Chapter 4 - A new mechanism for trust disputes resolution

A trusts ombudsman

One option for improving access to trusts dispute resolution is to establish a trusts ombudsman. Chris Kelly has proposed that this alternative approach to the supervision of trustees is the best option for improving the accountability and quality of trustees. The option of a trusts ombudsman was also mooted by others in response to concern about the power of corporate trustees.120 Under Kelly’s proposal, this ombudsman would be able to investigate complaints against trustees, resolve disputes and provide guidance to trustees as to their legal duties.121

In Swedish the word “ombudsman” means “agent” or “representative” of the people.122 The role of an ombudsman is to investigate complaints from members of the public who feel they have been treated unfairly by an organisation. Traditionally ombudsmen investigate citizens’ complaints about the public administration and make non-binding recommendations. The purpose of these public sector ombudsmen has been to provide a fast, effective and user-friendly method of providing public accountability for public institutions. A relatively recent development is the growth of ombudsmen for the private sector. Organisations and industries such as universities, the media, banks and hospitals have introduced ombudsmen.123

New Zealand’s public sector ombudsmen were introduced in 1962 and have become an important part of New Zealand’s public administration and accountability structure. Their power and role are established by statute.124 In addition, New Zealand has two private sector ombudsmen: the Banking Ombudsman and the Insurance and Savings Ombudsmen. Both of these are voluntary, industry-funded schemes with jurisdiction for loss of up to $200,000, and are established by financial institutions to facilitate disputes within their industries.125

The ombudsman concept has evolved and been adapted for different purposes in New Zealand. There are authorities that have similarities to an ombudsman but have had functions added to them or been given different emphases. The Health and Disability Commissioner,126 Privacy Commissioner127 and Human Rights Commission128 are examples of positions or bodies with an ombudsman-like character.

 

Powers and role of a trusts ombudsman

The key features of an ombudsman seem to be the authority to make non-binding recommendations and the role of overseeing a sector or industry. Ombudsmen will commonly issue guidelines to improve the functioning of that industry or sector. Other features depend on how the role has been adapted for the context.

Kelly has suggested a trusts ombudsman could have some powers of the High Court, such as reviewing trustees’ charges, but would not have other powers, such as being able to appoint or remove trustees or vest trust property. He suggests that the trust ombudsman’s role would be to issue reports of an advisory nature. Most of the ombudsman’s rulings would be non-binding but highly persuasive. Kelly suggests that the ombudsman could make binding decisions in three areas: the release of information to a beneficiary; reviewing trustees’ charges; and the allocation of the costs of its investigation.129 This would have the advantage of bringing a theoretically low cost resolution to matters that can cause much uncertainty. However, it is not clear that binding decision-making works well with the ombudsman’s role in the context of trusts law.

The Commission’s view is that, if established, it would be appropriate for a trusts ombudsman to have non-binding recommendatory power rather than binding powers. The role of an ombudsman should not undermine that of the courts. However, it would be important that the ombudsman’s findings were highly persuasive so that in most instances they would be sufficient to resolve disputes. A jurisdictional limit, such as the $200,000 threshold delineating the District Courts’ jurisdiction, may need to be considered in order to restrict the seriousness of the complaints that could be determined by an ombudsman.

The principal activities of a trusts ombudsman under this model could include:130

(a)listening to and evaluating the viewpoint of the parties;

(b)providing mediation and advice services (to encourage all parties to see the view point of the others involved);

(c)explaining the obligations imposed by law and by terms of the trust deed or will;

(d)advising where, as a matter of law, a party was incorrect or had misunderstood the legal obligations imposed by the trust;

(e)advising what would be required to remedy any mistakes or inadequacies in trust administration; and

(f)attempting to achieve an agreement on a lawful way forward that would meet the legitimate needs and expectations of the parties.

This framing of the role of a trusts ombudsman is somewhat wider than other New Zealand ombudsman schemes. However, incorporating the skills of mediating and advising into the role could produce significant benefits, as long as the ombudsman’s impartial position could be retained.

The trusts ombudsman could have an educative role by reporting annually or providing case notes about individual cases that could provide guidance for trustees. This would help to provide lay trustees with information on the requirements of their role and how the duties translate into practical administrative and management obligations. The trusts ombudsman or someone from the office of the trusts ombudsman could engage with the parties to a dispute in processes similar to arbitration or mediation.131 This may prevent a dispute becoming too adversarial in tone.132

If an ombudsman is to have a mediation role, a method for gaining consent to any mediated arrangements from unborn and unascertained beneficiaries would also need to be considered. It may still have to be the court which provides consent on behalf of these beneficiaries or otherwise the ombudsman could have the power to appoint someone else to approve the arrangements on their behalf.

Kelly has suggested that there should be a right of appeal to the District Court (or High Court where the value contested is above $200,000) against all determinations of a trusts ombudsman. There is a question of whether this would be appropriate where the ombudsman has made a recommendation. However, if a trustee was protected from liability when following a recommendation of the ombudsman, there is a strong case for allowing appeal rights. The legislation would need to clearly set out how the right of appeal would work and how an ombudsman’s non-binding recommendations would interact with court decisions.

Evaluating the option of a trusts ombudsman

A trusts ombudsman would be a private sector rather than a public sector ombudsman because trusts are private arrangements and the costs of disputes are currently borne by parties rather than the Government or the public generally (although there is some public cost through trusts cases appearing before the courts). Because there is no unified trusts industry with a clear interest in providing an alternative dispute resolution mechanism to the courts, it is unlikely that impetus for a trusts ombudsman would arise in the private sector. The Government may consider that the need for improved decision-making and dispute resolution on trusts matters is significant enough and in the public interest, particularly of lay trustees and beneficiaries who otherwise have little chance of having their legal rights enforced, that it should establish a trusts ombudsman by legislation. Almost certainly there would be a need for government involvement and funding to establish a trusts ombudsman and possibly on-going government funding. It would be unlikely to work as a voluntary scheme because there would be limited incentive for trustees to sign up.

 

Advantages

A trusts ombudsman would avoid the formality of court proceedings. It would allow issues to be resolved speedily. The trusts ombudsman could become a specialist in trusts law, which would make its decisions or recommendations highly persuasive. It could ensure that disputes do not escalate to the extent that they require court intervention.133 It may allow decisions on some issues, such as access to information by beneficiaries, without need for court involvement. The trusts ombudsman would be able to provide authoritative guidance to trustees, making it easier for them to carry out their role and improving the management of trusts by trustees.134 Parties would be able to proceed without legal representation, meaning the process could be significantly cheaper. This mechanism would be available at an early stage in disputes.

Challenges

One of the main concerns about a trusts ombudsman relates to the legal authority of this role. Its establishment would necessarily require the divestment of some of the court’s authority in looking at trust matters. Historically, the Chancery Court has had exclusive responsibility for the development and operation of the law of equity. While in New Zealand there is unified jurisdiction over common law and equity in the High Court, it would be understandable if there was disquiet amongst some of the legal profession and judiciary if equity were to become further removed from its roots and become the domain of a non-judge.

A further issue relating to a trust ombudsman’s legal authority is that there are many areas of trusts law where the law is not firmly settled, such as the release of information to trustees. There are areas of trusts law where a trusts ombudsman would be required to reach a recommendation or decision without a clear precedent for how the case should be decided. It may be inappropriate for an ombudsman to be developing the law in this way and it may lead to many appeals, eroding the value of having an alternative mechanism.

However, there are some areas of the court’s powers under the Act that are more settled or involve administrative, rather than decision-making, functions. There may be a stronger case for an ombudsman to be able to make binding rulings on these matters instead of those suggested by Kelly. Also, it may be the case that legal issues, such as the duty to inform beneficiaries, can be clarified and simplified as a result of reforms following this review. This may make it more appropriate for an ombudsman to decide these issues.

The fact that ombudsmen or similar authorities have not been introduced in comparable contexts, such as companies or contracts, should be considered. It could be argued that trusts are no more special than companies and that trusts issues should have to be taken before the courts as companies issues or contractual issues are.

One of the key issues that must be addressed in determining whether a trusts ombudsman is feasible is how it would be funded. The options are government funding, self-funding by those involved in the dispute, or funding by some sort of levy on all trusts. None of these options is straightforward.

Kelly envisaged that a trusts ombudsman could be mostly self-funding, with the party that is found to be at fault bearing the costs of the investigation. He proposes that a trusts ombudsman should have the discretion to make a binding ruling as to whether the trust fund, the trustees personally, the complainant or an advisory trustee, protector, appointer or other quasi-fiduciary should bear the costs.135

In order to have an ombudsman who has a high calibre of experience and expertise, a relatively high-scale salary would need to be provided for the position. The salary of a District Court Judge is currently $288,500.136 If the salary is in this vicinity, it is difficult to see that an ombudsman’s office could operate on a budget of less than $500,000 annually when costs of staff, administration and overheads are taken into account. If there were 100 complaints per year, the fee per investigation would need to be $5,000 to meet administrative costs. If the cost of investigations were fully passed on to parties this would mean that a complaint to the trusts ombudsman is not a cost-effective option, even in comparison with a High Court application. It could be argued, however, that if a trusts ombudsman is to have fairly wide-ranging tasks that have a beneficial effect for trustees, settlors and beneficiaries throughout New Zealand, that cost should not only be borne by parties to a dispute.

An alternative is for the Government to bear the costs of the trusts ombudsman. This raises the issue of whether the Government should have responsibility for trusts disputes or whether costs should be borne privately because trusts are private matters. Trust issues already cost the Government when disputes have to go to court. The Government appears to have an interest in having user-friendly trust law and administration. However, trusts are most often private matters that only advantage individuals or families.

Another method of funding a trusts ombudsman would be to levy all trusts. The other non-public service ombudsmen in New Zealand, the Banking Ombudsman and the Insurance and Savings Ombudsman, are funded by the industries in which they operate. Banks and insurance and savings companies opt in to the ombudsman scheme, pay levies and agree to be bound by decisions. This option presents difficulties in that currently there is no requirement for trusts to register, report or otherwise indicate to any regulatory body their existence, except the requirement for a tax return for income earning trusts to be filed with Inland Revenue. A mandatory levy, fee or duty on all trusts, either when they are established or annually, would only be possible if there were also registration requirements for trusts. This issue is discussed in chapter 9. If such a mechanism were in place, it could be argued that it is a justifiable charge on all trusts to fund a dispute resolution system to improve the operation of trusts in New Zealand. On the other hand, it could be a disincentive for people to settle trusts, which may be considered problematic. New Zealanders may instead choose to settle trusts off-shore.

In evaluating the option of a trusts ombudsman, it must be considered whether this approach solves enough of the current problems with trusts for it to be worthwhile. It is difficult to assess the potential case load of a trusts ombudsman. An ombudsman would provide greater accessibility to disputes resolution decision-making, and would do so in a less adversarial way. It could be established in a way that ensures high-quality decision-making, but this could add to the cost.

“Calls for better regulation of family trusts: Please sir, can we have some more… of our own money” Sunday Star Times 22 August 2008; Jacqueline Smith “Guardian Trust beneficiary worried about fund freeze” New Zealand Herald 6 August 2008.

Kelly Supervision of Trustees, above n 111, at 119−120.

Emily O’Reilly, Irish Ombudsman Office of the Ombudsman – Ireland < www.ombudsman.gov.ie >.

Steven Van Roosbroek and Steven Van de Walle “The Relationship between Ombudsman, Government, and Citizens: A Survey Analysis” (July 2008) Negotiation Journal at 289; O’Reilly, above n 122.

Ombudsmen Act 1975. Ombudsmen also have powers under the Official Information Act 1982, Local Government Official Information and Meetings Act 1987, Protected Disclosures Act 2000 and Crown Entities Act 2004.

Banking Ombudsman < www.bankomb.org.nz >; Insurance and Savings Ombudsman < www.iombudsman.org.nz >.

The Health and Disability Commissioner Act 1994 establishes the Office of the Health and Disability Commissioner; Health and Disability Commissioner < www.hdc.org.nz >.

Established under the Privacy Act 1993; Privacy Commissioner < www.privacy.org.nz >.

Established under the Human Rights Act 1993; Human Rights Commission < www.hrc.co.nz >.

Kelly, Supervision of Trustees, above n 111, at 138−140.

Ibid, at 134.

Ibid, at 123.

Ibid, at 133.

Ibid, at 119.

Ibid, at 120.

Ibid, at 121−122.

Judicial Salaries and Allowances Determination 2010, sch.