserve funds.

 

Position where a trust exists

 

4.2.                  Where a constructive trust exists, Anchor will have to act in accordance with the duties imposed on them as a trustee.

 

4.3.                  In general terms, trustees cannot receive any benefit or payment for carrying out their duties as a trustee unless they have express authority to do so.  Clearly, in the case of a constructive trust such an express authority is very unlikely to exist.  However, AnchorÕs existing duties as a trustee are for the most part the same as general management, and therefore we would expect adequate wording to be in the leases to cover those charges.  It is only if Anchor chooses to follow its proposals does this become an issue.

 

4.4.                  This general prohibition on trustees receiving benefits does not apply to reimbursing trustees for reasonable out of pocket expenses for trustees.  Expenses are refunds by a trust of payments that a trustee has needed to meet personally in order to carry out trustee duties (Trustees Act 2000).

 

4.5.                  Legitimate expenses would include reasonable travelling costs incurred whilst on trust business or the cost of postage or telephone calls whilst on trust business.  Expenses requiring an express authority would include payment for specialist skills and services.

 

4.6.                  Even if the leases contain a power enabling Anchor to be paid for acting as trustee, any payments should be proportionate to the needs of the trust and Anchor should avoid creating a perception that its interests are put ahead of the interests of the beneficiaries (i.e. the residents).

 

Position where no trust exists

 

4.7.                  If no trust is found to exist then Anchor two considerations apply:

 

4.8.                  First, as a matter of contract Anchor can only charge residents for a service that they have agreed to pay for. We understand that there is no such agreement.

 

4.9.                  Secondly, whilst Anchor will be the legal owner of the reserve funds and entitled to use the monies it will be required to fulfil its obligations under its various leases (we have not been asked to comment on AnchorÕs obligations under its leases and ha therefore not reviewed any of its leases).

 

Anthony Collins Solicitors LLP

June 2007

30670.0007


Annex 1

Standard Investment Criteria

Trustees Act 2000 – Part 2, Section 4

 

1.     In exercising any power of investment, whether arising under this Part or otherwise, a trustee must have regard to the standard investment criteria.

 

2.     A trustee must from time to time review the investments of the trust and consider whether, having regard to the standard investment criteria, they should be varied.

 

3.     The standard investment criteria, in relation to a trust, are:

 

3.1       the suitability to the trust of investments of the same kind as any particular investment proposed to be made or retained and of that particular investment as an investment of that kind, and

 

3.2       the need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust.

 

 


ANNEX 2

 

Outline of financial services regulation under FSMA

 

General prohibitions

 

1      Unless Anchor is FSA-authorised or exempt FSMA prohibits it from carrying on:

 

1.2     a wide range of investment activities that are detailed under FSMA; and

 

1.3     financial promotion.

 

2      If Anchor wants to carry on prohibited investment activities it will need either to seek FSA authorisation or fit within exclusions (carve outs) or exemptions that are available under FSMA.

 

Enforcement

 

3      Breaching either of the prohibitions is a criminal offence.  The penalties are up to 6 months in prison and/or a fine up to the statutory maximum (on summary conviction) or up to two years in prison and/or a fine (on conviction on indictment).  The statutory maximum is currently £5,000.  Authorisation is on a per-activity basis so even a FSA-authorised entity commits an offence if it undertakes activity outside its authorisation.  There are other criminal offences under FSMA that could apply depending on what investments or activities Anchor wants to carry on.

 

4      The FSA has other enforcement powers including withdrawal of authorisation, information-gathering and investigatory powers, and power to discipline authorised firms by public censure.  See  http://fsahandbook.info/FSA/html/handbook/ENF for a short list of enforcement measures.  The disciplinary power includes the ability for the FSA to impose fines for breach of regulations by firms or key staff in the course of authorised activity.  The FSA is known to be eager to impose large fines to make an example of firms and staff.

 


Authorisation Route

 

5      The cost of FSA authorisation and on-going compliance is potentially quite high.  Anchor can get an indication of the initial fees by using the fee calculator at http://feecalc.fsa.gov.uk/FeeCalc.asp?fy=2007_2008&sc=Final.

 

6      Anchor would need to meet certain conditions to obtain authorisation, which include Anchor having ÔfitÕ (ie suitable) managers and systems to the required standards, pay annual fees to the FSA and perhaps the Financial Ombudsman Service and comply with regulatory inspections.  Annual fees can run to tens of thousands of pounds.

 

Exclusion/exemption route, and FSA guidance

 

7      FSMA works by defining a broad swathe of investment activities that are prohibited, then identifying narrow exclusions or carve outs.  If Anchor can fit its activities within exclusions and carve outs it will not carry on regulated activity and so will not need to be FSA authorised.

 

8      At this stage we suggest Anchor aim to fit within exclusions/exemptions, and consider the pros and cons of authorisation only if necessary.  Likewise, in this report where we advise that AnchorÕs proposals could involve regulated investment activities we turn briefly to outline potentially relevant exclusions and exemptions.  This report is intended only to give a flavour of how Anchor might use exclusions/exemptions, and to indicate ones it may be worth looking at in detail later on.  Which exclusions/ exemptions are relevant depends on which regulated activities Anchor wants to carry on, so we will need final proposals from Anchor before we can advise conclusively.

 

9      The FSA can give informal written guidance about exclusions/exemptions on request.  Informal guidance does not amount to formal sign off or even ÔcomfortÕ and the official line is that it cannot be relied on.  The actual value of such letters is unascertainable but realistically if the FSA approves exclusions/exemptions-based proposals it would need a good reason to disown the guidance later.  The risks for the FSA include judicial review or reputational damage. 

 

10   It would be rash to bank on relying on informal guidance, but if Anchor chooses the exemption/ exclusion route we would recommend seeking a guidance letter on the basis it may have some value.  To maximise the value of informal guidance Anchor could seek a comprehensive ÔapprovalÕ from the FSA (based on a comprehensive summary of the proposals).  Anchor would also need to pick up and implement relevant changes in the law, and use monitoring/management systems to ensure staff stay within the exclusions/exemptions.

 



[1] Regis Property Co v Dudley 1958; Perseus Property Co Ltd v Burberry and other 1984