Campbell, Jane --- "Financial management for protected persons" [2016] PrecedentAULA 23; (2016) 133 Precedent 46

FINANCIAL MANAGEMENT FOR PROTECTED PERSONS

By Jane Campbell

This article considers Australia’s system of financial management, the different financial manager choices available to plaintiffs, and claiming the cost of funds management.

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FINANCIAL MANAGEMENT IN AUSTRALIA

All states and territories have systems of financial management which aim to balance the need for protection with the need for autonomy and self-determination.^[1] The details vary slightly from state to state, but the basic concepts are as follows:

• ‘Financial management’ is the regime of control, management and substitute decision-making exercised by a person or an entity over the financial affairs of a person who does not have capacity to manage those affairs for themselves and is in need of such control and supervision.^[2]

• The ‘financial manager’ (sometimes called the administrator) is the person or entity who is appointed as the substitute decision-maker.

• A ‘protected person’ is subject to a financial management order.

• The ‘estate’ of a protected person may comprise all or only part of their financial affairs, depending on the terms of the financial management order.

• ‘Capacity’ is the term given to the ability of a person to rationally and reasonably make decisions for themselves. Legislative tests can be applied to determine whether someone lacks capacity. The Law Society of NSW has published a helpful guide to assist solicitors who suspect that their client may not have capacity.^[3]

In many circumstances, informal financial management arrangements are adequate. A family member, friend, or disability worker may assist a person in managing their finances. However, such arrangements may not be viable if there is no suitable trusted person who is willing and able to take on this role, if there is family conflict or if the size of the estate would make this unwise.

In most jurisdictions, formal financial management orders can be made by the local Guardianship and Administration Tribunal, or the Supreme Court. In the personal injury context:

• Tribunals are the usual forum if orders are needed in respect of a plaintiff’s financial affairs pre-settlement.

• The Supreme Court usually makes orders post-settlement.

The process for obtaining orders is generally as follows:

1. The application can be made by anyone with a genuine interest in the welfare of the person, the Public Advocate, the tribunal or court on its own initiative, as well as the person themselves.^[4] The applicant can apply for themselves or another person or entity to be appointed as financial manager.^[5]

2. The investigation and determination relates to whether an appointment should be made and who should be appointed as financial manager.

3. The appointment will be made in the form of an order which specifies who is appointed in respect of which assets and for how long.

Legislation governs the role of financial managers as follows:

• General principles are provided. For example, if the protected person can communicate their views and wishes, financial managers should take them into account.^[6]

• Financial decision-making is authorised. For example, in relation to significant expenses, investments, business decisions, significant gifts and maintaining dependants.

• Administrative tasks must be undertaken, such as paying bills, keeping records, preparing annual accounts, submitting to audits and paying tax.

• Financial managers are granted power to institute or defend any legal action relating to the protected person’s estate. For example, property transactions, family law or criminal law matters.

• Financial managers are not authorised to make decisions about personal or healthcare matters, unless they are also the person’s guardian or attorney for personal matters under an enduring power of attorney.

In the immediate aftermath of an appointment in a catastrophic injury matter, the financial manager usually attends to:

• paying debts;

• resolving the legal costs of the claim and the conflicts involved;

• arranging for the preparation and approval of an initial financial plan which enables expenditure over the lifetime of the plaintiff;

• establishing investments to deliver flexible income streams, taking into account relevant cash flow, tax and Centrelink issues;

• buying or building a home, arranging modifications and insurance;

• purchasing a vehicle, arranging modifications, insurance;

• setting up systems for bill-checking and paying; and

• purchasing equipment, liaising with carers and other service providers.

The exact nature of a financial manager’s services will vary greatly, depending on the extent of the protected person’s incapacity, their needs, wants, personality and level of financial literacy. It also depends on their broad family, social and financial circumstances.

The financial manager usually plays a very significant role in the life of the protected person and their family. The role is extremely personal, and needs to be based on a high level of understanding and trust. Contact may be as frequent as daily.

Financial decision-making is a continuous process, which must take into account all the relevant circumstances in a protected person’s life. Financial managers must be sensitive in treading the fine line between providing financial protection and respecting personal decision-making autonomy.

FINANCIAL MANAGER OPTIONS

Adults without financial capacity usually have a choice of financial managers available to them. The three main choices are:

• direct management by a public trustee;

• management by a private trustee company (with in-house or independent financial advice); or

• management by a person (usually supported by professional financial advice).

Children, by reason of their age, don’t have financial capacity. Personal injury settlement proceeds due to them will usually be paid to the local public trustee, which is quick, easy, relatively low cost and can be done in the absence of a special order under the relevant legislation or rules of court.^[7]

It is possible, however, to appoint a private manager. This may be appropriate if a child is approaching 18 and their parent is a suitable manager.^[8] A private trustee company may also be appropriate if a child’s financial incapacity will continue beyond age 18.^[9] The appointment must be in the best interests of the child.^[10]

Note that in Victoria the regime impacting plaintiffs differs from the other jurisdictions. In Victoria the Senior Master’s Office of the Supreme Court usually takes on the financial management role in respect of the settlement monies of both children and adults without financial capacity.

The public trustee

A public trustee is a state or territory government agency established for the purpose of providing trustee services.

Public trustees are usually able to offer relatively low fees because they are subsidised by government. Also, governments may be able to negotiate low investment management fees and benefit from economies of scale due to their large size.

No matter how remotely a protected person lives or how small their estate, the public trustee is obliged to take them on as a client.

However, a number of government reports have highlighted the service difficulties encountered by public trustee clients. For example, according to a 2012 report by the Intellectual Disability Rights Service, typical complaints include:

• use of ‘client service teams’, leading to no particular person being responsible or accountable;

• clients left ‘on hold’ for extensive periods of time when they telephone the offices and being forced to leave voicemail messages that do not get returned or answered; and

• cynical and pejorative attitudes displayed by some of the staff in these offices towards their clients.^[11]

Dissatisfaction with the quality of service was detailed in the 2014 Review of fees of the NSW Trustee and Guardian (NSWTAG) prepared by the Independent Pricing and Regulatory Authority of NSW.^[12] Despite this, the NSWTAG is now being asked to do more with less.^[13] In the long term, these funding cuts may lead to service needs not being met.

Private alternatives

If a public trustee is not appointed to directly manage a protected person’s financial affairs, the alternative options are referred to generically as ‘private management’. Private management may be provided by a private trustee company or a person (or other entity^[14]).

In order to be appointed, private managers must prove their suitability. The testing is much more stringent for people than for private trustee companies, which have onerous legislative obligations. However, both must (for example) prove that they have thought through how to invest the funds.^[15]

Once a private manager is appointed, they will usually be subject to government oversight.^[16] In NSW, the NSWTAG provides supervision and monitoring, whereas in Queensland, the ACT and Victoria it is provided by the local Civil and Administrative Tribunal.

The terms of appointment usually require a private manager to submit not only an initial financial management plan for approval,^[17] but also annual (or less frequent) accounts for review.^[18]

A private trustee company

Private trustee companies provide trustee services for profit and are often preferred in large personal injury matters. They charge premium fees to provide professional staff who are resourced to deliver personalised services.

Private trustees usually offer regular face-to-face meetings in the protected person’s home; extended hours’ access to a dedicated professional trustee who is supported by a team of expert advisers; management of the full financial administrative load; and extensive consultation with the protected person and their family. They are able to adopt a more flexible approach when attending to clients’ ever-changing needs and supporting family members who provide care to them.

Private trustees have a different business model to public trustees, typically charging higher fees to cover the higher level and range of services provided.

Private trustees may decline to take on clients whom they cannot service efficiently, profitably and with an acceptable level of risk to their staff. Some protected persons may be particularly difficult to assist, such as those with issues relating to substance abuse, severe mental illness, violence or those who are remotely located.

There is a relatively small number of private trustee companies operating nationally that specialise in supporting personal injury clients. They include Australian Executor Trustees Limited (AET), Equity Trustees, National Australia Trustees (NAT) and Perpetual. They each take a slightly different approach in respect of the services they offer:

• financial advice in-house: some trustee companies, such as Perpetual, use in-house financial advisers.

• specialist financial advisers: some trustee companies, such as AET, Equity and NAT, engage specialist financial advice businesses (such as Aeran, ipac/AMP Advice and Ability One).

Fees are very similar between providers as this market is highly competitive. Those who use fully independent financial advisers highlight the protection this provides against conflicts of interest.

The courts are familiar and comfortable with all these different approaches. It is up to the client and their family to make an informed decision about which model and provider they favour.

A person

A person (or other entity) can be appointed as financial manager, though they will need to prove their suitability for the role in accordance with the relevant legislation.

In all jurisdictions, the person must be aged over 18. In most jurisdictions, they must also be willing to respect the relevant decision-making ‘principles’ and be compatible with the protected person.^[19]

Relevant factors in favour of appointing a family member include:

• familiarity with the protected person’s situation, which enhances understanding;

• proximity (living together or near to each other), which enables more frequent interaction and likely influence;

• the ingredient of love and affection and unquestioning devotion to the protected person, which can improve the quality of the protected person’s life; and

• professional education or training by the family member, which does not necessarily guarantee good management but suggests at least the possibility that they would not be unfamiliar with the management of large sums of money.^[20]

In the past, the courts were comfortable appointing family members only in cases involving small sums or when a minor was approaching majority.^[21] However, at least in NSW, it is now common for a family member to be appointed as financial manager, especially when they have the support of a professional financial adviser. This occurs even in cases involving quite large settlement sums. In Queensland, the courts have strongly favoured trustee companies as administrators, however, they have appointed a family member in appropriate circumstances.^[22]

Families often value the opportunity to maintain decision-making control and privacy. Fees are also kept to a minimum, as the family member is not usually able to charge a fee for undertaking the financial management role.

Some disadvantages include:

• the burden of a serious legal responsibility and an administrative workload when they may already have a significant carer workload;

• it will not be possible to re-negotiate settlement to include the cost of outsourcing this responsibility if the burden of the financial management role later becomes unmanageable;

• the significant potential for conflict as the financial manager stands between the protected person and their money – it becomes this person’s responsibility to say ‘no’;

• the risk of mismanagement and having the funds treated as ‘family money’; and

• the need to make alternative future arrangements when the family member becomes too elderly to continue the role.

Comparison summary

The following table compares the three main financial manager options.

	Public trustee	Private trustee	Family member with professional support
Fees	Medium	High	Low
Administrative burden on family	High	Low	Medium
Legal responsibility on family	Low	Low	High
Investment choice and flexibility	Medium	High	High
Personalised service in family home	No	Yes	Yes
Obligation to take all clients	Yes	No	No
Appropriate for small settlements	Yes	No	Yes
Risk of mismanagement	Low	Low	Medium

CLAIMING THE COST OF FUNDS MANAGEMENT

Who can claim?

The decisions of the High Court in Nominal Defendant v Gardikiotis^[23] and Willett v Futcher^[24] refined the common law on funds management and re-stated the principles set out in Todorovic v Waller^[25] to provide that:

‘where the defendant’s negligence has so impaired the plaintiff’s intellectual incapacity as to put them in need of assistance with managing the lump sum awarded as damages, the expense associated with obtaining that assistance is a compensable consequence of the plaintiff’s injury.’

This was recently restated in the now leading High Court decision in relation to funds management of Gray v Richards.^[26]

The plaintiff can also claim the cost of funds management if their intellectual incapacity to manage their own affairs does not result from the defendant’s wrong, but preceded it^[27] (for example, if a person was a child or had a pre-existing intellectual incapacity).

A child is entitled to the cost of funds management for the duration of their expected financial incapacity. This may be for life, or only to age 18 in the context of physical injury only.

It was suggested in Diamond v Simpson^[28] that physical disability alone is insufficient to claim an award for funds management. However, the entitlement of a plaintiff whose capacity to manage his or her affairs is compromised by physical disabilities only could more accurately be described as undecided.^[29] It is possible that some courts may use their broad discretionary powers where it is clear that the person is vulnerable and needs protection.

The calculation methodology

Unlike loss of earnings and costs of care, the valuation method for funds management is not explicitly prescribed by legislation.^[30] The valuation methods accepted by the courts in GIO v Rosniak,^[31] Willett v Futcher,^[32] and Rottenbury by his tutor Wren v Rottenbury^[33] may be described as follows:

- assume that equal amounts will be expended each year for the benefit of the plaintiff;

- assume that the capital amounts reduce the fund balance uniformly to exactly zero over the plaintiff’s life expectancy (this is sometimes referred to as ‘straight line reduction’);

- project the fund balances each year to enable a calculation of the financial management fees charged each year;

- discount these financial management fees to present values using the relevant discount rate applicable to damages calculations in that jurisdiction; and

- add up all the discounted fees to get a total lump sum figure reflecting a future stream of management fees.^[34]

The High Court in Gray v Richards^[35] accepted the above principles, and focused on two particular facets of the calculation methodology; namely, ‘fees on fees’ and ‘fees on earnings’.

In relation to fees on fees, the High Court said that an award for funds management will swell the size of the fund to be invested with extra money that will also require management. Accordingly, the award for funds management should take into account this higher cost. It stated that fees on fees are not an extra or separate component, but a fundamental integral part of the primary calculation.

In relation to fees on earnings, the High Court upheld the abovementioned notion of straight line reduction and stated that awards for funds management should not include an amount to cover reinvested fund earnings.

Generating calculations

For the purposes of claiming an award for fund management, it is imperative that such calculations be consistent with the principles laid out by the Court. Lawyers should bear in mind that the legally recoverable costs of fund management are not necessarily an accurate reflection of ’real world’ costs.

A number of actuarial and forensic specialists can provide comprehensive reports to compare the legally recoverable costs of fund management under a range of scenarios and financial managers. In addition, financial managers specialising in this area are usually able to provide court-accepted costings of their own fees. Consulting actuaries, Cumpston Sargeant, who were involved in Gray v Richards, publish an online calculator which provides estimates of funds management costs. The calculator requires the inputs noted below.

It is important for plaintiff lawyers to obtain accurate estimates specifically generated for their clients in each case, to ensure consistency when comparing providers and when delivering accurate figures to the court. Free services delivered online or by professional financial managers make this step quick and easy.

The calculation inputs

The necessary calculation inputs are the initial sum, the discount rate, the duration of management and the relevant fees.

1. The initial sum

This is the amount that will be paid out of court to the financial manager for management.^[36] It will be net of workers’ compensation, Centrelink and Medicare repayments, but there should be no deduction for likely immediate expenses such as solicitor/client costs, past gratuitous care or the cost of purchasing a home.

It has previously been argued that only those components pertaining to future losses require investment management. However, this argument was examined and rejected in GIO v Rosniak,^[37] which was approved by the High Court in Gray v Richards.⁴⁵

The High Court said that the ‘court should be slow to pre-empt the decisions of a trustee charged with the prudential management of a large sum of money that is required to meet the needs of a severely disabled plaintiff over a lengthy period of time’.^[38]

2. The discount rate

The High Court set the discount rate at three per cent in Todorovic v Waller,25 but since then legislatures in all states and in the NT have made amendments, increasing the discount rate for some if not all types of accidents.

A discount rate is applied because in calculating the present value of future expenditure, it is assumed that the plaintiff will invest the capital sum awarded and receive interest.^[39] It is also assumed that inflation and tax will erode earnings. As the discount rate makes allowances for these matters, no further allowance should be made.^[40]

3. Duration of management

The duration of management may be to age 18 or life expectancy or another specified date. If life expectancy is still at issue during settlement negotiations, it is possible to obtain funds management estimates for (still-to-be-agreed) life expectancy estimates.

4. The relevant fees

All financial management fees payable by a protected person will form part of the funds management calculation. ^[41] These fees are usually categorised as establishment fees, management fees, financial advice fees (if not included in management fees), investment fees (administration and investment) and government supervision fees.

The courts do not insist upon the plaintiff selecting the fund manager with the lowest fees.^[42] There can be compelling reasons to appoint a particular fund manager. In Gray v Richards⁴⁵, uncontested evidence was led that the mother had in the past experienced difficulties in dealing with the NSWTAG. White J accepted this evidence and used it as a reason to support the proposition that the private manager should be appointed.

The Court of Appeal in Gray v Richards noted that: ‘The question is what is reasonable compensation in these circumstances,’ and that the various fees put into evidence were set ‘in a competitive and informed market’. In concluding that the selection of a private trustee was reasonable, the Court also took into account ‘the need for constant communication between those having day-to-day care of the respondent and the fund manager’.^[43]

The plaintiff must prove that their choice of financial manager, and the relevant fees, are ‘fair and reasonable’. Plaintiff lawyers can support their client’s choice of a private trustee company by:

• ensuring that their client understands the differences between the options and can articulate why the services offered by the private trustee company will better suit their needs (for example, difficulties with travelling and the frequent need for assistance after hours);

• ensuring that their client has met their preferred provider and at least one other for comparison purposes; and

• obtaining funds management estimates from a number of providers so as to demonstrate market fee rates.

Helping plaintiffs in the new environment

Historically, personal injury damages payable to those incapable of managing the funds were routinely paid to public trustees.^[44] However, in recent decades, applications for payment to other financial managers have been increasingly successful.^[45] A trend towards appointing family members is discernible, particularly in NSW.

These changes seem to be the result of the combination of the following forces:

• consumers wanting more choice and control, more information and better service;

• private trustee companies building up their experience, and the courts becoming familiar and comfortable with them;

• private trustee companies experiencing enhanced competition, which has put downward pressures on their fees;

• the introduction of the Lifetime Care and Support Scheme resulting in much lower lump sum settlements for catastrophically injured people in NSW;

• judicial views increasingly in support of pro-family, low-cost management options;^[46] and

• state and territory governments, under financial pressure, recognising the value in embracing private management.

In this environment, it is especially important for plaintiff lawyers to help their clients to understand all of the options available, so that they can make an informed decision. It is also important for plaintiff lawyers to assemble strong evidence to support their client’s preferred choice of financial manager, including funds management estimates.^[47] Specialist providers of financial management services can help facilitate this process.

Jane Campbell LLB, B.Com, CFP is the principal and a director of Aeran Pty Ltd, a specialist independent provider of financial advice to protected persons, their families, their lawyers and trustees. PHONE: [phone] EMAIL: [e-mail] WEBSITE: www.aeran.com.

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^[1] NSW Trustee and Guardianship Act 2009 (NSW); Adult Guardianship Act 1988 (NT) and Aged and Infirm Persons Property Act 1979 (NT); Guardianship and Administration Act 1986 (Vic); Guardianship and Administration Act 1993 (SA); Guardianship and Administration Act 2000 (Qld); Guardianship and Management of Property Act 1991 (ACT); Guardianship and Administration Act 1990 (WA); Guardianship and Administration Act 1995 (Tas).

^[2] Intellectual Disability Rights Service (IDRS), Guardianship and administration laws across Australia, January 2012, p1: http://www.idrs.org.au/pdf/Guardianship_and_administration_laws_across_Australia_by_Ben_Fogarty.pdf.

^[3] Client Capacity Guidelines, see https://www.lawsociety.com.au/ForSolictors/professionalstandards/Ethics/Protocolsguidelines/Clientcapacityguidelines/index.htm.

^[4] IDRS, see note 2 above, p20.

^[5] For example, in Queensland see QCAT, Form 10 – Application for administration/guardianship appointment or review – Guardianship and Administration Act 2000, http://www.qcat.qld.gov.au/using-qcat/forms.

^[6] For example, NSW Trustee and Guardianship Act 2009 (NSW) s39.

^[7] Harold Luntz, Assessment of Damages for Personal Injury and Death (4th edn), p614.

^[8] For example, Cutcheon v David [1964] QWN 4.

^[9] In NSW, s16 of the Infants’ Custody and Settlements Act 1899 (NSW).

^[10] Luntz, note 7 above, p618. Also JJK v APK (1986) Aust Torts Reps 80-042 (NSW SC).

^[11] IDRS, note 2 above, p6-7: http://www.idrs.org.au/pdf/Guardianship_and_administration_laws_across_Australia_by_Ben_Fogarty.pdf.

^[12] See p34 of the draft report and p41 of the final report at:

http://www.ipart.nsw.gov.au/Home/Industries/Other/Reviews/Trustee_and_Guardian/Review_of_Fees_for_NSW_Trustee_and_Guardian.

^[13] See http://www.justice.nsw.gov.au/Pages/media-news/media-releases/2015/Future-secure-for-.aspx.

^[14] Ability One Financial Management Pty Ltd and Anor v JB by his Tutor AB [2014] NSWSC 245.

^[15] Re L [2000] NSWSC 721, and see legislative requirements in respect of private managers.

^[16] No supervision is required for a private trustee company appointed in the ACT.

^[17] For example, in Queensland QCAT requires a financial management plan; see http://www.qcat.qld.gov.au/matter-types/administration-for-adults-matters/appointed-administrator-section/financial-management-plan-guidelines.

^[18] In NSW, the NSWTAG issues ‘Directions and Authorities’; see http://www.tag.nsw.gov.au/private-managers.html.

^[19] For example, Guardianship and Administration Act 2000 (Qld) s15.

^[20] Holt v Protective Commissioner (1993) 31 NSWLR 227 at 242-3. See also McKinlay v Mahoney & Anor [2011] QSC 279.

^[21] Cutcheon v David [1964] QWN 4; Jones v United Collieries Pty Ltd [1956] QWN 3; Horsnell v Sturgess (No. 1) [1964] QWN 9 (HC).

^[22] McKinlay v Mahoney & Anor [2011] QSC 279.

^[23] Nominal Defendant v Gardikiotis [1996] HCA 53; (1996) 186 CLR 49.

^[24] Willett v Futcher [2005] HCA 47; (2005) 221 CLR 627.

^[25] Todorovic v Waller [1981] HCA 72; (1981) 150 CLR 402.

^[26] Gray v Richards [2014] HCA 40.

^[27] Nominal Defendant v Gardikiotis [1996] HCA 53; (1996) 186 CLR 49 at [67]- [68]. See also Renehan v Leeuwin Ocean Adventure Foundation Ltd & Anor [2006] NTSC 4.

^[28] Diamond v Simpson (No. 1) [2003] NSWCA 67 at [253].

^[29] Smith (by his next friend) v Hanrahan [2006] WADC 20, McCann DCJ. See also Burford v Allan [1993] SASC 3974; (1993) 60 SASR 428 (FC) at 442; although she was not mentally impaired, the plaintiff was allowed an amount for funds management after she turned 18 because of her physical difficulties.

^[30] Corey Plover, History and development of fund management awards (provided to the author, and previously published on the Cumpston Sarjeant website: http://www.cumsar.com.au).

^[31] GIO v Rosniak (1992) 27 NSWLR 665 at 678E as per Kirby J, 692A as per Mahoney JA and 698A as per Meagher JA.

^[32] Willett v Futcher [2005] HCA 47; 221 CLR 627 at [5].

^[33] Rottenbury by his tutor Wren v Rottenbury [2007] NSWSC 215 at [53].

^[34] Luntz, note 7 above, p258.

^[35] Gray v Richards [2014] HCA 40.

^[36] In L F Bell as litigation guardian for DC Bell v Pfeffer & Anor [2009] QSC 209, Dutney J concluded that when calculating future management and investment fees, the correct starting point is the amount actually received by the administrator.

^[37] GIO v Rosniak (1992) 27 NSWLR 665 at 678C per Kirby P, 688D per Mahoney JA and 694B per Meagher JA.

^[38] Gray v Richards (No. 2) [2011] NSWSC 1502 at [97].

^[39] Statutory discount rates are widely acknowledged to be too high, particularly in the current low interest rate environment. As noted by Professor Harold Luntz, a too-high discount rate protects insurers and the premium-paying public at the expense of seriously injured people. Luntz, see note 7 above, pp406 and 413.

^[40] Lewis v Bundrock [2009] 1 Qd R 524; [2008] QSC 189 at [26]; Gray v Richards (No. 2) [2011] NSWSC 1502 at [38].

^[41] GIO of NSW v Rosniak (1992) 27 NSWLR 665 at 695; Willett v Futcher [2005] HCA 47; 221 CLR 627 at [49].

^[42] Hulanicki bhnf Hulanicki v Walton [2014] ACTSC 17 at 177; Morris v Zanki (1997) 18 WAR 260 (FC); Tu Tran v Dos Santos (No. 2) [2009] NSWSC 336.

^[43] Gray v Richards (No. 2) [2011] NSWSC 1502 at [159].

^[44] Jones v Moylan (1997) 18 WAR 492 (FC).

^[45] Smith v Reynolds (No. 2) [1990] VicRp 35; [1990] VR 391 – giving reasons for not appointing the public trustee and considering other options.

^[46] M v M [2013] NSWSC 1494. See also Ability One Financial Management Pty Ltd and Anor v JB by his Tutor AB [2014] NSWSC 245 at [30] - [32].

^[47] Jones v Moylan [2000] WASCA 361.