The Financial Conduct Authority (FCA) has warned consumers about the mismanagement of ‘asset protection’ trust schemes.
The UK regulator said it has seen cases of firms seriously mismanaging trusts with unsuitable investments being made by trustees.
Trusts are a legal arrangement set up to manage assets, such as property, money or shares. When run correctly, trusts can deliver good outcomes and be an efficient way to control and protect these assets. Trusts have legitimate uses, for example in estate planning, in safeguarding the assets of children or those who are incapacitated, and in some regulated investment structures.
The FCA said on 25 April: “When you start a trust arrangement, the trustee is responsible for the assets you put into your trust. The trustee then has the power to decide how to invest these assets. The agreement you sign explains how your assets should be invested. However, where the trustees involved are not sufficiently competent, or not acting in your best interests, there is scope for your money to be misused.
“It is possible for trust assets to be inappropriately invested, including into high-risk illiquid assets. In most cases, these investments are not suitable. When you invest through a trust, there is also a risk that the usual protections in place for consumers are lost.
“Often these firms are emphasising the benefits of trust arrangements including shielding your assets from certain claims, costs, or fees, for example in the event of divorce or probate. They may also promote high rates of return on the assets held in trust.”
Protection
The FCA said to investors that the best way to protect themselves is to seek independent legal advice to ensure that the trust will “actually work to deliver the intended protection of your assets”, as well as independent financial advice to “validate any proposed strategy for investing your assets before agreeing to put any money, property or assets into a trust scheme”.
The regulator added that clients should read their trust agreement carefully and make sure it clearly sets out what the trustee is able to do with their assets, in particular, that the types of investments the trustee may make and the level of risk they may involve, making sure it matches their preferences.
“If your agreement does not set out your investment preferences in your agreement, then the default investment powers will be in place,” the regulator said. “This means that your trustee is permitted to invest your assets as they see fit, which could include investing in high-risk investments.”
