§ 2.43 p.m.
§ Order of the Day for the Second Reading read.
§ THE EARL OF DUNDEE
My Lords, the proposals contained in this Bill have been considered for a long time. As my noble and learned friend the Lord Chancellor said in your Lordships' debate on the subject in May of last year, they affect the fortunes and interests of a large number of individuals and organisations in this country, and therefore they cannot be taken lightly.
923 This Bill confers power on trustees to act contrary to the expressed intentions of the persons, the testators, who drew up the trust instruments, and a power of that kind ought not to be given without strong reasons. In particular, Clause 1 (3) of this Bill provides thatNo provision of any Act or instrument relating to the powers of the trustee which was passed or made before the passing of this Act shall limit the powers conferred by this section, but those powers are exerciseable only in so far as a contrary intention is not expressed in any Act or instrument so relating which is passed or made after the passing of this Act.That is to say, if after the Act is passed a new trust is drawn up, the testator or the person who makes the trust, is allowed to insist that all trust investments shall be in trustee stocks in spite of what is in this Act, because he knows already what the Act is about and, in spite of that, he wants to make a different arrangement for his own trust. But in the case of a person who made the trust before this Act was passed and who might have had the same ideas, the trustees are given power to act contrary to his expressed intention. I think there are a number of sufficiently strong reasons for doing that. One of them, of course, is the fact that, in practice, nearly all the trusts which have been drawn up since the war have conferred on the trustees much wider powers of investment than used to be customary before the war.
The reasons are well known and obvious, the principal one being the decline in the value of fixed-interest stocks in relation to other kinds of property. If nearly everybody who makes a trust now is giving power to his trustees to invest, either wholly or partly, in equities, the presumption is, I think, that those who drew up their older trusts at an earlier time limiting them to the investments laid down in the Trustee Act, 1925, would presumably have wished their trustees' powers to be altered had they known what the pattern of investment would be in post-war conditions. If fact, if it were possible now to ascertain the opinions of these people who have passed away, I think it is very probable not only that they would approve of what we are doing, but that they might severely reproach us for not having done it a good deal sooner.
924 That, of course, applies to the general provisions of this Bill. But another reason for making this general provision in subsection (3) is that it might otherwise be difficult to give the right legal interpretation to the intentions of a testator. He may have mentioned in his trust that his trustees' powers should be subject to the Act of 1925 because he had looked carefully at the investments and particularly liked them; or it might have been simply an expression of his general intention that his trustees should be guided by whatever investments were approved by the Government. This subsection will remove any doubt. I think a third reason is this: that under modern conditions the difficulty in administering these old trusts in the best interest of the beneficiaries is so great that very often the trustees have to go to the court and get an order allowing them to set aside the limitations to which they are legally subject. In some cases they require a Private Act of Parliament. When these things happen as often as they are happening now, I think it is a clear indication that the law is in need of revision.
The Committee which sat under the noble Lord, Lord Nathan, who I am glad to say is to follow me in this debate, and which reported in 1952, was not asked to consider the whole question of trustee investments; it was asked to consider the question of the law and practice relating to charitable trusts. One of the recommendations which the Committee made was that the trustees of charitable trusts should be allowed to put one-half, 50 per cent., of their funds into investments which were not included in the Trustee Act, 1925. The Government, after some consideration, decided to accept that recommendation, and a White Paper published in 1955 proposed to give trustees of charitable investments these wider powers. But that did not at all satisfy public opinion, which wanted other trusts also to be given similar advantages. A Private Member's Bill in another place was withdrawn only on the assurance that consideration would be given to this; and in your Lordships' debate in May, 1959, which I have already mentioned, my noble and learned friend the Lord Chancellor stated that more comprehensive proposals were then being prepared. These were published in the White Paper of December, 1959, 925 which, I believe, was received with fairly general agreement; and, with one or two minor exceptions, this Bill is based on the contents of that White Paper.
The essential feature of this Bill is the power given to trustees to divide their investments into two halves, one of which is called the "narrower range", the other to be known as the "wider range". This division, if it is made, is to be made once and for all; that is to say, trustees do not have to keep revaluing their investments every year in order to see whether the "fifty-fifty" ratio has been altered because of the increase in value of some stocks and the diminished value of others, and then to make an adjustment between the two halves. Obviously, that would be very troublesome, although I believe that it has been done in the ease of some special court orders. If, after five or ten years, the narrower-range investments have been reduced in value while the wider-range half have perhaps doubled, nevertheless that will not make it necessary for any sums to be repaid or transferred from one half to the other.
The narrower-range half of the investments are described in the First Schedule to the Bill, in Parts I and II. I have very little to say about them. They include the present trustee list, but they go a good deal wider. For instance, for the first time they include the fixed-interest securities of local and public authorities of the Commonwealth as well as of the United Kingdom; fixed-interest United Kingdom securities of the International Bank for Reconstruction and Development; the debentures of United Kingdom companies which conform to certain conditions, and deposits in the ordinary and special investment departments of trustee savings banks.
Commonwealth Government stocks will continue to rank as trustee investments but without the Government concerned having to comply with the conditions laid clown in the Colonial Stock Act. And here, since I understand that the necessity of repealing one part of the Colonial Stock Act, 1900, has caused a certain amount of doubt about the future of Commonwealth stocks and their trustee status, I should like to make it clear that, subject to the conditions of this Bill, fixed-interest 926 securities issued in London by the Governments of any Commonwealth countries will be trustee investments. It is necessary, therefore, to repeal Section 2 of the Colonial Stock Act, 1900, and the associated statutory provisions which Commonwealth Governments hitherto have accepted in order to obtain trustee status for their stocks. The obligations in respect of existing stocks assumed by Commonwealth Governments under the provisions of the Act of 1900 are in no way affected by the repeal by this Bill of Section 2 of that Act. As regards future issues of stock by Commonwealth Governments, Her Majesty's Government have under consideration the institution of voluntary arrangements, under which Commonwealth Governments may, if they so wish, assume obligations similar to those assumed under Section 2 of the 1900 Act in respect of existing stocks. That is all I have to say on the narrower-range half of the investments.
With regard to the wider-range investments, defined in Part III, I think that the definitions are fairly obvious. Trustees are, of course, allowed to have narrower-range investments in the wider-range half of their portfolio if they wish to do so, either temporarily or permanently, although they are not allowed to have wider-range stocks in the narrower-range half of their fund. These wider-range stocks include all securities issued in the United Kingdom and shares in any building society and in unit trusts. There are in Part IV of the Schedule certain conditions which apply to these Part III investments and also to the debentures which are included not in the wider-range but in the narrower-range part of the investments. The conditions to which I am referring are to be found in paragraph 3 of Part IV of the Schedule. One is that the company in which the trustees are buying either ordinary shares of debentures must have a capital of at least £1 million and must have paid dividends on its ordinary shares over a period of live years.
The powers conferred in this Bill are intended to be in addition to the existing special powers under trust instruments, and are not intended to derogate from those powers. Trustees can either avail themselves of the special powers they have already and not avail themselves of this Act, if they think that that course will be to the advantage of the 927 trust; or they can avail themselves of the Act and not avail themselves of their special powers; or they can combine the two together. Clause 3 of the Bill describes the manner in which trustees may combine the two courses. Safeguards are contained in Clause 5 of the Bill. There is, first of all, the duty of obtaining good professional advice. That is something which probably most trustees do, anyhow. They are not compelled under this Bill to accept the advice. It would not be desirable to abrogate their judgment as trustees; but they have to get such advice in writing when making changes in investments.
If they do not make any change in their investments they have to get professional advice on the general balance of their investments every five years. They are also required to have regard to the need for diversification of investments, but on this point this Bill does not follow the White Paper, which stated that the trustees would not be allowed to have more than one-tenth of the fund or £250, whichever was the greater, in any one company. I do not know what consideration that was based on. But, on reflection, it has been decided that it is impracticable and therefore is not contained in the Bill. In fact, there is no arithmetical rule which the trustee must follow in giving effect to his duty of providing for diversification of investments. One reason for that is this. It has been strongly represented to us that some unit trusts, such as "Charifund", have got so much and such well-ordered diversification of investments that if a trust were to put their money into such a unit trust then they would achieve all the diversification of investment which a good trustee could be expected to provide for.
On reading this Bill, some of your Lordships who are not well acquainted with the duties of trustees might perhaps wonder whether the danger in being a trustee may not be rather great. But I think that the requirements laid upon trustees by this Bill are no greater than those which a prudent trustee would follow now, and I am advised that the legal dangers of a trustee having an action brought against him for mismanagement are no greater—or will be no greater—under this Bill than they are now.
928 There are, of course, some bodies other than trustees which are affected by the Trustee Acts, including local authorities. Clause 6 of this Bill extends its provisions to those bodies. Clause 7 enables schemes to be put forward for a number of different local authorities to combine their investments in a common fund. That was introduced at the request of the local authorities and I think it will be of great help, perhaps in particular to some of the smaller ones which have not had any previous experience of investing money. Clause 8 gives power to confer additional powers of investment and to alter the present Schedules by Order in Council, which will be subject to a Negative Resolution.
My Lords, I am sure that your Lordships will give this Bill the close examination which it deserves. I do not think it would be possible to devise an Act of Parliament which would apply in the best conceivable way to every conceivable trust in this country, but I hope that your Lordships will take the view that the proposals in this Bill are at least a sensible and practicable solution to the problem. I beg to move.
§ Moved, That the Bill be now read 2a.—(The Earl of Dundee.)
§ 3.3 p.m.
§ LORD NATHAN
My Lords, there are many who have been waiting a very long time for this Bill, and no one with more anticipation than myself, because, as the noble Earl indicated, I have a sort of avuncular interest in it. The recommendations of the Committee on Charitable Trusts, to which the Minister referred, included recommendations in regard to trustee investments; but, realising that our remit was in relation to charities, we limited our recommendations to charities, though knowing that they could not be regarded as applying to charities only but would have to be applied to the whole field of trust investments. But we there set out certain recommendations, and I am glad to think that, when I read the White Paper of December, 1959, I found that the Explanatory Memorandum with which that White Paper was prefaced really paid my Committee's Report the compliment of being very much a paraphrase of what we there said. I can therefore assure your Lordships that the White Paper fell very acceptably upon our ears.
929 I share the view of the noble Earl that this Bill is one to be treated to-day as a broad issue upon which, in general, I think your Lordships' House can agree without controversy. But there are, of course, various points of detail which will arise for consideration on the Committee stage. I ought perhaps to interrupt myself to say to the noble Earl that I had not expected the House was going to meet on Monday afternoon for this purpose, and I committed myself to an engagement of what I might call an official nature from which I cannot disentangle myself. So I hope that your Lordships, and the Minister, will forgive me if I am unable to remain for the whole period of the debate. I am sorry about that because it is a subject in which I take a very special interest.
In the course of some 40 years of practice I have made it a point always to advise that settlors and testators should leave the widest possible power of discretion to their trustees; that the powers contained in the Trustee Act were far too limited. My observation over that long period of time is that that advice was well founded. Up to a point—up to a very far point—the advice which I have given to others is now adopted by the Government in relation to testators and settlors in general, and I am glad of that.
I must tell your Lordships that there are one or two points in this Bill which I find somewhat disappointing. I have held the view, and hold it now, that in considering their investments trustees should be very careful to remember what really is the duty which lies upon them. It is, of course, well recognised that the protection of the Trustee Act is not so much a protection to the beneficiary, or only indirectly: it is really designed as a protection to the trustee. It is to prevent him from becoming the subject of proceedings by beneficiaries if investments he has made turned out wrong. So long as he restricts himself to the permitted range of investments he is, generally speaking, free from any fear of action on the part of beneficiaries arising out of loss on investments. Although I believe that to be the true legal position, there is no doubt that it has been interpreted widely and generally as implying protection for the beneficiary. In truth, that is only incidental 930 and arises out of the course of action which it is open to the trustees to take under the Trustee Act. And in a sense, in the context in which I am speaking, the Minister will agree that these investments are to be regarded as trust investments in the same way as if they were within the Trustee Act, 1925. Speaking generally, that is the position which these investments will have.
A trustee has the duty of investing in such a way as to hold a proper balance, a reasonable balance, as between the capital and income. He is therefore as much concerned with the preservation, and indeed the increase, of capital as he is with the amount of dividend or interest which is to be received. He has to preserve a reasonable and proper balance between life tenant and reversioner. Now that puts a great responsibility upon trustees; and, although I speak in the presence of two former Chancellors of the Exchequer, one in front of me and the other by my side, I am bound to say that I feel that trustees are in a great difficulty in investing in non-redeemable stock. I do not think trustees should invest in non-redeemable stock in these days, whether they be Government stocks or other such securities. It is no satisfaction to a beneficiary—except, possibly, a life tenant—if Government stocks are bought for a low price and he is to receive a larger return, because any children coming after him will have to pay for that by way of obtaining in the market a much lower price for the capital value of the trust fund.
I believe—and I shall attempt to persuade your Lordships of this in Committee—that there should be, as indeed was recommended in my Committee's Report, a fixed date by which it shall be obligatory for such securities to be redeemed, whether they be Government securities, debentures or preference shares. Money stocks are no good for a trustee, and they are no good for a trustee's beneficiary. If we look back into financial history, we see that that is the way in which fortunes have been lost. It would be a great safeguard to beneficiaries if there were a date, not too far ahead yet not too early—a reasonable date—by which the investments or the loans (because that is what they are) must be redeemed: a fixed date and an obligation upon the borrower to redeem on that 931 date. I should say that less than 15 years would be unreasonable; more than 30 years would be equally unreasonable. But between those two dates there is a reasonable margin for manœuvre, and, at the same time, the trustee would know that it was unlikely that the change in the value of money would operate so fast as to deprive the investment of a large proportion of its value, as has happened during the past years.
The number of widows and others who have been ruined, or nearly ruined, by investing in non-redeemable Government stocks is legion, and such investments were made, for the most part, out of a sense of patriotism. They were originally often investments made during war at the special wish or exhortation of the Government of the day, for the purpose of facilitating the conduct of the war. In that respect, patriotism has not been well rewarded. But the Government, of course, can easily make that situation good by now determining—and there has been much agitation in many quarters in this respect—that at a certain date those stocks now not liable to be redeemed may become redeemable under an obligation gratuitously accepted by the Government. I speak now not only of a single Government, but of any Government. It is not a single Government that is responsible for these stocks: it has been the Governments of all Parties over a long period of years. I believe that nothing is more important than that people should know that money lent to the State will be repaid by the State, and will be repaid at a fixed date.
Now if that applies to a Government, as in my view it does, how much more, must it apply to debentures and preference shares issued by industrial and commercial companies! It has long been the habit of those responsible for these matters to advise those who consult them not to invest in irredeemable preference shares, for the same reason as they advise them, or may advise them, not to invest in irredeemable Government stocks. Money stocks are a trap for the investor, especially in these days of fluctuating values of money and rates of exchange, and of inflation. I advise the Government now that I propose to 932 raise this matter on the Committee stage in the appropriate way, but I hope that, meanwhile, they will give the matter some consideration. Without very much optimism, I at least hope that they may possibly feel themselves able to accept such a suggestion.
Now, my Lords, I am very glad that, for the reasons mentioned by the Minister, the Government have resiled from their position so far as limiting the proportion of wider investments is concerned. I am sure that that is right, as the Minister mentioned just now. I am not so certain about the necessity for the written advice. On the whole, I think that trustees are accustomed to taking, and are well competent to take, advice from those whose professional duty it is to proffer it when asked. If, as is said in this Bill, trustees must seek advice at least once in every five years, then that is making it all rather nugatory and aloof. If they have to obtain advice only once in five years, we might just as well leave out the provision altogether, because to have his portfolio looked at once every five years would not, I think, be very satisfactory to anyone who is serving in these positions. Either it ought to be done at regular periods—which I do not advise—or the matter should be left open to the trustees. The latter course seems to me to be far better. For what is the duty of trustees? The duty of trustees is to act with the money entrusted to them as trustees in the same way as, being prudent men, they would act with regard to their own affairs; and it may be assumed that, in that capacity in their own affairs, they would seek advice just as much. Therefore, even more so must they seek advice if they wish to make changes in regard to the investment of their trust monies.
My Lords, it would be quite wrong for me, as I am myself very much pressed for time, to put pressure upon your Lordships' time by speaking unduly upon this matter. I think this Bill is overdue. It is eight years since my Committee's Report brought this whole matter prominently to the public notice, and this Bill has been a very long time in gestation. But here it is. It is a Bill which, broadly speaking, can fairly be said to fulfil a necessary public purpose; and, for my part, and for that of my friends, I would 933 say to the House that, subject to any modifications necessary in Committee, we shall be prepared to support it.
§ 3.20 p.m.
My Lords, I suppose we owe this Bill, which has been rather long on the way, to my noble friend behind me, and we must express our gratitude to the former Chancellor of the Exchequer for having pushed this matter along during his term in office. I listened to the words of the noble Lord, Lord Nathan, with great interest, and very wise words they were, some of them. The advice about money stocks is most valuable. Would that we had taken heed of these precepts and principles a good many years ago! But I should say that to make it impossible for trustees to hold money stocks—and that would involve a similar provision regarding unredeemable preference stocks—might in some cases create a certain amount of hardship, because this type of stock is rather a valuable one in the exceptional type of trust where the last beneficiary is alive and is an elderly person with an expectation of life of, perhaps, under 10 years, The difference between 4 per cent. and 7 per cent. on the money might make a considerable difference to the happiness of that person's final years of life. Therefore I should think an absolute prohibition of the holding of money stocks and preference shares would not be advisable, especially as I believe trustees are more and more alive to this point than they have ever been before
I am interested to see that the noble Lord trotted out our old friend, the redemption of War Loan,et cetera, and I shall look with great interest to see what reception he has at the Committee stage if he is really going to put down some Amendments about that matter. I should have thought it would not be past possibility that the Government should create some sort of sinking fund for these irredeemable stocks in the same way as there is a sinking fund for (I think it is) the 3 ½per cent. Conversion Stock. If one chooses to do the arithmetic, one cart work out the last date on which one is likely to get paid off. It is a very long way ahead, but the date will come when one's grandchildren, at any rate, might be paid off at par.
Generally speaking, I welcome the freedom of this Bill, long as it has taken 934 in arriving. I think it is going to be criticised in Parliament, probably on two grounds: first of all, that the freedom is inadequate; secondly, that the Bill is incomprehensible.
On the question of the inadequacy of the freedom, I do not disagree in principle on this question of dividing the funds into a narrower half and a wider half. Investment trends—all economic trends—always tend to be overdone in all communities, and perhaps some sort of hard-and-fast rule laid down is, to some degree, a protection to trustees from perhaps importunate beneficiaries, and so on, who want to stampede them into doing the fashionable thing at the moment, though in the long run it may not necessarily be the wisest.
After all, one can lose a lot of money in equities. It is wrong to think that you just have to pop money into an ordinary share and you have made your fortune; that is far from the case. There may be occasions when equities are a very dangerous thing to buy. So many funds have to provide emergency money at times—to meet death duties, and so on—that there should be something which one can be certain of realising so as not to be caught in a financial crisis, or something like that, and having to raise large sums of money in a very bad market. So, my Lords, I support this statutory limit. I am not quite sure whether perhaps a different ratio—two-thirds wider and one-third narrower—might not have been a better proportion. I think that anyone who looked at the last accounts of the Church Commissioners, who are supposed to be fairly shrewd in this matter, if I remember aright, will find that they had one-third equities, one-third fixed-interest securities and one-third in land and property.
So far as I can see—and here I come to the incomprehensible part of it—the Bill does not provide any power to invest in land. Yet I can visualise circumstances in which land might fall into a trust. Presumably in that event the land would immediately be sold quite regardless of whether the time was ripe for selling or not. I said that this part is incomprehensible, and I have heard rumours that even the Lord Chancellor finds one or two of the clauses not so 935 easy to understand as they might be. Certainly several eminent solicitors to whom I have shown the Bill have told me that it is the most incomprehensible Bill they have ever seen. If that is true, of course, that is a very great charge. Therefore, unless the Bill is changed considerably in its course through Parliament—and I imagine that it will not be changed in this respect—I feel that some very clear guide to trustees should be issued, so that they know where they stand. I have had several queries, for instance, which show that it has put skilled people to considerable doubt; yet I know, from what I have learned of the Bill, that the fears expressed are quite groundless.
When one comes to smaller points, there are many, of course, and these will emerge in Committee. I cannot quite understand why convertible debentures are not allowed to be held in the narrower range, because, after all, they are a very sound two-way investment; and if they are converted into wider-range investments, well, the machinery exists for balancing up the two sides. Then again, with regard to the provision in Clause 2, subsection (4), the taking of money out of the fund "fifty-fifty" from each side, I visualise that the taking of money out of the fund would be, or might be, chiefly for payment of death duties, and nearly all such cases would arise at a moment when, clearly, one side or the other would be the better to sell. It might be a good moment for selling equities or a good moment for selling gilt-edged; but it might not necessarily be a good moment for selling both. Therefore I should have thought that there might be some arrangement by which sales could be made from a preponderance on one side, and arrangements be made to level out the matter over a period.
Then again, rights issues appear to accrue to the half of the fund in which the shares are held from which the rights issues accrue. I have received rights issues for debentures based upon a holding of ordinary shares. Clearly, they could not be taken up if the Bill stands as it is. One of my legal friends was rather intrigued by the permission to hold tax reserve certificates, because he could not conceive how it would be possible under this Bill for trustees to 936 have need to, or have power to, tender tax reserve certificates in due course; but that is a technical point with which I am afraid I cannot deal.
Your Lordships may have seen that the criterion of size for investment in the equities of companies has been strongly criticised in some of the financial papers. I am sure that the Government appreciate that merely to lay down that the company must have £1 million of share capital means almost nothing. It may well have lost a great deal of that share capital and still have paid dividends over the last five years; on the other hand, a company with far less than £1 million share capital may have colossal reserves: so this is a completely non-workable yardstick.
I am not sure whether I have interpreted the Bill correctly, but there appears to me to be an anomaly in this respect. Suppose at the moment a testator had an old-fashioned trustee clause in his will—if there be any such at the moment. If he died before the passing of this Bill, his trustees would get the freedom of the Bill. On the other hand, if he died the day after the passing of the Bill, his old-fashioned trustee clause would be binding on his trustees for ever, unless they chose to go to court. If the court followed the sort of reasoning that was followed inBerkeleyv.Berkeley, from which I suffered once, the court might well say that the testator ought to have changed his will and must be deemed to have decided that the old-fashioned trustee clause was the one he wanted.
Finally, I should like my noble friend to confirm what I am told on all sides, though Clause 3 is most incomprehensible—namely, that if trustees choose to operate their own powers under existing legislation, they are not affected by this Bill in any way at all; but if they want to combine some freedom of their own with some of the freedom they would get under the Bill, they will have to divide the fund and come totally under the Bill. I hope that your Lordships will pass this Bill, which I support in principle. I hope that in so doing, it is possible that we may manage to make its language a little easier to understand by the uninitiated.
§ 3.34 p.m.
§ LORD CONESFORD
My Lords, eighteen months have passed since we 937 had a debate on this subject, to which allusion has already been made, and at the end of which my noble and learned friend the Lord Chancellor promised this general legislation. In the course of that debate my noble friend Lord Clitheroe, who speaks with so much authority on these matters, described the operation of the Trustee Act, 1925, in limiting investments Which trustees could make as "acrying scandal." He said that for 20 years he had tried, with singular lack of success, to persuade Governments to end this crying scandal. The effect of those limitations was to cause disastrous and wholly unnecessary loss to beneficiaries—widows, children and others—whom settlers and testators had sought to protect by the trust instrument. The trust instrument had brought about precisely the opposite effect from that desired by the settlers.
It was for that reason, since I entirely share the views of my noble friend Lord Clitheroe, that I heard with so much delight the promise of my noble and learned friend that legislation to revise the powers of investment of trustees was to be introduced. And here it is. Here, at last, is this belated and much-needed legislation. I wish very much that I could welcome it wholeheartedly. Frankly, I cannot. I think that the fundamental fault (and here I differ from my noble friend Lord Hawke; though with much of his speech I agree) is the compulsory division of the trust fund into two equal parts, if any use is to be made of the new powers conferred by this Bill. In my submission, that division is bad, both in theory and in practice. I am aware that it follows the recommendation in paragraph 289 of the Report prepared under the chairmanship of the noble Lord, Lord Nathan; but, as he himself has pointed out, that was eight years ago, and I am not at all sure that he would take the same view to-day.
I wonder what is the theoretical basis of this proportion and in whose interests it is prescribed. I cannot believe that it is in the interests of the beneficiary. If the interests of the beneficiary are to be the first consideration, I believe that prudent and well-advised trustees should have the maximum freedom of investment, and of varying investments, in accordance with the circumstances of the 938 day. I think that at times that may lead them to invest the whole of the trust funds in fixed-interest-bearing securities and at other times to invest a very large proportion in equities; but I believe that the circumstances are very rare in which it has been advisable that that division should be half and half. Very seldom, since 1925, has it been advisable for prudent trustees to invest half the trust funds in fixed-interest-bearing securities. In passing, I would mention that possibly the present is a time when it may be so advisable. There may be such times, but I do not believe that it is advisable to lay down this fixed proportion by law when a first subdivision is made.
Why has it been prescribed? I rather suspect that the liberal ideas that inspired the movement towards this type of legislation were somewhat changed after they went through the Treasury. I believe that the advisers of the Treasury and the Treasury Ministers may have had in their minds the thought that there might be some risk of prejudicing the Government's ability to borrow in the gilt-edged market. In devising the Bill the authors could not quite make up their minds whether they wanted to consider the interests of the Government in borrowing or to help the beneficiary and the trustees to preserve the value of the trust property. In the result, they decided that the thing was roughly "fifty-fifty". I do not think that is a happy inspiration for the legislation.
One enormous disadvantage, to which my noble friend Lord Hawke has justly drawn attention, has flowed from it. This compulsory limitation has led directly to the complexity and obscurity of certain clauses. I am not saying this in criticism of the highly skilled draftsman; I think the fault almost certainly results from this initial decision. But the result is—my noble friend Lord Hawke was quite right in drawing attention to Clause 3—that I do not believe there is anybody in this House, except perhaps a Law Lord, who could say what the words mean; and I do not think any of the Law Lords will tell us, because they will prefer to wait until the matter comes before them in their judicial capacity and they then have the benefit of the argument of counsel upon 939 it. For that reason, I will not put a series of conundrums to my noble friend who introduced the measure, because it would barely be fair, even if my noble and learned friend the Lord Chancellor were the Minister who was going to reply.
What must be the result of this obscurity? The result is perfectly simple. It is that no layman in his senses will agree to become a trustee of any settlement to which these clauses apply. It is quite insufficient for my noble friend who introduced this Bill to say that, so far as the law is concerned, the trustee will not be more liable to have an action brought against him. That may well be so; but there are trustees who like to be able to understand the powers conferred by Statute under which they are supposed to act. Which of us, if this Bill goes through, if he is concerned with or interested in any trust settlement to which this Bill will apply, would ask a friend to become a trustee? Why on earth should he?
No doubt I am expressing a very old and reactionary view when I suggest that an Act of Parliament should be written in plain English and should convey some meaning at first sight to the ordinary reader. But all this obscurity is comparatively modern. If any noble Lord cares to take down any Victorian Statute from the shelves of the Library he will derive at first reading a fairly accurate idea of its meaning. Let him look at the Sale of Goods Act, 1893—of course, that was drafted by a draftsman of genius, on the basis not of the ideas of Parliament but of the Common Law, which is an advantage that few modern draftsmen enjoy. But, for my part, I cannot see why a Trustee Act should not be as plain to a trustee as the Sale of Goods Act is to a trader. Every modern settlement will give the trustee far wider powers than are conferred under this Bill. But in the case of the older trusts, which it is the purpose of this Bill to relieve, it will be very difficult indeed to find lay trustees willing to take on the trusteeship.
I pass for a moment to the clause to which my noble friend the Minister referred in introducing the Bill—namely, Clause 5, on the duty of trustees. I think I fully understand the intention of securing diversification. What I question is the aptness of the words for that purpose.
940 In the case of a small trust, far greater actual diversification will be secured if the trustees place the trust fund in one or two investment trusts than if they invest them in a much longer diversified list of particular investments. The Minister mentioned unit trusts. I do not know why he mentioned unit trusts rather than investment trusts, which I think are often the better investment for trustees. But, be that as it may, he implied that he would approve of the use of a unit trust for such a purpose. But, in my submission—it might well be a small trust—if all the trust funds were placed in one or two investment trusts, that would not be a compliance with the words that at present appear in Clause 5 (1) of the Bill.
The Minister has drawn attention to the somewhat curious fact that the trustee is put under an obligation to obtain and consider proper advice—and what is proper advice is explained in subsection (4)—yet he is under no obligation whatever to follow that advice. I agree with the Minister that there may be good reasons for that: it would be absurd to require a trustee to follow advice which he in fact believed to be unwise. But, at the same time, if he is not under any obligation to follow the advice when he gets it, the obligation to get advice may not be quite so effective as Her Majesty's Government imagined when they put this clause in the Bill.
It may be thought—I do not know—that my criticism is what is sometimes called destructive criticism and that I have no concrete suggestion to make on the method that the Government might have adopted. Well, my Lords, I will endeavour to say what I think they might have done, and I hope that, when this matter is dealt with further in this House and in another place, they may think it worth consideration. I believe the answer is perfectly simple. I believe that what is required is to add some class or classes of equity investments to the trustee list. A trustee would then know that, in addition to the other securities set out in which he could invest trust funds, there were some equity investments which he could also select. The obvious class of investment, to my mind, particularly suitable for trustees, consists of the stocks or shares of the investment trusts.
My Lords, may I interrupt my noble friend? Everybody 941 will agree with him, but you cannot buy them and therefore—
§ LORD CONESFORD
I was going to deal with that. It is not quite as bad as my noble friend says, but I agree with him that the market is narrow, and that is why, peculiarly suitable as I think they are and I think he thinks they are, they might not by themselves be sufficient.
There are also suitable insurance shares. There are probably very suitable bank shares. It is quite possible that, if you added all those classes and described them as possible trustee securities, the list might be too wide. You might prescribe, of course, such, requirements as can be put into the Statute—a certain age and record of payment of dividends and so forth—but something more might be required. I can imagine that it might be desirable for the Treasury to approve and publish from time to time a list of the equity investments that would be legitimate investments for trustees. Needless to say, for such a matter they would require an advisory committee, and an advisory committee has been provided on many occasions under Statute.
Let me throw out suggestions of the sort of people who might constitute such an advisory committee: representatives from the Bank of England, the Stock Exchange, the Public Trustee, the Investment Trusts Associations and the British Insurance Association Investment Protection Committee, and a good city lawyer. I believe that that would make a good advisory committee, and that with its heir the Treasury would not have much difficulty in adding one or two classes of equity investments to the trustee list.
The noble Lord, Lord Nathan, in dealing with money stocks in the course of his speech, talked about the great advantage of having a date by which they must be redeemed. He rightly mentioned the great losses that had often been sustained by a trust fund where an investment had been made in a money stock with no such fixed date. But, of course, immense losses have been made in trusts where there has been a fixed date, but where there has been no liberty to invest in equities—a point admirably brought out, if I may say so, in the report of the Committee over which the noble Lord presided. I believe that if you added a 942 few classes of equity investment to the trustee list, you would achieve everything which this Bill seeks to achieve without any of these appalling complications. May I mention one final matter? On one point it seems to me that this Bill—
§ LORD PETHICK-LAWRENCE
My Lords, it seems to me that what the noble Lord is suggesting would be grossly unfair as between one body of equities and another: that there should be certain equities picked out and favoured, and other equities left alone. I should have thought that it was an unfair proceeding which nobody could possibly support.
§ LORD CONESFORD
It all depends on what you are aiming at. I do not think Cut makes an enormous difference. The equity which the noble Lord imagines to be injured would very often be precisely the sort of equity that would be included in many of the investment trusts. I have so great a respect for the noble Lore who has just put this point that I should like to deal with it in a little greater detail. What I had in mind, of course, was the interests of the trust fund and of the beneficiary, which seem to me to be the overriding interests that we ought to have in mind. But I should not mind at all a further development under which even individual ordinary shares could be put upon a list. What I was wanting is something that gives a trustee clear guidance as to what he can invest in, without an obligation that may he disastrous to the trust—dividing the trust funds into two sections, one of which it is obligatory to put into fixed-interest bearing securities.
The final point which I was approaching is this. In most respects, undoubtedly, this Bill, apart from its complications, at least makes matters better than they are at present. But in one respect it may, I fear, unintentionally make them worse. Under the Variation of Trusts Act, 1958, which I had the honour of piloting through this House, it is possible to go to the court and have the investment clause altered. That has been done in a large and increasing number of these old trusts that contained an unsatisfactory investment clause. Generally the applicant, in applying to the court, applying both under the Variation of Trusts Act, 1958, and under the Trustee Act, 1925. When such 943 an application has been made, the Chancery judges, in their wisdom, have frequently allowed an excellent modern investment clause without any of the rigmarole provided in this Bill.
I believe it is the Government's intention that that practice of the court should not be interfered with. I gather that from the concluding words of paragraph 7 of last December's White Paper, which says about these proposals:They will not affect the existing power of the Court in England to extend the range of investment for particular trusts.I am sure that that is the intention, and there is nothing in this Bill which expressly takes away their power. But I am afraid the practice of the courts may be greatly affected. I think it is unlikely that, if this Bill is passed into law, the courts can be relied on to go on allowing the type of investment clause that they have been allowing since the 1958 Act has been on the Statute Book, because they will be likely to say, "Here we have a modern and up-to-date declaration by Parliament of what the powers of investment by trustees should be, and in those circumstances we will not give you the new investment clause for which you ask". I would ask Her Majesty's Government, whatever else they do, if it is their desire that the type of order that has been made in the last two years by the Chancery judges should continue to be made in appropriate cases, to make it quite clear that the present measure is not intended to interfere with that Chancery practice.
I apologise for the time I have taken in my criticism of this Bill. The relief of trustees which the Bill provides is long overdue, but the main limitation which this Bill imposes—a compulsory division of the trust funds into two equal halves at the time of the division—is wrong in theory, and leads to great complication in practice. It will be very difficult to persuade laymen to become trustees of settlements to which the Act will apply, and the difficulties could all be avoided by a simple measure adding some classes of equities to the trustee list.
§ 4.0 p.m.
§ LORD POLWARTH
My Lords, I am sure we all enjoyed the stimulating comments of the noble Lord who has just 944 sat down. I would go some of the way with him on some of his points, but not all the way. I do not believe in looking a gift horse in the mouth, and that is how I regard this Bill. I would therefore give it a welcome from some modest experience in all three capacities: as a trustee, as a professional adviser, and, of course, inevitably, as the ultimate abject of it all, as a beneficiary. I think this Bill shows a continuation of the enlightened policy of this Government, which started by giving us the Variation of Trusts Act, which I am glad to see is to be followed shortly by a similar measure for Scotland. Could I say how glad I am that this present Bill is to apply to Scotland as it is to England?
At the same time, I do not think we should over-emphasise the impact this measure will have, because, as the noble Earl said in introducing it, it applies in general only to the older type of trusts. Certainly it is my experience, as it is Lord Nathan's experience, that professional advisers to-day are more and more pressing for the inclusion of the widest possible investment powers, and I am, too, quite certain that they are right in doing so. But there is no doubt that in the case of these older trusts this new measure will save time, trouble and certainly expense, because while trustees can go to the courts, as the noble Lord, Lord Conesford, said, it is an expensive business and not one for the smaller type of trust. Like him, I hope this will not mean any change in practice in the Chancery Court, because having experienced their operations I realise how enlightened their handling of the Variation of Trusts Act has been up to date.
I do not think any of us need to have elaborated why the powers of this measure are needed. All the previous speakers have emphasised it. It is clear that over a long period it has only been by investment in equities of a proportion, at least, of the funds that beneficiaries have been able to enjoy even approximate equality of real benefit with their fellows who are wage and salary earners. I am particularly glad that the Government have improved on the terms of the White Paper. I think this Bill gives a wider measure of flexibility with-out removing adequate protection. I go a long way with the noble Lord, Lord Conesford, on the question of the spread 945 of investment, and I am particularly glad that we have not been restricted to those very small holdings of equities that the White Paper suggested. I must declare my interest as a director both of investment trust companies and also of a group of unit trusts who do precisely what the noble Lord suggested, namely, invest in the shares of banks, insurance companies and investment trusts. I hope that will not be considered what is known in the world of entertainment as a "plug".
But I am also particularly glad that we have the introduction of this requirement to seek skilled advice, even if it should not be taken. I am glad it applies to fixed-interest stocks as well as equities, because I think the need is every bit as great there as with ordinary stocks. On the subject of advice, I disagree a little with the noble Lord, Lord Nathan, as to the need for trustees to be required to take it. Far too often beneficiaries have seen heir income or capital or both steadily eroded through the failure of trustees to review the investments. I do not say it is necessarily their fault; it is sometimes the fault of their so-called advisers or the agents for these trusts. I can recall several cases where, as a trustee. I have had to stir up agents of my co-trustees to take some action about reviewing trust lists, particularly where they were all in gilt-edged stocks and the agents felt they were legally quite safe to leave things as they were.
I am not quite so sanguine as the noble Lord, Lord Nathan, as to trustees fulfilling their duties automatically. After all, at times all of us need to be reminded of our duties. Some of us do not have the professional competence to under-stand them in full and others of us are very busy. I am sure it has been the experience of others of your Lordships who have become professionally qualified that you are immediately surrounded by your friends or relations—or others who appear to think: they fall into one or other of those categories—and who come round like a swarm of bees and say, "Here is the very chap to make one of our trustees". Unless you are very strong-minded you soon find yourself trying to deal with more trusts than you would think it wise to do. I think it is a good thing to be reminded of the need for taking professional advice. I would query whether the provision fixing five 946 years is worth putting in the Bill at all. I believe it should be a shorter period at most two or three years, but preferably one year. I think that any trustee who does not have professional advice on the investments at least annually is almost culpably negligent.
Like the noble Lord, Lord Hawke, I doubt whether one or two of the provisions regarding companies in which a trustee may invest are very effective. They are somewhat inflexible. The provision requiring the company to have £1 million capital seems to me to be completely out of date; a nominal capital is no measure of the worth of the company. I agree with the noble Lord about the question of payment of dividends. Surely the question should be whether the dividends have been well earned and are covered, and we should take care to avoid companies paying dividends out of wasting assets.
There are two major points on which I may have been very stupid, but I should like the noble Earl to give an assurance in his reply. The first is this: a trustee divides his fund into two parts specified by the Bill and makes a handsome profit on the wider range, the equity portion. Presumably then he can re-invest it, if he thinks fit, in fixed-interest securities for the time being, without affecting the basic division of the two parts. In other words, the wider-range investments include the narrower range as well. I should like to be quite clear on that point. The second one applies to the trust where there is in the deed a special requirement of investment, as, for example, a statement that the trustees shall hold at least 40 per cent. of the funds in trustee securities and have a free power with the rest. Does this Bill mean that in future the 40 per cent. can be divided again in two, as it were, and therefore the trustees would effectively be able to put 80 per cent. in equities, or is that not the case? I am sorry if I have not followed those two points. But, let us face it, though the intention of the Bill is simple, I feel the noble Lord, Lord Conesford, expressed the view of most of us on its horrible complexity to the layman, and even to many of the professionals among us.
One consequence of this is that there is going to be more work for trustees and their advisers; the accounting and bookkeeping is going to be more complicated. The lot of a private trustee is not an easy 947 one to-day, however well advised he may be. There are many complications and pitfalls and singularly little thanks. I believe that today we are seeing a greater trend towards the use of professional trustees in the sense of banks and insurance companies and other bodies, and this Bill may well accelerate that trend. That may not, after all, be a bad thing; but it would be a pity if all the personal touch in these matters were to be lost behind the impersonality of these institutions. However, such criticisms as I have made are comparatively minor ones compared with the worth of the Bill as a whole. I believe it will remove some of the frustrations under which all three parties—the trustees, the advisors and the beneficiaries—who have to do with these trusts of older construction have laboured.
§ House adjourned during pleasure and resumed by the Lord Chancellor.
§ 4.10 p.m.
§ LORD SPENS
My Lords, before the noble Earl replies, may I take up just a minute or two on Clause 4, which has not been mentioned by any noble Lords who have spoken, but which seems to me one of considerable importance? Clause 4 starts by stating thatproperty' includes real or personal property…There are a vast number of trusts throughout this country where there is settled land together with settled investments, and what the effect of Clause 4 is going to be on a trust such as that is not easy to understand. It seems to be quite clear that if the trusts for beneficiaries are identical as regards an estate and a fund of settled investments, then the two make one and the same fund; and the question then arises, on what principles, and how, is the fund to be divided into the two moieties required by this Bill?
If you start by valuing the real estate, possibly an expensive business, apparently not answered by this Act, you add the settled fund, and you get a rather curious result. Assume that the settled estate is worth £200,000; that you have a settled fund of £100,000, and that the beneficiaries are not all the same, the 948 limitations are not all the same; you then get a total fund of £300,000, of which one-half is £150,000. The result of that, of course, is that the whole of the free investments can immediately be put into the wider-range investments. What happens after that is not very clear. Assume, on the other hand that the beneficiaries' limitations vary in some small respect, then the two have to be treated as two separate funds. The real estate is a separate fund and the investments are then a separate fund. I do not gather that, in those circumstances, a fund consisting solely of real estate, settled land, comes under this Bill at all. I think that it would have to be part of a mixed fund if the Bill is to be effective in that case.
I raise that point only because Lord Hawke has already noted that there is apparently no power in the Bill to invest in land. It seems to me that the question of land and how land comes into this Bill has been left, at any rate for the moment, vague. I should think it has been done quite deliberately. But it would appear that if you get a mixed fund of land and investments limited for the same beneficiaries, then you get one mixed fund and the land comes under the provisions of this Bill. Presumably then that gives a new power of sale over the land which has not existed before. I raise these points because it seems to me that this may be a most important clause. It has not been mentioned before, and I greatly doubt whether the noble Earl would care to reply straight away about it. It is rather more than a Committee point, and I therefore raise it as a matter of some considerable importance.
§ 4.15 p.m.
§ EARL FORTESCUE
My Lords, as one who for many years has struggled with investment clauses and with charitable funds I should like to say that I welcome this Bill. We are all most grateful to the noble Lord, Lord Nathan, for what he has done in getting it to this stage. A number of criticisms have been made of the Bill from various quarters. I believe that that is absolutely inevitable when we all know from experience that no two trusts will be suited by the same clauses. As I see it, this Bill will not be applicable to all future trusts, many of which will have new trust clauses; but it is an alleviation of the 949 damage done by the wiseacres who drew up trust clauses in the past. Whether we are much better than our ancestors were at drawing up trust clauses for 50 or 100 years hence obviously remains to be seen, but I think it is doubtful.
In this debate so far we have been concentrating more on what I may call private trusts, rather than on charities. I think it is inevitable that the investment of charitable funds will have to be regulated by a Trustee Act; and, taking it all round, I think that this particular Bill is as good an omnibus solution as could be found. Quite obviously, the 50–50 division between the wider and the narrower will not suit everybody. In many instances there will be a good case for saying that the ratio ought to be 60–40; in others 33–66. In some cases, indeed, it may be right for the charitable fund to be invested wholly in equities. But that is not the point. What we are doing now, as I see it, is to produce something which will not do too much harm to people who are tied up already.
As many of your Lordships know, for years it has been the practice to give wider and wider powers to trustees. To my mind, it does not make any difference how wide those powers are, provided that the right trustees are chosen. As the noble Lord, Lord Polwarth has said, there will be an increasing tendency to use professional trustees, like banks and insurance companies. For many years I personally have advised family trusts and the like to adopt: a bank or an insurance company, with a member of the family as co-trustee to give the local picture. I feel that there is a danger at the moment that the powers resulting from this Bill may be taken as the guide for young solicitors drawing up trust clauses. That, I think, would be a tragedy. I regard it as only an alleviation of damage done in the past.
There is another minor matter which probably I should bring up on the Committee stage—namely, in the First Schedule, the limitation to equities on which dividends of 5 per cent, had been paid for five years. Far be it from me to guess what the forthcoming Report of the Jenkins Committee may advise, but I believe that in investment circles it is generally felt that sooner or later we shall have no-par value shares in this 950 country. There are arguments against that, I know, but I would suggest to the noble Earl the Minister that in Part IV, paragraph 3 (b) might be revised so as to allow for that. It was my experience some years ago to advise on a trust which could put money into any part of the British Empire in various types of investment provided they had paid 5 per cent, for five years. The trustees wanted to put part of the money into Canada, but there was great difficulty in finding investments which had paid 5 per cent, for five years, because nearly all the companies had no-par value shares and therefore did not pay on. a percentage basis. I am not going to attempt to suggest a form of wording to meet that, but I am sure that the draftsman could find some solution.
§ 4.22 p.m.
§ THE EARL OF DUNDEE
My Lords, perhaps I might just mention the question asked by my noble friend Lord Spens while it is still fresh in my mind. If he wished me to give a full reply to his argument, I should have to have a little more time. But Clause 4 does not affect settled land; it applies only to the monies as a separate fund. I believe I am right in saying that for trustees to own land they must be given power to do so in the trust instrument; and that if trustees were to foe established only for the purpose of administering certain monies or investment entrusted to them, and later were bequeathed land, they would have to sell it where they did not have power in the original deed to own land. The answer to my noble friend's immediate question is that here Clause 4 would apply only to the settled monies as a separate fund.
I am very grateful to your Lordships not only for your general support for the Bill but also for the great number of useful and helpful suggestions which you have put forward. The noble Lord, Lord Nathan, was good enough to give notice of the matters which he proposed to raise in the form of Amendments on the Committee stage: that in the narrower-investment range it should be compulsory to put the money of the trust into securities with a fixed date of redemption, which he suggested might be not less than 15 nor more than 20 years. Perhaps we had better wait for Committee until we deal with that 951 subject, but my first thought was to wonder why he should suggest "not less than 15 years". Supposing trustees had a chance of putting their money into a dated stock in five years' time, which is now available at 90, why should they not be allowed to take this certain profit of 10 per cent. in a fairly short time?
With regard to insisting upon dated stocks, of course we all know the arguments for that, but I should have thought that it was a rather unwise restriction to make that compulsory and to prohibit trustees from putting their money into undated stocks. There have been so many examples, of which we have all heard a great deal, of undated stocks which have fallen heavily in value, and there may be times when it would be a good thing to buy them when they have fallen so low that they are paying 6 or 7 per cent. It might then be the right thing to buy those for the sake of the yield alone, and the trustees might consider that those stocks could not go much lower—because, of course, they fluctuate in inverse proportion to the interest rate. Surely it would not be unjustifiable for a prudent trustee to buy such stocks when the rate of interest is very high and the capital value very low.
§ LORD NATHAN
My Lords, I should not care to interrupt the noble Earl, the Minister, in the middle of his argument, but I am not at all certain that this is not one of the traps into which trustees are very apt to fall: for they have to preserve a balance between capital and investment. It is not sufficient that they should see there is an investment standing at a low capital value producing a large income unless that is balanced somewhere by a capital investment which has improved in value. Because their responsibility is not only to provide income as it is commonly understood: their responsibility is to two classes of beneficiary—the life beneficiary, who is entitled to income, and those who come after, who are entitled to capital. It would be contrary to their duty if the trustees invested the money in stocks producing a high rate of interest unless that was compensated elsewhere by a high return on capital.
§ THE EARL OF DUNDEE
My Lords, I should have thought that that showed it was unwise to interfere too rigidly with the discretion of trustees.
The noble Lord also said that he was not certain about the need for written advice, and my noble friend Lord Cones-ford dealt with the same point in his criticisms of Clause 5, which lays down the duty of the trustee to obtain written advice, although he need not accept it. I feel that because a trustee does not have to accept the advice—and my noble friend Lord Conesford admitted that it would be wrong Ito insist that he should do so—it is not necessarily a bad thing, even from the point of view of his own protection, to insist that he should seek it. In practice, of course, most trustees who ask for advice do take it; and if a trustee had asked for advice and taken it, dearly that would be important to his defence in the event of his being sued. Even if he had not taken it, the fact that he had considered it and had a written record of having done so, and of his reasons for not taking the advice, might still be very relevant to his defence.
The noble Lord, Lord Nathan, also raised the question which has just been raised by my noble friend behind me, about five years being too long a period. I should like to look into that point. I admit that in any trust with which I had anything to do I should certainly insist on the investments being reviewed much more frequently than every five years. The noble Lord thought that perhaps a better alternative would be not to insist on having them reviewed at all; but no doubt we have all had experience of old-fashioned trusts run by some dear old family lawyer, in a beautiful, sleepy office, who never thinks of looking at investments for 20 years. Although that may not necessarily be a bad thing—because if the investments had been reviewed mistaken action might have been taken which would not have been to the benefit of the trust—probably on the whole it is a good thing for the generality of trusts to provide that they should be reviewed with some frequency. I will not say at the moment exactly how many years is the ideal number.
My noble friend Lord Hawke had two criticisms of this Bill: one that its freedom was inadequate, the other that it was incomprehensible; and my noble 953 friend, Lord Conesford, was also inclined to think that parts of it were incomprehensible. Both my noble friends concentrated on Clause 3 as the most outstanding example of incomprehensibility. That is the clause which deals with special powers which already exist under trusts. Under the clause the trustees will have three different courses which they will be able to pursue. They can continue to act under their special powers and ignore the Bill, or they can act under the Bill and ignore their special powers; or they can combine the two. And the last passages in Clause 3 describe how they can combine them. I would be willing to admit that when I first looked at Clause 3 I thought to myself, with some relief, "There are not three incomprehensibles but one incomprehensible". I must say, though, that the particular question which my noble friend Lord Hawke asked about Clause 3 was the one part of it which I thought was entirely comprehensible and, indeed, lucid. He said that he wanted to be assured that if the trustees choose to operate their special powers those powers will not be affected by this Bill. I really think that that is very clearly stated in the opening sentence of Clause 3:The powers conferred by Section 1 of this Act are in addition to and not in derogation from any power conferred otherwise than by this Act.I should like to assure my noble friend that the special powers which already exist are not removed or in any way diminished by this slightly complicated clause.
My noble friend Lord Conesford thought it was a fault of the Bill that a trust fund should be divided into two equal parts, and I agree that it is difficult to find a solution which will be equally right in respect of all the numerous different kinds of trust which exist in this country. My noble friend, I think, rather implied that good trustees ought to be given freedom to put the whole thing into equities. I have heard that argued in debates in your Lordships' House. I have heard some noble Lords go even further than that and suggest that, in modern conditions, trustees should be prohibited by law from ever having any money in trustee investments at all. I think that was put forward, in some irony, perhaps, by my noble friend Lord 954 Brand a year or two ago. As my noble friend Lord Hawke pointed out, you cannot always be sure that equities will go up, and (especially, I think, in the case of small trusts with trustees who are not perhaps always very conversant with businesses, or who perhaps have a great deal to do and a great many small trusts to look after, and may not have a great deal of time to devote to each of them individually) I think it is some protection that part of the trust should be in trustee investments, even though they are a fixed-interest-bearing security.
After all, the range of possible rise and fall in equities is very great indeed; and even in the recent booms in equity shares you can say that there have been some stocks which were formerly thought to be quite sound equities which have gone down a great deal while other things were going up; and in the case of fixed-interest-bearing stocks, which for understandable reasons are so unpopular now, after all, the range of the movement is more or less limited by the variations of interest rates. If bank rate goes up, if interest rates on borrowing go up, then the gilt-edged correspondingly go down; but when interest rates go down to 4 or 3 per cent., then fixed-interest-bearing stocks go up. And that range of rise and fall, although it may be considerable, is not so violent in its possible extremes as the range of appreciation and depreciation to which a great many equity stocks may be subject.
My noble friend, I thought, was very kind in saying that he was not going to ask me any of his conundrums because I was not the Lord Chancellor. My Lords, I am nevertheless very sorry that he did not ask me the conundrums he had in mind, because I am sure that your Lordships would not have expected me to reply to them but it would have given me most enormous pleasure to hear them, and I am sure it would have delighted your Lordships, too. He asked whether the definition of diversification in this Bill could really justify a trustee in putting all the money in the wider range of moiety of the trust into a unit trust. I did not actually recommend that, my Lords, in my speech. I think that if a trustee was considering putting half a fund into a unit trust he would have to consider not only the diversification of investments provided by that trust but also how far it was right to 955 entrust all the funds to one set of managers.
The reason why I said what I did was this. I was giving the reasons for not following that particular part of the White Paper which laid down that not more than one-tenth of the fund or £250, whichever was the greater, should be placed in one investment. I gave one reason why we had not implemented that part of the White Paper, which was that it had been represented to us that a number of unit trusts—one particularly, "Charifund"—might give all the diversification that was required.
§ LORD CONESFORD
My Lords, I am in complete agreement with what my noble friend is now saying, and I entirely approve of the change made in this Bill from what was said in the White Paper. My point on this matter, if I may express it, was this: that, if it were a very small trust, an investment in a couple of investment trusts would give far more diversification than a diversified list of ordinary shares. Nevertheless, I suggest to him—perhaps he would inquire of his advisers whether this is not the fact—that even a couple of investment trusts would not be a diversification within the meaning of Clause 5 (1).
§ THE EARL OF DUNDEE
My Lords, on my noble friend's first point, I agree with him that probably most good investment trusts would provide a better diversification, and I am glad that he has given me the opportunity to say that. With regard to the point of definition, I think we must leave that until later.
I am very grateful to my noble friend Lord Fortescue for his support of the Bill and also to my noble friend Lord Polwarth, whose qualifications, I am sure, are as well known to those of your Lordships who live in England as they are to his own countrymen. He has perhaps at least as great, if not more, knowledge of the subjects which are relevant to this Bill as any of your Lordships. There were only two questions which he asked me. One was: if you make a profit on your wider-range moiety can you invest it in gilt-edged? Yes, my Lords, you certainly can. Part III of the First Schedule defines "wider-range investments", and it may be that 956 my noble friend has been puzzled by the last phrase in paragraph 1:not being securities falling within Part II of this Schedule.That is simply a part of a definition of the first kind of securities which are being described here. It does not mean that it is impossible to invest in such securities with part of the wider-range fund. Of course, if a large profit was made on some equity share, and if the trustees thought it right to sell out and to put it into some early-dated stock while they were waiting to find a good alternative, that would be a very good thing to do. There is nothing to prevent them from doing that. And if they preferred to have it for a longer period in some gilt-edged stock, that again would not prejudice their rights to keep it in the wider-range half, and later on to sell it out again and put it in an equity once more.
The noble Lord's other question was with regard to special powers. He asked: supposing there was a trust which had to invest 40 per cent. of its funds in trustee stocks and which could do what it liked with the other 60 per cent., would it be affected by this Bill? Would the 40 per cent. be divided up? I am afraid the answer is that it would not. We cannot go beyond 50 per cent. If it was 25 per cent, that the trust was allowed to invest in equities, then that could be raised under this Bill to 50 per cent.; but if, as in the case given by my noble friend, the trustees were already allowed to invest 60 per cent. in equities, then it would be better, from their point of view, to continue to exercise their special powers and not to take advantage of the Bill—that is, so far as equities are concerned. There might possibly be other, more complex, advantages which might be derived from combining their special powers in some other way with the Bill, but perhaps we could leave that to a later stage.
My Lords, I am very grateful to your Lordships for having made so many constructive suggestions. They are too many for me to acknowledge individually now, but they will all be considered most carefully, and I hope not always unfavourably, before the Committee stage of the Bill is reached.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.