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ombudsman news

issue 52

April 2006

powers of attorney on bank accounts

Some of the complaints referred to us involve bank accounts where the accountholder has given someone else a formal written authority to act for them – in the form of a power of attorney. This is a legal authority given by one person – the donor – (in Scotland the granter) to another person or persons (the attorney or attorneys) to conduct the donor’s financial or legal affairs.

This article:

  • outlines the different types of powers of attorney, and how they operate on bank accounts
  • considers some issues that commonly arise when bank customers act through attorneys; and
  • provides some case studies illustrating some of the complaints we have considered recently involving power of attorney.

ordinary and enduring powers of attorney

It used to be the case, broadly, that a power of attorney was valid until:

  • it expired
  • it was revoked by the donor (unless it had been stated to be ‘irrevocable’)
  • the donor died; or
  • the donor lost the mental capacity to manage their own affairs.

However, there are now two broad categories of powers:

  • the ordinary (in Scotland, the general) power of attorney. This automatically ceases to have effect if the donor loses their mental capacity; and
  • the enduring (in Scotland, the continuing) power of attorney. This continues to apply, even after any loss of mental capability on the part of the donor.

The donor can place limits on what the attorney can do, and on the length of time for which the power operates. So, for example, a donor might give an attorney power to:

  • manage the donor’s financial affairs generally while they are abroad, until a given date
  • sell the donor’s house, if the donor has already moved abroad and is not available to sign the sale documents; or
  • do everything except sell the donor’s house.

A power of attorney does not prevent the donor from acting. For example, if a student setting off abroad on a ‘gap year’ grants his parents a power of attorney, enabling them to write cheques on his bank account and pay his bills while he is away, he can still draw on the account himself.

And so long as they retain their mental capacity, the donors of an enduring power of attorney can continue to manage their own affairs along with, or instead of, the attorney.

if the donor becomes mentally incapable

Someone appointed to act on another person’s behalf under an enduring power of attorney is entitled to act until that person (the donor) is – or is becoming – mentally incapable. At that stage, the attorney must apply to the Court of Protection to have the power of attorney registered. Once that has been done, the attorney can continue to act.

common problems arising for banks and building societies

A donor is not bound by the actions of an attorney who acts outside their powers. Suppose a donor gives her son a power of attorney allowing him to operate her account at the AB Building Society. If he then uses the power of attorney to withdraw money from her account at the CD Bank, CD Bank may be liable to the donor for acting in breach of their mandate.

The general legal principle is that the wording of a power of attorney is given a strict interpretation. So a bank that allows the attorney to ‘bend the rules’ is likely to be liable to the donor accountholder for any loss caused as a result.

Banks sometimes encounter other pitfalls when they allow an attorney to operate a customer’s bank accounts. Here are some of the things a bank should consider before it acts on an attorney’s instructions.

  • Is the power of attorney properly effective- An enduring power of attorney may be arranged to come into effect only when, for example, the donor loses mental capacity. So if the bank acts on it before then it will be liable to make good any loss caused to the customer as a result.
  • If the donor has lost mental capacity, has the power of attorney been registered- If not, the account may have to be frozen until the Court of Protection has registered it.
  • If more than one attorney has been appointed, how many signatures are needed to confirm transactions-

A newly-appointed attorney will sometimes go back over the donor’s banking affairs and question, for example, whether the bank can prove that the donor authorised a particular transaction made on the bank account in the past. This often occurs where an enduring power of attorney has been registered because of the donor’s mental incapacity. Such complaints can present evidential difficulties. But we can still consider evidence about:

  • what happened
  • whether relevant law, rules, regulations and guidance were adhered to; and
  • whether good industry practice was followed.

How firms set up and operate accounts where an attorney is involved are generally matters for them, not us. But if a firm’s systems or policies mean the account cannot be operated as the donor or the attorney require, we would expect the firm to explain this clearly at the outset. It should not wait for things to go wrong before pointing out the problem.

case studies

powers of attorney on bank accounts

52/4
banking – power of attorney – firm insists on registration of power despite medical evidence that donor is not lacking mental capacity

Mrs H arranged for her son to have an enduring power of attorney so he could help manage her affairs. About a year later, after she had decided to move into a nursing home, the son called in at the firm’s local branch. He wanted to make arrangements to operate his mother’s account for her once she had moved. When he mentioned that she was becoming a bit forgetful, the firm said he would have to register the power of attorney before it could act on it.

Mr H felt this was unnecessary. He sent the firm written evidence from his mother’s doctor that although she was suffering from early Alzheimer’s dementia, which affected her short-term memory, she was not mentally incapable. However, the firm remained adamant that it could not act on the power of attorney until it had been registered.

Eventually, Mr H and his mother concluded that they would have to obtain legal assistance. It was only after their solicitor intervened that the firm agreed there was no need to register the power of attorney. After complaining direct to the firm about its handling of the matter, Mr H came to us.

complaint upheld
We accept that situations of this sort can often place firms in a difficult position. They want to protect their customers, but equally they do not want to inconvenience them.

In this case, we felt the firm had no real grounds for believing Mrs H to be mentally incapable. Even after receiving unequivocal medical evidence that she did not lack mental capacity, it persisted in saying her son had to register the power of attorney before it could act on it.

We felt it had been reasonable, in the circumstances, for Mrs H and her son to get legal help in order to resolve the situation. So we told the firm it should meet their legal costs and pay Mrs H some compensation for the inconvenience it had caused.

52/5
banking – power of attorney – firm’s systems limit way in which donor and attorneys can operate account

Shortly before he took on a temporary assignment abroad, Mr J appointed his parents to act as his joint attorneys. He assumed the power of attorney would automatically enable his parents to operate his current account. However, the firm told him the situation was not quite so straightforward.

It said its internal procedures meant that attorneys could only operate a donor’s account if they had first been added as parties to that account. And as the firm’s systems did not allow more than two parties to a joint account, it would not be possible to add both Mr J’s parents.

Mr J’s father thought the firm was being unreasonable. He said the power of attorney should enable him and his wife to operate their son’s account, without the need for any further ‘formalities’. So he refused to complete the forms enabling the firm to add him as a party to his son’s account. The firm refused to change its stance, so Mr J came to us.

complaint rejected
The impasse seemed to us to be most unsatisfactory for all concerned. However, the firm had made its position entirely clear at the outset. We did not feel we could fairly make it put special arrangements in place to accommodate Mr J and his parents. The firm had offered him £250 as a gesture of goodwill and we encouraged him to accept this.

52/6
banking – whether special circumstances allow firm to release money to customer’s relative who does not have power of attorney

Mr D had learning difficulties and was unable to manage his own financial affairs. He held a joint bank account with his father. He also received several state benefits which were paid to his cousin, Miss E, under an informal arrangement with social services.

When his father died, Mr D became solely entitled to the money held in the joint account – about £400. But, because he lacked sufficient mental capacity, he could not withdraw it or authorise anyone else to do so on his behalf. Miss E asked the firm if it would release the money to her, so she could give it to Mr D. The firm refused because she had no power of attorney.

complaint resolved informally
Miss E could have asked the Court of Protection to appoint her as a receiver to deal with Mr D’s affairs. But the costs of doing so would have been disproportionate – more than the £400 in the account.

We could not say that the firm’s stance was wrong in law. But it agreed with us that (given the relatively modest amount at stake, and that Miss E was entrusted with Mr D’s benefit payments) it would be appropriate in this particular case for it to release the money to Miss E.

Walter Merricks, chief ombudsman

ombudsman news issue 52 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.