§ Mr. Barber
I beg to move, in page 4, line 37, to leave out from "for" to end of line 41 and to insert:diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust.If the House accepts the Amendment, the opening words of Clause 5 (1) will read as follows:In the exercise of his powers of investment a trustee shall have regard—(a) to the need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust.The Amendment arises from an undertaking which I gave in Committee during a discussion of an Amendment which sought to delete paragraph (a). I then said that while I felt strongly that there should be a reference in the Bill to the duties of trustees on diversification and suitability, in the light of what had been said on both sides of the Committee, I wished to see whether we could improve the drafting. In particular, I wanted to meet points which were made by two hon. Members. The first was that the existing paragraph (a) might cause trustees to diversify existing investments, contrary to the interests of the beneficiaries of a trust.
The second was that the paragraph might require a trustee of a relatively small trust to diversify investments in an impracticable and unnecessary manner. The Amendment meets both points. It is an improvement and it is a good example of an Amendment which will not have a very extensive effect but which will nevertheless be an improvement to the Bill. It is the direct result of points which were raised on both both sides of the Committee.
§ Mr. A. E. Oram (East Ham, South)
I rise to do little more than ask a question and seek an assurance. I recognise that the Amendment was put down to meet issues raised in Committee, but I have rather a different matter to raise. Am I right in thinking that there is nothing in the wording of the Amendment or in the original wording of the Clause which could over-ride the provisions of a trust deed? If, for example, a trust deed lays down the pattern of investment, am I right in thinking that it will not be disturbed in any way by either the Amendment or the Bill by anything that may be said about diversification of investment?
For example, some businesses have superannuation funds which are required or at least permitted to be invested within the business. I am fairly confident that my understanding is correct and that that situation would not be disturbed by the Bill or the Amendment, but if the Economic Secretary agrees with me that there is no change which could over-ride a trust deed or disturb the investment of a superannuation fund, I should like to have it placed on the record.
§ Mr. Barber
Subsection (1) of Clause 5 is, as the hon. Gentleman appreciates, a general provision, whereas the subsections which follow are concerned with the exercise of powers under the Bill. But despite the fact that this is a general provision, the position is that, if a trustee is given particular powers of investment and, in particular, is authorised to make investments in a particular manner—for example, if it is explicitly stated that he is under no obligation to take advice—then the provisions of the trust fund will override subsection (1) which, in effect, as I explained in detail in Committee, does little more than codify what we understand to be the existing law.
Consequently, it is really a question of interpretation of trust instruments. If nothing is said, then this subsection will apply. If some other rule is laid down by the testator, that rule will prevail.
§ Amendment agreed to.
§ Mr. Mitchison
I beg to move, in page 4, line 44, at end to insert:and(c) to the risks inherent in long-dated or irredeemable securities, that is to say fixed interest securities, debentures, guaranteed or 1926 preference stock or shares, rent-charges. feu-farm rents, feu-duties or ground rents, as regards any of which the holder is not entitled to repayment of principal within twenty-five years from the date of investment".
§ Mr. Deputy-Speaker (Sir Gordon Touche)
Perhaps it would be convenient also to discuss the other Amendment to Clause 5 in the name of the hon. and learned Member for Kettering (Mr. Mitchison) and his two Amendments to the First Schedule, in pages 11 and 12.
§ Mr. Deputy-Speaker
I suggested that we should also discuss with this Amendment the hon. and learned Gentleman's other Amendment to Clause 5 and also his two Amendments the First Schedule, in pages 11 and 12.
§ Mr. Mitchison
With respect, I think that those other Amendments raise different points. I would rather take this Amendment separately, if I may.
§ Mr. Mitchison
I think that I can explain why I regard them as different matters.
The effect of this Amendment is to oblige a trustee to have regard to the risks inherent in long-dated or irredeemable securities. It includes a list of such securities and what amounts to a freezing of them—cases where the holder is not entitled to repayment of the principal within twenty-five years from the date of investment.
This is, of course, no more than a statement of what a trustee should have regard to. The trouble about subsection (1) as a whole is that it applies, as the Economic Secretary has just said, to all trusts, and it selects two particular things which are to be considered by a trustee. One, in paragraph (b), I calf diversification. The other, in paragraph (b), is… the suitability to the trust of investments of the description of investments proposed and of the investment proposed as an investment of that description.These words are somewhat vague. I agree that they could be taken to include the particular risks I am referring to 1927 in this Amendment, but I suggest to the Government that it is as well, if we are listing things which trustees should have regard to, to mention these particular cases. We should do so because of the history of the matter and of the facts at present.
We all know the difficulty—arising in so many cases where a fund, or too much of it, has been invested in long-dated or irredeemable securities—which is caused by the change in values that has taken place in recent years. I suppose that, in the comparatively peaceful atmosphere at present prevailing, I must not say too much about the financial policy of the Government, but with that change there has been a fall in the value of these long-dated securities.
It is the kind of case which my hon. Friend the Member for Ashfield (Mr. Warbey) mentioned. We all of us know many instances-3½ per cent. War Loan is one that is very much in people's minds now, but there are many others, and, later, we shall come, I hope, to a particular case where the Government themselves have got caught very badly. It is surely right, particularly when we are prescribing something intended to have special relation to the smaller trusts, to put in something to refer to these risks. This Amendment does no more than that. It does not impose any other obligation except simply to have regard to these risks. I feel that this is one of that class of Amendments which cannot possibly do any harm and which ought to be an advantage.
It is true that people do not read Acts of Parliament. None the less, these Acts are binding on them, and if one mentions in this subsection a couple of things—one of them as vague as paragraph (b) and the other a particular matter only slightly connected with this—it is reasonable to mention this particular case, and to do so having regard to the difficulties we all know so many trustees have met in connection with these risks.
I do not need to go through the list. I have simply taken words from the First Schedule. Feu duties, ground rents, and so on, carry the same risks as long-dated debentures or anything of that sort. If this were an imperative Clause which called for a particular action, 1928 one might have to look at this question of the date of repayment a little more closely. When it is simply a question of calling the attention of trustees to risks, I suggest that this is sufficient.
§ Mr. Barber
As the hon. and learned Gentleman pointed out, this Amendment would require trustees, whether they were exercising powers of investment conferred by the Bill or not, as well as having regard to the needs for diversification of investments in the amended paragraph (a), to have regard also to the suitability of the investments as referred to in paragraph (b), and also to what he calls the risks inherent in long-dated and irredeemable securities. He has explained what he means generally by the terms in his Amendment.
The Amendment is, once again, an attempt by the hon. and learned Gentleman, for reasons which I well understand, to provide protection in the Bill against making unsuitable investments in long-dated or irredeemable securities. But to acknowledge the need for this is really to accept that there is some special risk attached to investments in these securities for which the law ought to provide. For example, in guaranteed stock or preference shares, or as he said, 3½ per cent. War Loan. These would all be covered by the Amendment.
Securities of this kind are, in some circumstances, perfectly suitable investments for trustees. There is always a risk involved in making investments, particularly if the wrong ones; are chosen, and there is a risk in making investments in equities in certain unsuitable circumstances—for example, when capital has to be realised at very short notice.
There is always some risk in equity investment at any time, but to draw the attention of trustees particularly to investment in long-dated or irredeemable securities would, I think, be to overstate any risk in relation to that inherent in other investments, particularly in equities. I appreciate the point which the hon. and learned Gentleman has in mind. Indeed, some of the considerations to which he referred are considerations which should have great weight in the minds of any trustee. But this matter is covered in Clause 5 (1, b). The hon. and learned Gentleman described that as vague, but, after all, 1929 it says quite specifically that in the exercise of his powers of investment a trustee shall have regardto the suitability to the trust ofthe investments which he proposes to make.
These are not meaningless words. They cover the circumstances referred to by the hon. and learned Gentleman. As I say, while it would certainly be possible to go on and add paragraphs to subsection (1) to provide that various other aspects of investment should be taken into account and that all these should be specified in the Bill, what I think would be wrong would be to refer in terms to the particular matters which are contained in the hon. and learned Gentleman's Amendment. I think that it is much better, unless one is going into far greater detail concerning the matters which a trustee must bear in mind in making investments, to rely on the general provision in paragraph (6). I hope that, with that explanation, the hon. and learned Gentleman will not feel it necessary to press his Amendment to a Division.
§ Mr. Diamond
I do not think that the Economic Secretary is fully aware of the point which my hon. and learned Friend the Member for Kettering (Mr. Mitchison) was making. It is not adequately included in paragraph (b), nor are we dealing with the question whether, having given the matter careful thought, there might not be a case for investing in long-term securities.
The Economic Secretary said that there might be suitable cases for investing in the investments referred to in the Amendment. Of course, there might be. My hon. and learned Friend did not say that there never could be. All we are saying is that there is a special need in present-day circumstances, as opposed to the provisions of the Trustee Act, to draw the attention of trustees to certain factors. That is admitted in paragraphs (a) and (b).
We are saying that paragraphs (a) and (b) do not go far enough, because it is quite obvious that a new element has arisen, namely, the appreciation on the part of very many trustees that there are special risks inherent in this kind of investment. I need not go into those risks, for they are obvious to all of us. If every trustee were automatically aware 1930 of this, there would perhaps be no need to mention them—perhaps—but I am quite satisfied that there is a need. One has only to listen to what has been said even here today, and certainly to what was said in Committee from time to time. That is sufficient for me, at all events, to take the view that not even every on. Member in the House is sufficiently aware of the risks inherent in this kind of investment, and, certainly, trustees outside the House would not, by and large, be sufficiently aware of it.
The Economic Secretary has said that one of the reasons why he believes in breaching the principle of giving trustees full discretion is that trustees in the provinces would not be able to command immediately adequate or satisfactory advice of the kind that a trustee in London can get. I do not accept that completely, but if the hon. Gentleman thinks that that is so, he should surely agree with my hon. and learned Friend that there are a number of trustees whose attention should be specially directed to the problems of this kind of investment. Without this addition to the Bill, they will not have their attention directed to them.
I do not know whether the Economic Secretary was merely complaining that to use the precise words about risks inherent was to overstate the position and, therefore, he was not prepared to accept the Amendment on those lines. I cannot speak for my hon. and learned Friend, but I dare say that he takes the view that, more important than stressing that there are risks inherent, he wants the attention of trustees drawn to the problems of this kind of investment, and that they shall be given full consideration.
There are these problems, and they are very real problems. It does not hurt anyone to have this provision in the Bill, though perhaps not precisely these words if the Economic Secretary prefers less precise or, if one likes, less damaging words about risk. It would not hurt anybody in the slightest, and it would not damage the principle of the Government's Bill, so far as there is a principle. It does not affect the question of dividing trust funds, or the kind of securities in which a trustee should be allowed to invest. It merely invites trustees to give attention to matters to which they should give attention.
1931 I repeat that it is not adequate to refer to either paragraph (a) or paragraph (b), because new paragraph (a) deals with diversification and old paragraph (b) deals with the suitability of trust investments and people would look at the kind of investment in relation to an investment of that description. I think that it is very necessary to draw attention to the fact that beyond those two very wise pieces of advice there is this further advice necessary. I hope, therefore, that the Economic Secretary will go further and will be prepared to accept an Amendment on the lines of this one.
Sir H. d' Avigdor-Goldsmid
I wonder what would have been the reaction if, instead of discussing this matter in 1961, we had discussed it fifteen years ago, in 1946, when Lord Dalton was so actively engaged in his conversion campaign that he succeeded in paying off the 3 per cent. Local Loan Stock at par by a general rise in fixed interest investments. At that time, trustees everywhere were looking for stocks which could not be paid off. When they were looking for such stocks, there were special advantages in long-dated stocks. For example, the 3½ per cent. War Loan had a special advantage in those years because it could not be paid off before 1952. For that very reason it went to quite a substantial premium.
Fifteen years may be a long time in parliamentary history, but it is short in human history, and certainly short in the history of this country. We are, I think, trying to legislate on a permanent basis, and, therefore, I feel that there would be more force in the arguments adduced by the hon. Member for Gloucester (Mr. Diamond) if he had called attention not only to the risks, but also to the advantages of the long-term investment. If he wishes to see a totally neutral Clause in the Bill, I suggest that he has not given sufficient validity to the judgment of trustees and their advisers.
It is an unfortunate thing that thought about investment is as much governed by fashion as any article of women's wear, and it would be quite a mistake for us in this House, where we are trying to create an article which will survive the vagaries of fashion, to put in something 1932 which at present seems valid, but which is an expression of a temporary nature.
For that reason, I hope that my hon. Friend will resist the Amendment
§ 2.0 p.m.
§ Mr. Mitchison
The reason for referring to these risks is that on the basis of the history of the matter, and principally, of course, on the basis of recent history, these are the risks which have been overlooked. It is perfectly true that there are risks in equities, but they are much better known and better realised. There are still far too many people who think that their money will be perfectly safe if they put it into Government stock.
The hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) is right. The position was very different a little time ago. It is since the change in financial policy brought about by successive Tory Governments, resulting in higher Bank Rates and higher interest rates, and so on, that these long-dated and irredeemable stocks have depreciated so heavily.
The other day I had the curiosity to look at the history of the irredeemable War Loan. When the Tory Government came in it was round about par, but the depreciation since then has been severe. I am not arguing about the merits or demerits of that financial policy. I have had something to say about it on other occasions, but it has been the result of a change of Government and a change of Government policy.
At the moment it is the trap which has caught most people. That is the reason for putting in that risk, but there is another reason. If one looks at the Schedules, the totality of which comprise all the investments which a trustee can make in the exercise of powers under this Bill, one gets quite a number of limitations on the purchase of equities, limitations by the amount of capital, the amount of dividend, and so on.
I agree that this subsection does not apply only to trustees acting under the powers of this Bill, but applies to trustees generally. I think that it is a pretty clear indication that the character of the risk in equities is much better understood than the character of the 1933 risk in these long-dated and irredeemable securities. I would say that it was particularly a sort of small provincial point, that is to say, people who are investing under smallish wills and so on in industrial towns in the North, who are a little too liable to put too much into this type of security. I should have thought that the Government would have done no harm by accepting this.
They say that the point is covered by suitability, but suitability is a different point. Suitability means looking at the terms of the trust deed or the circumstances of the trust and then considering what type of security one wants. It is not in relation to a particular set of risks. For that reason I should have liked to see this subsection inserted.
On the other hand, I must recognise that we have a later Amendment which raises in a much more acute and controversial form a similar question. In those circumstances, while I should not feel justified in withdrawing the Amendment, I should not regard it as of sufficient importance to justify a Division at this stage.
§ Amendment negatived.
§ Mr. Barber
I beg to move, in page 5, line 3 after "Act" to insertor before investing in any such manner in the exercise of a power falling within subsection (2) of section three of this Act".
§ Mr. Deputy-Speaker
I think that it would be convenient to discuss with that Amendment, the Amendment in page 5, line 8.
§ Mr. Barber
Yes, Sir Gordon.
These are drafting Amendments. Subsection (2) lays down that a special power to invest property in any investment for the time being authorised by law for the investment of trust property shall have effectas a power to invest property in like manner and subject to the like provisions as under the foregoing provisions of this Act.When we discussed this Clause in the Committee upstairs, the hon. and learned Member for Kettering (Mr. Mitchison) asked me to confirm that this special power would be exercisable subject to the provisions of Clauses 1 and 2, but not subject to Clause 5. In reply, I explained that my initial view was that Clause 5 as drafted would apply to the 1934 use of these powers, but, because of the doubt expressed on the point, I agreed to look at it further and give a considered opinion.
It is the intention that Clause 5 should apply—as I said I thought it did—in future when a trustee exercises an express power which is given him to invest as authorised by the general law, and these Amendments are proposed so that the matter may be freed from any doubt.
§ Amendment agreed to.
§ Further Amendment made: In line 8, after "power", insert "and in such manner".—[Mr. Barber.]