Trust Officers and Shoemakers
When I arrived in the Cayman Islands just over 30 years ago this December, one of the books I brought with me from London was the fourth edition of The Modern Law of Trusts by David Parker and Anthony Mellows. In their preface the authors said that it was important for readers to be aware that the law of trusts was constantly, and rapidly, developing.
I can see from reading the current ninth edition that this turned out to be an understatement; the statutes, it seems, cannot keep pace with the case-law. The fourth edition contained 415 pages whereas the latest edition has 979 pages.
In England the trust’s predecessor, the use, began to feature in law in the second half of the 14th century. Even then, one of the objectives of the use was to avoid taxes, much to the chagrin of the Crown.
It was eventually replaced by the trust in the early part of the 17th century, which, as we all know, made the matter of taxes even more vexatious, not just to the Crown but in more recent times to those cash-strapped members of the Organisation for Economic Cooperation and Development (OECD) who have found their treasuries empty following the last two years of global economic crisis.
If trust law is in continuous development, it is perhaps comforting, then, to find that whilst English trust law might be in a constant state of flux, the principles which apply to the management of trusts are not and despite the passage of time, the fundamentals remain unchanged.
Traditionally, trusts were often testamentary (stemming from the terms of a will) and lawyers acted as trustees; although the law allowed laymen to act as trustees, it was often advantageous to have a trustee with legal training – especially where administration was complex. The centuries-old role of the lawyer, however, was eventually supplemented by the advent of financial institutions acting as trustees.
In some cases banks either created trust departments (like the one I audited in London as part of a bank inspection team or the one I was in charge of in the Cayman Islands) or they incorporated subsidiaries as trust companies (such as the one I was a branch manager of in southern Africa). In addition to pure trust work, as well as other related services, it is not unusual for institutions to act as executors also.
As trust business became big business, independent trust companies (like the one I am Managing Director of in Panama) –which were completely detached from the bankers – began to appear; often quite a few of these trust companies were formed by law firms themselves.
Trust officers worldwide now have their own society based in the United Kingdom (UK) called the Society of Trust and Estate Practitioners (STEP) (I became one of its members in 1992), which now plays a leading role in training professionals, particularly in the UK. Even so, neither a trustee diploma from a banking institute nor STEP can substitute for a law degree; it is not meant to, but it provides, inter alia, a sound knowledge of the law of trusts.
This concentration of specialised knowledge in a particular field of law, combined with continuous practical application every day, can make many trust companies, including banks with trust departments, repositories of a wealth of expertise which is not usually to be found in such crystallised form elsewhere. In fully respecting the importance of lawyers, and particularly their knowledge of laws, one must remember that a skilled craftsmen can produce a fine pair of leather shoes without needing to have an intimate knowledge of cows from whence the leather came.
So trust companies wishing to be successful for the long haul have to be concerned with the quality of the administration behind the trusts they manage. Management may take the view that if complicated legal problems do arise, they can always rely on a local law firm to bail them out.
However, this hand-holding can be deceptive – particularly where either the lawyer is detached from the overall specifics of the trust or he is brought in too late (and at the same time assuming that he has specialised in trust law, rather than other areas of law).
It is a sad fact, however, that whilst a trustee can obtain indemnification from following the guidance of the courts it does not follow that the courts will automatically indemnify the trustee (especially professionals engaged in the business of trust management) whose actions are based on legal advice received. Even the courts have recognised the distinction between lawyers who specialise in trust law and those who do not.
Trust Companies: Fish or Fowl?
Like banking itself, trust business began to eventually gravitate towards the emerging offshore financial centres. And yet despite the prevalence of offshore trust companies today, usually it is not until the average person uses one that he begins to understand just what it is trust companies do – everyone understands the relationship between a trust and a lawyer, but a trust company?
So for the benefit of more recent readers who are not professionally connected with trust work in any way, it is worth going back over, as well as repeating, some salient issues which will be just as relevant in the second decade of this century as they have been in the first one.
Both as a practitioner and a former bank and trust company regulator, I have encountered businessmen anxious to acquire either an offshore bank or trust company licence. In many cases the motives have had more to do with egos than enterprise; as if such a licence was a badge of success to be worn with entrepreneurial pride.
As we have seen, banking in particular can prove to be a precarious profession and although the capital requirements for an offshore trust company are not too difficult to meet, the responsibilities it brings can be more onerous, in many respects, than those of the trust company’s cousin, the bank. Civil suits in particular – as opposed to criminal suits – are the real danger.
There are similarities between banks and trust companies in that both manage assets. But a trust company, unlike a bank, isolates its trust activity from its balance sheet. In the case of a bank, its audited accounts incorporate customers’ deposits and loans, because these have an intrinsic link with a bank’s financial health. The depositor, in a way, is the bank’s partner and if it fails, the depositor can lose his money.
Where a bank does happen to engage in trust work, the auditors recognise that the trust assets under management cannot be pooled with the bank’s own assets; this firewall means that the bank’s fate is detached from the assets of its trust clients – unless, of course, the bank, in its role as trustee, has become a depositor in its own institution.
As in the case of small family businesses (Germany comes to mind) it does not always follow, as I have frequently said, that size bears any correlation with competence. Ask the legions of disgruntled customers of some banks with an international reach not dissimilar to that of Coca-Cola but whose general service record is abysmal.
Clearly, second tier, but well-established, trust companies which have been in business for many years with a continuity due to minimal senior staff changes have their attractions.
Transient trust officers abound these days, especially in large banks and trust companies, and getting acquainted (as well as comfortable) with their replacements is the bane of many a client’s life.
Unlike airlines, sensible trust companies don’t categorise clients by creating the equivalent of coach, business and first-class passengers. Whether a client’s assets are, say, six-figure (coach), seven-figure (business) or eight-figure (first class), all should enjoy the same level of comfort and be served champagne; but like sensible airlines they too should ensure that the pilot who is at the controls is experienced with a proven track record.
The many directions in which the subject of trust management could go at this point and the number of words required would exceed this article’s maximum word count so let me just end by telling my readers what I am sure a large number of them already know: that the source of knowledge is reached by many pathways and no matter which path you take as long as you reach your journey’s end, that is all that counts. Although the Chinese emphasise the importance of the journey rather than the destination, trust work demands the opposite.
Bankers in the last two years who made mistakes on Wall Street (should Manhattan be renamed Follywood as the East coast centre of make believe?) often did so from greed; trustees, however, don’t need to be greedy to land themselves in trouble more quickly than any banker: being honest but lacking the necessary skills will do that.
Reading Parker and Mellows on trust law keeps the feet of trust professionals such as myself on the ground and is a reminder that there is always more to learn. Smug trustees, on the other hand, are dangerous and they should heed the words of Johann Wolfgang von Goethe, Germany’s 16th Century natural philosopher: “There is nothing more frightening than ignorance in action”.
Derek Sambrook is a member of the Society of Trust and Estate Practitioners in the United Kingdom and obtained the Trustee Diploma of the Institute of Bankers in South Africa in 1973, becoming a Fellow of the institute in 1996. He emigrated in 1977 from Rhodesia (now Zimbabwe) where he was branch manager of a trust company and continued his profession in North America (Miami), Europe (including London and the Channel Islands), and the Caribbean (including the Cayman Islands). He has lived in Panama since 1996 where he is the Managing Director of Topaz Services, S.A. (www.trustservices.net), a Panamanian financial services company. He was Treasurer of the British Chamber of Commerce Panama for several years. Mr Sambrook‘s regulatory experience began in the corporate division of the Rhodesian (now Zimbabwe) Ministry of Justice (1965-1970) and subsequently he was appointed by the British government (1989-1992) as the first Bank, Trust Company and Insurance Regulator in the Turks & Caicos Islands, British West Indies; he established a regulatory body and drafted trust and insurance laws, banking and other regulations including licensing guidelines. As a direct result of his innovative captive insurance law, the Turks & Caicos Islands at the end of his contract had more than 5,000 producer-owned reinsurance companies and was the leading domicile in the world for this service. During his tenure he was also an affiliated member of the Latin American and Caribbean Banking Commission and Chairman of the government’s Offshore Financial Services Committee. He was a columnist for a leading United Kingdom offshore financial journal for over 15 years. His newsletter, Offshore Pilot Quarterly, has been published since 1997. In 2021 he celebrated 50 years in the trustee profession.