Financial advisers should tread carefully when dealing with a client with reduced capacity as an inability to act in one area may not restrict them from acting in another, according to a superannuation lawyer.
Townsends Business and Corporate Lawyers superannuation online services division managing solicitor Jeff Song said the types of incapacity that may restrict an adviser acting for a client come in different forms and do not rule out all actions on behalf of a client.
“There are three types of incapacity and the first one is legal capacity. This is someone’s ability to exercise an independent adult’s legal rights, so they don’t apply to minors,” Song said during a recent webinar.
“That capacity is also transaction specific and there’s no single definition or test and so it depends on the context and what type of decision is involved.”
He said the second type – mental capacity – also had no single definition, but was linked to an action or transaction.
“Unless there is a specific test that’s provided in the case law or in relevant legislation, it is generally understood to be a capacity to understand the general nature of the transaction or the decision that they’re about to make,” he said.
He added the third type – physical capacity – governed someone’s ability to hear, speak and use their body and all three types were applied across a spectrum.
“When you see signs of incapacity, consider that incapacity is not all or nothing. If somebody has incapacity in one area, it doesn’t automatically disqualify the person from doing other things,” he said.
He said the New South Wales Supreme Court has found that a person incapable of managing their own financial affairs, and assisted by a third party such as a trustee, guardian or financial manager, may still be capable of making a will or enduring power of attorney.
“As long as they can understand the transaction, what assets they hold, the claims others may make and evaluate the strength of those claims, they can still make a will or an enduring power of attorney as the level of capacity required for both is similar,” he said.
He warned advisers there should be no presumption of incapacity by them and they can deal with clients unless they have been provided evidence of the loss of capacity.
“The law presumes that a person or the trustee has mental capacity, so you don’t need a list of 20 to 30 questions prepared each time the client comes to see you to check that this person has capacity,” he said.
“You can presume that the trustee has mental capacity and the onus of establishing mental incapacity lies on the person who claims that the person lacks capacity.
“Clear evidence is necessary for that and it’s not enough that a member of the family just calls you and says your client lacks capacity so you act on a particular matter.”
