Seòmar agus comataidhean

During stage 1, the committee heard evidence about how private purpose trusts are defined in section 42 of the bill and whether that definition is sufficient to distinguish between private purpose trusts with a beneficiary and “regular” trusts.

The definition of the term “private purpose trust” is important for the operation of the bill as a whole and for the SLC’s policy intentions. For example, several provisions in the bill expressly do not apply to private purpose trusts.

The Scottish Government has explored the matter further with the SLC, so amendment 23 will alter the definition of “private purpose trust” in the bill. It clarifies that such a trust exists where the trust property is held by, or is vested in, a trustee for the furtherance of a specific purpose which is not a charitable or other public purpose and, in contrast to a regular trust, is not constituted

“solely for the benefit of a specific beneficiary (or potential beneficiary).

That reinforces the distinction between beneficiary trusts, which have as their sole purpose the benefit of a specific beneficiary or potential beneficiary, and private purpose trusts, whose purposes are not solely to benefit a specific beneficiary or potential beneficiary.

I move amendment 23.

Amendment 23 agreed to.

Section 42, as amended, agreed to.

Sections 43 to 48 agreed to.

Section 49—Protectors

Section 12 is, generally, a default section, which applies to a trust unless the trust deed provides otherwise. The SLC’s policy intention on the issue is quite clear, as are the explanatory notes. However, the effect of section 12(1), as drafted, does not appear as intended to accommodate arrangements under a trust that will provide for trustees to take decisions other than by majority.

I am aware that some stakeholders have questioned the status of existing trusts that require a specific trustee to be involved in making a decision. The clear policy intention is that such trusts should continue to operate as they do currently. Amendment 8 resolves the issue by making it clear that section 12(1) is a default rule, which can be departed from by express provision in the trust deed, or where that is implied or required by a context where there is no trust deed.

In its stage 1 report, the committee asked me to consider defining a number of terms that had been highlighted by stakeholders. I wrote to the committee, setting out that I would consider that further. One such point was the definition of “beneficiary” in the context of public trusts, which was raised by the Law Society of Scotland. It said that the definition that is used in the bill is geared towards private trusts and is not particularly suited to public trusts. Since stage 1, I have examined the matter further and the Scottish Government has spoken to the Law Society.

In the context of trustee decision making in a public trust, the matter could be helpfully clarified. Section 12 provides a default rule that a decision binds the trustees only if it is made by a majority of those who are, for the time being, able to make it. Importantly, a trustee is not to be regarded as able to make a decision where they have, or might have, a personal interest in the decision, but that can be overridden by the trust deed or in specific circumstances. One such circumstance is where all beneficiaries know of the personal interest and consent to the trustee acting.

Although that circumstance may work in the context of a private trust, it would be unlikely to work in the context of a public trust. Amendment 9 sets out that section 12(2)(a) may be disregarded where the trust is a public trust and the decision is intended to benefit a section of the public of which a trustee is a member. In that circumstance, the trustee in question should not be disqualified from participating in the decision-making process by reason of their being a member of the section of the public that the decision is intended to benefit. However, a trustee is not permitted to participate in decisions in which that trustee has a particular interest that is specific to them as an individual. In other words, where the trustee’s personal interest in the decision is greater than, or goes beyond, their general interest in the decision as a member of the section of the public that the decision is intended to benefit, they should not be allowed to participate in the decision-making process.

Amendment 12 concerns section 22. That section relates to section 2 of the Apportionment Act 1870, which provides that all rent, annuities, dividends and other periodical payments in the nature of interest should be considered as accruing from day to day, and may be expressly disapplied by the trust deed.

I am concerned about the potential unintended tax consequences of the power that is conferred on trustees by that section. In order to avoid the risk of the imposition of higher taxes, amendment 12 adjusts the provision on trust law to set out the default provision that trustees have the discretion to decide whether either to time-apportion income in accordance with section 2 of the 1870 act or to treat income as accruing when it arises.

Amendment 22, in my name, sets out that a simple majority of the trustees must sign a document in order for it to be validly executed.

There is a tension between sections 40 and 73 of the bill. Section 40 provides that

“a deed ... is valid if executed by a majority of such of the body of trustees as are both capable and traceable.

On the other hand, section 73 inserts into the Requirements of Writing (Scotland) Act 1995 a provision that takes no account of whether the trustees are incapable or untraceable.

Incapable and untraceable trustees should, for a number of reasons, be included in the total number of trustees for the purposes of calculating the number that is required to form a majority in order to validly execute trust deeds. Whether a trustee is incapable or untraceable will change over time. If the number of trustees required to execute a trust deed is tied to these matters, the number of trustees required to validly execute a trust deed will also change over time. It would not be possible simply to look at the number of trustees in office at the time of execution of the deed, or at the number of signatures on a deed, in order to ascertain whether the document was validly executed. Instead, there would be a requirement to look behind the document to establish whether any of the trustees who were in office at the time that the deed was executed were incapable or untraceable at that time. That is impractical and would create uncertainty for any person who was seeking to rely on deeds that were executed by trustees.

If incapable or untraceable trustees in office make it difficult for the active trustees to command a majority to execute deeds, the bill already provides sufficient mechanisms for their removal from office. That includes sections 6 and 7 of the bill, which allow the court, or in some cases trustees, to remove a co-trustee.

I move on to Jeremy Balfour’s amendment 54. The effect of section 30 is to render ineffective a provision in a trust deed that purports, in a blanket fashion, to limit a trustee’s liability for breach of fiduciary duty, or to indemnify a trustee for such a breach. There is, however, an exception for a provision that authorises a particular transaction, or a particular class of transactions, that would otherwise be in breach of fiduciary duty.

The policy intention behind this section is to protect beneficiaries from overly broad clauses that seek to limit a trustee’s liability or indemnity clauses. It is there to protect trust property and, by extension, beneficiaries, from acts of trustees that breach their fiduciary duties. The SLC is well aware that broad provisions risk abuse, especially as it might be seen to encourage trustees to misuse their office to their personal advantage.

Amendment 54 would have the opposite effect from what the SLC intends. It would widen the range of circumstances that can be covered by provisions to limit liability or indemnify trustees for breaches of duty. That would all be to the potential detriment of beneficiaries, who would find that their usual rights of recourse against trustees who have breached their trustee duties were either weakened or unavailable.

With regard to amendment 55, I understand the point that Jeremy Balfour is making, and I am happy to support it.

Finally, I can see that amendment 56 would be a useful addition to section 39 and I am happy to support it, although I might need to think about how it interacts with other provisions in the bill, with a view to bringing forward stage 3 amendments to make the necessary adjustments.

I urge members to support amendment 8 and the other amendments in my name in this group.

I ask members to support Jeremy Balfour’s amendments 55 and 56. However, if Mr Balfour wishes to press amendment 54, which was not recommended by the committee at stage 1, I ask the committee to reject it.

I move amendment 8.

The general approach is that it is for the approved regulators to resolve regulatory conflict, in discussion with other regulators, as appropriate. However, should that prove to be impossible or unduly complicated, this power allows the Scottish ministers the flexibility to ensure that such conflicts can be resolved. As the provisions that would be made would depend on the detailed circumstances of any particular conflict that may arise and would address an issue that would be likely to require quick resolution, the use of subordinate legislation is considered to be appropriate. As was raised with the Law Society during its evidence, it is already subject to the oversight of a number of regulatory bodies, such as the Financial Conduct Authority, for the purposes of anti-money laundering and incidental financial business.

The bill also seeks to expand the oversight of the Scottish Legal Complaints Commission to allow it to set minimum standards for the first time. In addition, the bill introduces regulation of legal entities for the first time in Scotland, and we also have a system for the regulation of licensed providers, which it is hoped will be up and running soon. The Law Society will continue to be responsible for the regulation of individual legal practitioners and for some firms that operate across the border and that have regulatory responsibilities in each area of their operation. As has been acknowledged, the system is complex, and the regulation-making powers provide reassurance that any regulatory conflicts that may arise can be rectified.

As Leanna MacLarty said, we are still working through the detail of that. Of course, we will give careful consideration to the recommendations from this committee and the lead committee.

Thank you, convener. Section 20(6) is intended to be used should it be discovered in practice that further additional measures would be helpful tools because the existing suite of powers in section 20 are found to be insufficiently robust or extreme or disproportionately severe.

The powers ensure that there are appropriate tools to tackle any poor performance on the part of regulators. The section is also intended to be used to give further details about the specifics of the measures that can be taken and the procedures involved. For example, it allows the Scottish ministers to specify the maximum amount of financial penalty that may be imposed on a regulator in accordance with paragraph 13 of schedule 2 to the bill. That power has already been written into legislation and approved by Parliament in the Legal Services (Scotland) Act 2010.

I have indicated my intention to lodge amendments that will transfer the responsibility for carrying out the review under sections 19 and 20 to the Lord President. The regulation-making powers remain necessary despite the change, but the provision already requires the Lord President’s agreement before any regulations are made. That power acts as a veto against any new measures being introduced.

I will give members an example of where that delegated power could be used. Although we consider that the measures that are already provided are sufficient, the Lord President may seek a power to remove a particular individual from a role within a regulator rather than take measures against the regulator as a whole. As an example, in certain circumstances, the Lord President may remove the chair of the Scottish Legal Complaints Commission.

No, that is not fair. Early negotiations are on-going regarding the issue, and we will take forward and consider all the recommendations of this committee and the lead committee, and those of the legal sector. Engagement on the matter is on-going.

Yes, we are engaging with all stakeholders and the legal sector as we progress the bill.

Having considered the feedback from stakeholders, we intend to lodge amendments at stage 2 that will introduce a requirement for the Lord President’s consent to be obtained before any regulations are made using that provision and which will narrow the scope so that it will be used in response to a request by a regulator or the consumer panel.

The provisions are necessary to ensure that the guarantee fund, which is established in what is now quite aged legislation, continues to be able to adapt to changes in the way in which solicitors operate.

Do any of my officials want to come in on that?

I would like to provide some context to what we are proposing by explaining how things are done in England and Wales. In England and Wales, the Legal Services Board acts as an independent regulator of the front-line regulators of solicitors, barristers and other branches of the legal profession. The LSB is accountable to the Parliament through the Lord Chancellor and is sponsored by the Ministry of Justice. The Lord Chancellor, a United Kingdom minister, has several statutory roles in relation to the Legal Services Board and the regulation of legal services within the Legal Services Act 2007. Some of those are very similar to the things that have been proposed in the bill.

I have listened to the views that the committee heard last week, and officials have been engaging with the judiciary and stakeholders.

Yes.