Financial exploitation in the Twilight Zone – Capacity, vulnerability and safeguarding

Insight

24.05.2023

What is the “Twilight Zone”?

The “Twilight Zone” is the name we have given to the period of time when a person has mental capacity in the legal sense, but some impairment, such as dementia, affects their cognitive abilities. The law may treat these individuals as if they have full capacity (and can therefore make decisions), whereas the reality may not be quite as black and white. For example, people within this "zone" may be more vulnerable to influence and may be exploited financially by those who do not necessarily have their best interests at heart. We discuss this issue in more detail in this video.

The legal test for mental capacity depends on the transaction in question. There are competing tests for lifetime transactions and testamentary dispositions (ie dispositions made by will). The law is also, unhelpfully, set out in both statute (the Mental Capacity Act 2005) and in (often historic) case law (such as the test for testamentary capacity in Banks v Goodfellow, which was established over 150 years ago).

Having one consistent test for all aspects of mental capacity and which could take into account the vulnerabilities of people in the “Twilight Zone” – for example, the Mental Capacity Act 2005 – would be welcomed.

Red flags

There may be cause for concern if a client exhibits certain signs of declining mental capacity, for example:

Departures from previously stated intentions, especially if abrupt and / or without good reason
Decisions that would lead to a negative outcome without good explanation
Rambling, unsure and / or incoherent instructions.
Heightened or erratic emotions
Instructions suddenly given through a third party
Changes in friendships or affection

What can be done if clients have been exploited?

There are ways to unravel transactions that have taken place, but these can lack teeth. A common issue is that, even for lifetime gifts or spending, the problem often only becomes known to someone’s family after they lose capacity or after their death. By this stage, evidence is harder to gather and funds have often been spent which makes compensation harder.

Transactions can be challenged if it can be shown there was “undue influence”. For lifetime transactions, this is presumed in some relationships, such as parent and child or doctor and patient, so the burden is on the recipient to provide a good explanation for the transaction.

However, there is no such presumption when challenging a Will. The person mounting the challenge has to show the testator’s intention was actually overwrought – a high bar usually requiring evidence of pressure and coercion, often difficult when the main witness, the testator, has passed away. This is out of step with the law on lifetime transactions and arguably provides less protection for true testamentary intentions.

How can professionals help protect vulnerable clients?

Many cases of exploitation come from someone in a position of trust rather than a stranger. Exploitation can be sophisticated and does not have to rely on fear.

Charm can be a very effective weapon. This can mean that often, if questioned, the person making the transfer might say they are happy to make it. This makes it harder to detect exploitation.

This is clearly an area of real and growing concern. Both the FCA and The Law Society have published guidance on advising vulnerable clients. The Mental Capacity Act 2005 provides guidance that individuals should be empowered to make decisions as far as possible, but assessed on a case-by-case basis.

For example, some elderly clients may find technology intimidating. Modes of communication, as well as timing, are therefore very important.

It is harder for a client to be taken advantage of if there is already a framework in place to protect them. Professionals can play a role if there are vulnerability concerns, consider:

checking whether an individual has LPAs and, if not, suggest these are made to protect against future incapacity,
building close relationships with the client’s other advisers: often, doctors do not have long term relationships with their patients, whereas professional advisers may be well placed to assess patterns of behaviour,
arranging an in-person meeting with the client without potential recipients present, and
recording fully the vulnerable person’s wishes and intentions and referring back to previously expressed wishes for consistency.

If there is a question regarding an individual’s mental capacity, it is best practice to obtain (with the client’s consent) a formal capacity assessment. This also protects against the risk of future challenges.

As professional advisers, we are responsible for protecting vulnerable clients and this responsibility stretches far beyond capacity to give instructions. Ultimately, it is important to show compassion, empathy and, where possible, implement safeguarding measures in advance.