A couple of weeks ago we looked at identifying vulnerable clients, this week we wanted to touch on Power of Attorney; what it is, what they can do and what they can’t do.
It is a term that is floated around fairly often, but do you know what it means? Many only become aware of it at the last minute when it’s required, either personally or for a loved one.
What is a power of attorney?
A power of attorney is a legal document that is put in place to allow a nominated person to make decisions or act on a person’s behalf if they are no longer able. This scenario may only be needed as a temporary solution; For example, if they were in the hospital and needed help with tasks such as paying bills.
Another scenario is more long term. For example, should an individual be diagnosed with dementia, this would warrant a power of attorney as they may lose the mental capacity and be unable to make their own decisions in the future. It is important to note however that just because a person is diagnosed with dementia doesn’t automatically make them unable to make their own decisions. Needing more time to understand or communicate doesn’t mean they lack mental capacity. If this is the case with an individual, you, as an adviser should always attempt to help your client to overcome those difficulties and help the person decide for themselves.
There are 3 different types of power of attorney, they are:
Ordinary power of attorney
The ordinary power of attorney covers decisions about an individual’s financial affairs whilst they still have mental capacity. This option is suitable if they need temporary cover such as for hospital stays when bills still require paying or it could be useful if an individual moves abroad but still has a property in the UK that they are selling, they can get their attorney to sign it over instead of them having to travel back and forth. It can also be used if the individual struggles to get out and about or simply wants someone else to act on their behalf.
An ordinary power of attorney is usually set up by a solicitor. The individual is able to restrict the power they give to their attorney to ensure they can only deal with certain assets. With the ordinary power of attorney, it can be used on a temporary basis, for one transaction, then it will expire, or it can be used on an indefinite basis until it is revoked. It is important to note that an ordinary power of attorney is only valid whilst the individual still has mental capacity, should they lose mental capacity, it will come to an end.
Lasting power of attorney (LPA)
A lasting power of attorney can be used in a similar way to an ordinary power of attorney, but it has the benefit of remaining valid if the individual loses mental capacity and it has been stated in the LPA that this will be the case.
An LPA can cover decisions on financial affairs and/or Health and care on behalf of the individual. The advantage of an LPA is that it can be used as and when, as well as if the individual loses mental capacity.
With an LPA it must be registered with the Office of the Public Guardian, from the outset. It is important to note that only a financial affairs LPA will cover an individual’s assets.
Enduring power of attorney (EPA)
In October 2007, EPAs were replaced by LPAs, however, if your client signed their EPA before 1 October 2007 it should still be valid. An EPA is similar to an ordinary power of attorney and a lasting power of attorney. The difference being that an EPA will only need to be registered with the court of protection when the individual loses mental capacity and not from the outset. The EPA can also be used in the same way as an ordinary power of attorney. It covers decisions about their property and financial affairs.
What they can do
As an LPA will be the most common power of attorney that you will likely come across, we’ll look at what is allowed if an individual has one.
Firstly, there are two types of LPA.
1 – LPA for financial decisions
2 – LPA for health and care decisions.
As we’re addressing advisers, we’ll only touch on the LPA for financial decisions here.
An LPA for financial decisions can be used whilst an individual still has mental capacity, but they can state that it is only to come into force should they lose capacity.
It can cover decisions such as:
- Dealing with investments
- Paying the mortgage
- Buying and selling property
- Paying bills
- Arranging repairs to property
- Collecting a pension or benefits
- Liaising with HMRC regarding tax
If your client has an LPA for financial decisions, then the attorney must keep accounts and ensure that their money is kept separate from their own.
What they can’t do
- Make large financial gifts to people
- Manage discretionary funds with a fund manager (unless permission is noted within the LPA)
- The attorney cannot pay themselves a fee unless it is authorised within the LPA
- Make decisions related to health and welfare
- Using the position of attorney to benefit themselves or making a personal gain
- Purchase something from the individual at a below-market rate without the court of protection’s authority.
Due to the limitations around POA requirements, advising them can cause an increased risk to the business, both from a compliance and a conflict of interest point of view. It is suggested that you include an element of power of attorney recommendations within your compliance file monitoring.