MINISTER FOR ECONOMIC DEVELOPMENT
Trusts (Amendment No. 4) (Jersey) Law 2006 (the “Amendment”)
Article 56
1. Introduction
1.1 In November 2004, a public consultation paper was issued in relation to proposed changes to the Trusts (Jersey) Law. The results of this consultation were presented in July 2005 to the Economic Development Committee, which approved law drafting instructions in respect of the Amendment. Since then, work on the Amendment has progressed, and the Amendment is very nearly finalised.
1.2 One key matter that is to be included in the Amendment concerns Article 56 of the Trusts Law. This issue has for many years been the subject of debate, and when law drafting instructions were approved, the Committee felt that further negotiation should take place between representatives of the Finance Industry, the Jersey Financial Services Commission and the Economic Development Department in relation to this matter before law drafting instructions on that Article were finalised.
1.3 Despite the best efforts of all parties, it has not proved possible to reach a consensus. The purpose of this paper is to therefore request that the Minister set the policy that should apply in relation to this Article.
1.4 Once this policy is settled, it is anticipated that the Amendment will be finalised in short order, and will be brought back for Ministerial approval and submission to the States prior to the end of this month.
2. Discussion
2.1 Article 56 of the Trusts Law is a fairly lengthy article that, in simple terms, deems any director of a corporate trustee to be a guarantor of that trustee in respect of any breach of trust committed by the trustee. This is to the advantage of beneficiaries, in that, in the event that a trust company lacks the assets to make good a breach of trust, beneficiaries have direct recourse to the directors of that trust company.
2.2 The Finance Industry generally has argued since it came into force that Article 56 was unnecessary and a barrier in the way of work coming to the Island. The Commission has historically argued that it is important to maintain the Island’s reputation as a “beneficiary friendly” jurisdiction.
2.3 It is now agreed by both representative of the Finance Industry and the Commission that, as currently drafted, Article 56 is unduly onerous. The chief reason for this is that all directors of a corporate trustee are deemed automatically to be guarantors of the trustee in respect of any breach of trust, though the court may excuse directors from liability if it thinks fit. It is the assumption of culpability that is the most onerous aspect of the provision. However, the Article as a whole can be used for “nuisance litigation”, as a claim against a trust company with five directors could lead to the company and each director having to seek separate legal advice. Faced with six sets of legal fees, there is an incentive for the trust company to settle, regardless of the merits of any claim.
2.4 The key issue, therefore, is whether Article 56 should be repealed or replaced. Despite lengthy discussions, it has been impossible for the Finance Industry and the Commission to agree on a common approach. Industry is insistent upon a total repeal. The Commission’s view, set out in a letter from Colin Powell to John Harris dated 9 February 2006, a copy of which is annexed hereto, is that a replacement of Article 56 is to be preferred. However, it is worth pointing out that the Board of Commissioners were themselves divided on this issue, with four favouring a replacement and three a repeal.
2.5 Industry argue that Article 56 is unnecessary, as Jersey is among the most highly regulated trusts jurisdictions in the world, and settlers and beneficiaries are already accorded significant protection against the directors of corporate trustees under existing caselaw. In addition, the existence of Article 56 places a significant barrier in the way of private trust companies (PTCs) that would otherwise wish to come to the Island. PTCs are trust companies that are established to provide services in respect of a single ultra-high net worth family, a single transaction, or a similar restricted purpose. PTCs have been identified, along with specialist fund products, as one of the likely areas of growth for the Finance Industry. Such vehicles generate significant fees without requiring a large “footprint”, in accordance with the financial services action plan.
2.6 Imposing automatic liability upon directors is particularly onerous in the case of PTCs where, typically, a family member or advisor will wish to sit on the board of the PTC. A wealthy settlor, seeking to establish a PTC for the benefit of his family, will often be advised to establish the PTC in a jurisdiction other than Jersey specifically in order to avoid the potential liability arising under Article 56.
2.7 The only other jurisdiction that imposes a liability of this sort upon directors of a corporate trustee is Guernsey. Guernsey is currently in the process of reviewing its Trusts Law and the future of the equivalent article is the subject of ongoing debate. Other competitor trusts jurisdictions, which as well as established offshore centres such as the Isle of Man and Caribbean Islands increasingly includes jurisdictions such as New Zealand and Singapore, have been content to leave the question of the liability of directors of corporate trustees to be decided by the courts, applying common law principles.
2.8 In seeking a compromise, serious consideration was given to redrafting Article 56 so as to lessen the more onerous aspects of the article and provide a form of “carve-out” for PTCs. Both the Commission and Industry have agreed that carving out PTCs in this way was undesirable for a number of reasons: it was complex, potentially confusing and would give the impression that differing standards of behaviour applied to the trustees of Jersey trusts.
2.9 The liability of directors of a corporate trustee for a breach of trust committed by that trustee is an area that is developing quickly through caselaw. The general view is that there is a form of claim – the so-called “dog-leg” claim – under which directors of a corporate trustee who were directly involved in a breach of trust can be held liable for any loss suffered by a trust as a result of the breach, if that director had been either negligent or reckless in respect of the breach.
2.10 Nevertheless, caselaw is inherently uncertain and the Commission’s preferred view is that it would assist beneficiaries if Article 56 were to be amended to set out clearly in statute what is believed to be the current common law position.
2.11 There is agreement among both local trust practitioners and key London intermediaries that unless repealed completely, Article 56 will impose a form of statutory liability upon directors that will (assuming that Guernsey repeal their equivalent article) be unique to Jersey and will therefore be perceived by key intermediaries as a significant disincentive to place work into the Island.
2.12 The choice then, is between repealing Article 56 or replacing it with an article that imposes a form of liability upon directors based upon the “dog-leg” claim that has been developed in caselaw. A key remaining question is to determine whether the increase in business that is anticipated in the event of a repeal of Article 56 would be at the expense of settlers and beneficiaries, or whether such persons would continue to be adequately protected in the event that Article 56 was repealed.
2.13 Absent Article 56, the general principle would be that the corporate trustee alone would be liable for a breach of trust. Only if the corporate trustee is insolvent will the position of the director have any bearing on whether the beneficiaries are recompensed for the breach of trust. In terms of ascertaining the protection afforded to settlers and beneficiaries, it may be noted that this is the starting position all other jurisdictions (save Guernsey).
2.14 Article 56 was introduced in 1984, long before the introduction of the regulation of trust company businesses under the Financial Services (Jersey) Law 2000. That Law and the Codes of Practice issued under that Law provide comfort to beneficiaries that only trust company businesses that meet the exacting requirements of the Commission, both in respect of competence and solvency, will be permitted to operate from the Island. The prospects of a trust company falling insolvent as a result of a breach of trust is much reduced compared to 20 years ago, though such an event remains a possibility.
2.15 If a breach of trust was the fault of a director, and the director had failed to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”, then the corporate trustee (if a Jersey company) would be able to bring a claim against the director for breach of that director’s duties. Thus if the trust company was reduced to insolvency as a result of the breach of trust, the trust company’s liquidators would be able to pursue the directors in respect of that breach, and any assets recovered would be used largely to compensate the victims of the breach of trust. If the trust company was not insolvent, it would still be able to pursue the director for the losses caused, though in such circumstances the beneficiaries would in any event have been recompensed. It is, however, clear that the director who has acted negligently will still be liable to the trust company for his actions.
2.16 In the event that Article 56 were to be repealed, the Commission has indicated that it is likely to consult with industry upon the Codes of Practice issued under the FS(J)L in relation to trust company businesses in order to ensure that the overall regulatory environment in which trust companies operate offer beneficiaries appropriate protection. This consultation is likely to cover areas such as whether the current requirements in respect of paid-up share capital and professional insurance require modification as a result of legislative changes, and it would be open to the States to delay the introduction of any amendment or repeal to Article 56 until such time as the Commission has concluded such consultation.
3. Recommendation
3.1 The question of the future of Article 56 is one of significant symbolic importance to both the Commission and the Finance Industry. The Industry has campaigned for its repeal almost from the time it came into force, whereas the Commission (and its predecessors) have argued that Article 56 was an important part of the Island’s regulatory system. Paradoxically, despite the importance accorded to it by both the Finance Industry and the Commission, the existing article has never been used as the basis of a Jersey legal action.
3.2 There are pros and cons to both repeal and replacement. As far as repeal is concerned, a repeal of Article 56 is likely to be seen as a positive move by many intermediaries who place trust work in the Island, particularly in the area of PTC work. On the other hand, Jersey has long held a reputation as being a beneficiary friendly jurisdiction, and Article 56 has been one of the factors that has contributed to that reputation. It can be argued that this difference merely illustrates a feature of the trusts industry, where those advising settlors may often accord the protection given to trustees greater importance than the remedies that are available to beneficiaries.
3.3 Replacing Article 56 with an article that gives statutory force to the “dog-leg” claim would make it easier for a beneficiary to enforce such a claim by obviating the need to argue that caselaw, as developed in other common law jurisdictions, should apply to Jersey. On the other hand, caselaw is always fluid and developing, and it is arguable that a new Article 56 that attempted to set out the position as at 2006 would quickly become out of date. It is also inevitable that claims made by beneficiaries would be made under both statutory and common-law grounds, and that, rather than making it cheaper for beneficiaries to bring actions against trustees of Jersey trusts, there is a risk that the effect of such an amendment could be to increase costs.
3.4 The arguments in relation to both repeal and replacement are in themselves complex and finely balanced. However, there are perhaps four factors that suggest that repeal may be the most appropriate route to follow:
While Industry appears almost unanimously in favour of repeal, the Commission, within the body of the Commissioners, is divided upon the issue. That three out of seven Commissioners support repeal indicates that, of the two options available, repeal is the one that is acceptable to the majority of stakeholders in the Trusts Law.
PTC work has been identified as a significant potential growth area for the Island’s Finance Industry. Comments from London intermediaries indicate that Article 56 is seen as a barrier to this work coming to the Island, and that any replacement will still mark Jersey out as a less favourable place to carry out this type of work than other trust jurisdictions.
The regulation of trust companies has now been in place for over five years, and it could be argued that the time is right to recognise that the system of regulation offers beneficiaries better protection than the relatively blunt remedies that Article 56 offered. In particular, the detailed standards of care set out in the Codes of Practice, the restrictions imposed upon principal persons and the requirement for professional indemnity insurance have all contributed to improve the general standard of trust companies in the Island, and through that, the position of beneficiaries in the event of a dispute arising.
Finally, Guernsey, the only other jurisdiction with a similar provision, is considering its position. It seems likely that Guernsey may repeal its equivalent. While the fear of being different is never in itself a reason to act in a particular manner, it is difficult to see the benefit to the Island of being the sole jurisdiction to maintain a provision that is seen by many as an obstacle to business, particularly where that provision would not necessarily bring beneficiaries any greater protection that that provided by caselaw.
3.5 On balance, therefore, it is recommended that Article 56 be repealed and that the Law Draftsman be instructed accordingly. In addition, it is recommended that the Commission be separately informed of this decision, given an estimation of the likely date for the coming into force of the Amendment, and encouraged to undertake such consultation as it deems necessary in order to ensure that the overall regulatory environment for trust company businesses continues to offer beneficiaries appropriate protection.
PAUL DE GRUCHY
Director, Finance Industry Development
3 March 2006
Attachment (to physical document only)
Letter from Chairman of the Jersey Financial Services Commission to the Director – International Finance dated 9 February 2006
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