Powers of Attorney: watch out for the traps

The Office of the Public Guardian (OPG) is the government agency responsible for registering and monitoring powers of attorney (POA). In its 2020/21 annual report, it said it received 691,746 applications that year to register a Lasting Power of Attorney or Enduring Power of Attorney.

While that was a fairly significant decrease from the year before (917,550), it reported it now had over 5.3 million powers of attorney in total on its register.

That’s a huge number, yet some have suggested that even more people ought to be setting one up. To put that into context, research from Canada Life in 2020 found that 20 million UK adults, by comparison, had a will.

Whether your clients already have POAs in place or are thinking about granting them, there are a few traps to watch out for.

Don’t leave it too late

The first pitfall to be aware of is that an individual cannot set up a POA if they have lost mental capacity.

According to the Mental Capacity Act Code of Practice, this means a person who lacks capacity to make a particular decision or take a particular action for themselves at the time the decision or action needs to be taken.

In a similar vein, the charity Age UK defines mental capacity as being able to understand a specific decision, retain information for long enough to make it, weigh up different choices and communicate the decision in any way possible.

Research in 2019 by the OPG found that 75 per cent of people surveyed thought that their family or next of kin could make decisions on their behalf if they lost capacity. That’s incorrect, and in the absence of a POA, no one else can lawfully act on behalf of the individual. Unlike on death, for example, there are no de facto provisions akin to the intestacy rules.

The fall-back provision in this scenario would be for a family member to apply to the Court of Protection for a deputy order. However, this can be a long and expensive process. It requires the deputy to take out an indemnity bond with a bank or insurance company, keep a record of all payments and submit annual reports to the Court. There’s also an application fee of £371, and there may be ongoing supervision fees on top of that.

In the absence of a deputy order, however, a client’s investments could be left in limbo if there is no one lawfully authorised to provide instructions on them.

Use the right type of POA

There are different types of POA, and they have different uses.

The Lasting Power of Attorney is the most formal type, replacing the Enduring Power of Attorney in 2007. There is a standard form for it, and it must be registered with the OPG at the outset. It has two versions – one for health and welfare, one for financial affairs.

If a client is looking for something temporary, they could consider an Ordinary Power of Attorney. It needs to be executed as a deed, which means it must be in writing and be witnessed, but otherwise it’s straightforward to draw up and can be as simple as a one-page document. It doesn’t need to be registered with the OPG either.

In terms of uses, it can be a general power, meaning it applies to all of a client’s affairs, or it can be a specific power, meaning it can be used for a specific account or transaction. It can also be set to expire on a particular date, so if a client is out of the country for an extended period of time, an Ordinary Power of Attorney might be more appropriate than a Lasting Power of Attorney.

In terms of drawbacks, an Ordinary Power of Attorney automatically ceases if the client loses capacity. Therefore, for long-term use an LPA may work better as this would remain in force.

A key point is that neither of these POAs can be used in respect of decisions made as a trustee. Trustee decisions can only be delegated to a third party via a specific Trustee Power of Attorney drawn up under section 25 of the Trustee Act 1925.

It’s not uncommon with SIPPs at the bespoke end of the market for the client to be a co-trustee of their own SIPP. If they have a SSAS, again they will be a trustee. For clients with these types of pension schemes, they would need to execute a Trustee Power of Attorney to cover ‘trustee’ decisions alongside another type of POA to cover ‘member’ decisions. Helpfully the Act provides standard wording, and there’s no reason both powers can’t be included in the same document.

A Trustee Power of Attorney, however, is not a long-term solution given it expires automatically after twelve months. Clients who are concerned about losing mental capacity over the long-term might be advised consider moving to pension arrangements where they’re not a trustee.

Include specific instructions about discretionary management

In 2015, the OPG amended its guidance to say that if an individual wanted to allow an attorney to engage the services of a discretionary fund manager (DFM), they would need to include specific wording in the POA to that effect. This is the standard wording it provided.

My attorneys may transfer my investments into a discretionary management scheme. Or, if I already had investments in a discretionary management scheme before I lost capacity to make financial decisions, I want the scheme to continue. I understand in both cases that managers of the scheme will make investment decisions and my investments will be held in their names or the names of their nominees.

However, its guidance then went on to say there was no guarantee the investment provider would accept this wording, and an individual might want to seek legal advice.

Following this, there were mixed views in the industry about whether this wording was strictly necessary, and it broadly came down to the views of each provider’s Compliance department.

If a provider was insisting on that wording being present but it wasn’t present for a particular individual, the individual would need to revoke the existing LPA and set up a new one. This was fine if the individual still had mental capacity but became a lot more challenging if they didn’t and would necessitate an application to the Court of Protection to add the authority retrospectively.

In March 2022, the OPG revisited its guidance, and it no longer says an individual needs to include that wording, which is good news. However, it does still say that legal advice may be necessary, and it reports that at least one major financial institution still requires it. Anecdotally this seems to be the case, and it seems that some providers do still insist on the wording being present.

In terms of where that leaves clients and advisers, it may be sensible simply to suggest the client includes the wording if they currently use a DFM or might consider using one in the future. Certainly, there doesn’t seem to be any drawback to including it.

Sign up for the ‘Use an LPA’ service

So far, we’ve looked at how you set up a POA and what you can include in it. The next step is sending it out to third parties.

In July 2020, the OPG set up a new online service called ‘Use an LPA’, which third parties such as banks and investment providers can use to verify an LPA rather than relying on seeing a paper version.

Clients registering an LPA on or after 17 July 2020 will receive a reference number and an activation key, which they can use to create an online account. Once they’ve done that, they can add the LPA to the account and a generate a secure temporary access code, which they can give to a third party. The third party can then view certain details of the LPA online.

On paper (pun intended), this is a positive development from the OPG. However, the wheels of change turn slowly, and we’re still in the early adoption stage. While the OPG reports ‘growing interest’ among organisations, it might be a while before it’s used widely. Also, while the service will indicate whether there are specific instructions or restrictions in the LPA, it doesn’t say what they are. In the meantime, providers may still want to see the original document or a certified copy.

However, it’s clear that the direction of travel with this type of document is online, and for the sake of ten minutes spent setting it up it’s worth clients looking into it.

Make sure copies are certified correctly

If a client is sending out a paper version of the POA, providers will always be comfortable seeing the original. Given how valuable a POA document is, however, I suspect that most clients will be cautious about sending it by post. Instead, they might look at sending a photocopy.

This is a slightly nuanced area, and there’s less consistency across providers than you would hope. But if the client does send a copy, it’s more than likely that the provider will want it certified in a particular way and by a particular person.

The background to this is the Power of Attorney Act 1971, which says the contents of a POA can be ‘proved by means of a copy’ provided the copy is certified as a true copy by the donor (i.e. the person granting the POA), a solicitor or a notary public. Note the absence of ‘financial adviser’ from that list.

In terms of how it must be certified, the guidance on the Gov.uk website provides standard wording, and the person certifying it must sign and date every page. (Don’t assume that all solicitors will know this.) Industry best practice suggests the certifier should also print their own name and their firm’s name (if a solicitor).

Strictly speaking, providers are free to accept whatever third-party authorities they like and in whatever form they like, but it’s probable that most providers will align themselves with the legislation. That said, it’s always worth checking with the provider as some might be more relaxed than others on who can certify a copy.

This article was previously published on FT Adviser