The impact of transparency and Court scrutiny on the role of the protector

“Protector” is the title given to an individual, group of individuals or legal entity appointed to participate in the administration of a trust by acting as a check and balance against the trustees in the exercise of the powers granted to them by a trust instrument.  The protector is often appointed by the settlor of a trust when the trust is established in accordance with the terms of the trust instrument, which will also set out those trustee powers which are to be monitored, directed or restrained by the protector.  These powers commonly include a requirement that the protector consents to the distribution of assets, the appointment and removal of beneficiaries and/or changes to the terms of the trust, as well as commonly being granted the power to appoint or remove trustees.  A protector may also have the power to direct other actions to be taken by a trustee, including (by way of example) investment decisions.    

The concept of a protector is not one enshrined in law in Jersey but one that has developed over time, whether because settlors wished to retain a personal connection to the administration of their assets by corporate trust service providers or to provide the settlor with reassurance that the trust will be managed prudently and in accordance with the settlor’s wishes.

More recently, settlors have begun to consider the appointment of professional service providers as protectors. The use of professionals in the form of trust and company service providers (TCSPs) as protectors comes with a myriad of benefits: TCSPs are regulated by supervisory bodies such as the Jersey Financial Services Commission, they generally possess a detailed understanding of trust law, are experienced in the administration of trusts and better equipped to deal with complex matters, and they are more likely to be objective and impartial in the event of a breakdown in relations with the trustee (or even the beneficiaries).

The introduction of transparency regulation on a global basis clearly has many merits not least helping to defeat the funding of terrorism and fighting money laundering.  However it can also result in less financial privacy for some ultra-high net worth individuals and families.  One area that is often overlooked is the impact of transparency on the role of protectors to trust structures. This person may or may not be aware that under the Common Reporting Standard (“CRS”) their names will be reported against the assets of the trust structure.  In accordance with the CRS which was developed to facilitate the automatic exchange of information, financial institutions and trustees of trusts which are classified as Reporting Financial Institutions must report financial information on account holders to local tax authorities.  In accordance with the OECD guidance, “protectors must be treated as an Account Holder irrespective of whether [the protector] has effective control over the trust”.  This means that wealth held in trust is reported against protectors, despite them having no entitlement to the assets in question, which can lead to issues for private individuals acting as protector vis-à-vis their personal tax position.  The use of a TCSP to fulfil the role of protector therefore provides a tidy solution to this problem. Ideally this TCSP should be a firm independent of the TCSP acting as trustee.

A further driver for advocating the use of TCSP’s as protectors is that arising from current case law which has seen the extent of protectors’ powers coming under debate.  The “Narrower View” suggesting that the role of a protector is to consider whether any decision by a trustee is one which a reasonable trustee could reach.  The “Wider View”, that the protector is there to exercise an independent fiduciary function, albeit, on a more limited basis that that of the trustee itself.  In either scenario, TCSPs are well placed to act as protector given their experience in the trust arena, but should the latter view prevail, TCSPs, who are already used to exercising fiduciary powers, are perhaps better placed than those without such background.  It should give a family greater comfort that one professional TCSP is independently overseeing the trustees who invariably are also professional TCSP’s. That ensures that the trustee is kept in check and the family in essence have an experienced and regulated business in place to attend to those very important functions that are often only required in the time of a material decision needing to be made.