The Law Commission is running a public consultation on the “Fiduciary Duties of Investment Intermediaries”. This was prompted by a recommendation in the Kay Review that examined the issue of “short-termism” in business and investment decisions. It suggested that this area should be examined. One question posed was whether the legal concept of “fiduciary duty” should be extended so that investment intermediaries had clearer moral responsibilities to their clients.
For example, trustees of pension funds have a general legal obligation to act in a fiduciary manner and solely in the interest of those they represent, but investment managers only have contractual obligations.
In addition, case law on fiduciary duties emphasise that the financial interests of beneficiaries should take primacy so such matters as wider social responsibilities can only be taken into account in a limited way. Hence the focus tends to be on short term financial returns (or so it is alleged).
Now reading the Report of the Law Commission (which is available here: https://www.lawcom.gov.uk/project/fiduciary-duties-and-regulatory-rules/ ) makes it very clear that not only is the investment world enormously complex, but that the responsibilities of different parties are indeed somewhat unclear. The report is 280 pages in length and anyone operating in this arena on a professional basis might well find it of interest.
The main thrust of the recommendations in the Report is not for major change to the legal framework. Where there are some uncertainties or problems they recommend changes to FCA Rules.
One smaller area they cover is the problem of the legal uncertainties that apply to “intermediated securities” – for example those investments held in nominee accounts where an investor has a beneficial interest but not direct ownership. A UNIDROIT convention was devised to solve this problem but neither the UK nor any other country has signed up to it. This potentially directly affects retail investors.
ShareSoc is likely to submit a response to this consultation so please let us know if you have any views on the matters discussed. But it looks as though any major change to widen the obligations of investment intermediaries is unlikely to take place if the Law Commission’s recommendations are accepted. Responses to the consultation must be in by January 22nd.