OPERATIONAL GUIDANCE

TRUSTEE ACT 2000

POLICY STATEMENTS

OG 86 C2 - 23 November 2001

Purpose: This guidance provides clarification on the preparation and content of a policy statement, as required under Section 15 of the Trustee Act 2000.
Please note: throughout this OG series, "the Act" refers to the Trustee Act 2000, not the Charities Act 1993.

Divisional responsibility

For action:

Charity Support Division

For information:

All operational divisions

1. Overview
2. When must trustees prepare a policy statement?
3. Why must trustees prepare a written policy statement?
4. What issues could a charity's policy statement address?
5. What is the relationship between the policy statement and the agreement (contract) under which the investment manager is to act?

Meaning of expressions - list of Glossary terms used in this Guidance
Index to further related information

1. Overview

We have long considered it good practice that trustees decide on and clearly record in writing a policy for the investment of their charity's funds.

The need for a policy statement applies whenever "asset management functions" are delegated to an agent under section 11(3). In practice, investment functions are likely to be the most commonly delegated functions and the text of this guidance reflects this.

2. When must trustees prepare a policy statement?

The requirement for written guidance in a policy statement applies where trustees delegate their discretion in relation to their investment functions. A policy statement is not required under the Act where the trustees obtain investment advice, but take decisions on investment matters themselves.

Before trustees are able to authorise a person to carry out any of their investment functions as their agent, the Act requires that they give in the policy statement written guidance to the agent as to how they should discharge these functions on their behalf.

• Trustees cannot authorise a person to exercise any of their investment functions as their agent except by way of an agreement which is in, or evidenced in, writing.

The agreement need not be a written one but there must be written evidence of an agreement being made. This might be a letter confirming an agreement by telephone to carry out certain terms and conditions.

and:

• they have prepared a statement ("a policy statement") which is in, or evidenced in writing that gives guidance as to how the functions should be carried out.

Trustees must prepare a policy statement before an investment manager is authorised to act as their agent. The preparation of the statement is the responsibility of the trustees: it cannot be delegated to the investment manager. However, trustees may find it useful to prepare the policy statement with the help of the proposed investment manager.

Although the matter is not free from doubt, it is considered that a policy statement is required whenever discretionary investment management is delegated on or after 1 February 2001, whether the power of delegation relied on is the statutory power, or a power in the governing document of a charity, or an authority from us. However, where the discretionary management agreement was properly entered into before 1 February 2001 (ie there was a valid constitutional power, or a power from us), then the statutory requirement for a policy statement does not apply unless or until the agreement between the charity or its trustees and the discretionary investment manager is replaced with a fresh agreement.

3. Why must trustees prepare a written policy statement?

A charity's policy statement is intended to give guidance to the managers to whom investment management has been delegated. It clarifies the responsibilities and the extent of the authority of the investment managers appointed by the trustees. A charity's policy statement provides a written framework for a charity's investment strategy and should contain the principles that will govern the detail of the investment decisions taken by the investment manager. The investment manager's investment decisions must be taken within the parameters of operation set out in the policy statement.

The preparation of a policy statement is the responsibility of the charity trustees and the statutory duty of care under clause 1 of the Trustee Act 2000 applies to its preparation.

4. What issues should a charity's policy statement address?

Charities have different investment objectives depending on their size and their activities and it is likely that the content and the complexity of a charity's policy statement will reflect these differences.

The Trustee Act 2000 does not dictate the content of a policy statement. However, section 15(3) of the Act states that trustees must formulate any guidance given in the policy statement with a view to ensuring that the functions of the trustees which will be delegated to their investment manager will be carried out in the charity's best interests.

As a general guide a charity's investment policy statement might well contain guidance in the following areas:

4.1 The charity's aim in investing its funds
4.2 The balance between capital growth and income generation
4.3 Consideration of risk
4.4 The timing of returns
4.5 Special preferences
4.6 Review of the policy statement
4.7 The way in which the investment discretion will be exercised

4.1 The charity's aim in investing its funds

A charity's policy statement should clearly state what a charity is trying to achieve through the investment of its funds. It should set out the charity's investment objectives. In considering this, trustees will need to take account of the needs of present and future beneficiaries and how the charity will meet these needs. They will need to consider past patterns of expenditure and the anticipated demand for the charity's support

4.2 The balance between capital growth and income generation

A charity's policy statement should set out the balance between capital growth and income return that is needed by the charity in order for it to meet its objects.

4.3 Consideration of risk

The policy statement should clearly set out the parameters of the degree of risk the charity is willing to take in the investment of its funds.

4.4 The timing of returns

The policy statement should set out the degree of liquidity required of the charity's assets. Trustees will need to consider the charity's activities and the types of investment that will be needed in order to pursue these. They will also need to consider the nature and the timing of any cash requirements which the charity may have.

4.5 Special preferences

The policy statement should set out the charity's preferences in terms of the investment of its funds. For example, does the charity have a preference for investing in particular sectors of the market or does it operate under any ethical considerations relevant to the investment of its funds?

4.6 Review of the policy statement

The policy statement should clearly set our how often the charity's investment policy will be reviewed.

4.7 The way in which the investment discretion will be exercised

When investment management is delegated, the investment manager takes on the responsibility to ensure that the delegated investment discretion is exercised:

• within the scope of the powers of investment available to the trustees; and

• consistently with the duties in section 4 of the Act (see section 7.2 of OG 86 B1) which includes the obligation to keep investments under review.

The standard investment criteria include the requirement to consider the suitability to the charity of a particular asset class and of a proposed investment within that class and also to consider the need for diversification in so far as is appropriate to the circumstances of the charity.

The policy statement should be compatible with the obligations in section 4 of the Act and might usefully expand upon the way in which the investment manager should have regard to the standard investment criteria in the circumstances of the particular charity.

5. What is the relationship between the policy statement and the agreement (contract) under which the investment manager is to act?

The policy statement is not itself part of the contract (agreement) between the trustees and their investment manager. However, the contract under which the investment manager is to act must include a clause to the effect that the investment manager will comply with the policy statement (or any revision of the policy statement or any replacement made in accordance with section 22 of the Act). The effect of this requirement is that the investment manager is contractually bound to follow the instructions in the policy statement, unless there is a good reason not to do so.

It is therefore important for both the trustees and the investment manager to ensure that the terms of the policy statement are workable. Should the investment manager find the policy statement (or any revised or replacement policy statement) unworkable, he or she would have no alternative but to decline to enter a contract with the trustees, or to terminate an existing contract, as the case may be.

Under some discretionary fund management agreements the investment manager is obliged to send a "client profile" to the trustees for approval on a regular basis. A "client profile" will usually summarise the key provisions concerning the objectives and restrictions under which investment management is delegated to the investment manager. Where this has been approved by the trustees (or is approved subject to amendments) and confirmed by letter sent to the investment manager, this could constitute a policy statement which satisfies the requirements of section 15. If this process happens sufficiently regularly, it could discharge the obligation of the trustees to keep the policy statement under review.

The following words and phrases are defined in the Glossary of Terms:

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Trustees

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