The World Interdisciplinary Network for Institutional Researchers has a call for papers open, due to close this Thursday 31st July. The call for papers can be found here. The Symposium is due to take place 22nd-24th April 2015 at Universita della Svizzera Italiana (USI), Lugano, Switzerland.
Monday, 28 July 2014
Wednesday, 16 July 2014
Law Commission Consultation on Fiduciary Duties of Investment Intermediaries: A brief comment
Following on from my previous post I thought it worthwhile to note a few comments/thoughts I had on the Commission's Report on Fiduciary Duties of Investment Intermediaries.
On the whole the report gives a largely accurate portrayal of the law and is a helpful document. There are a few points that I would raise. The main point surrounds what is actually meant by contract first in determining the application of fiduciary duties.
The first point is between 3.33-3.40 in the report on duty-duty conflicts and modifying fiduciary duties. Certainly the position is correct that a fiduciary acting for two principals must obtain authorisation to do so. However, as I pointed out in my response and the Report accepts, this is not the end of the matter as the fiduciary must still comply with their other duties.
With modifying fiduciary duties at 3.37-3.40 the Report adopts a contract first approach, relying strongly on a privy council decision in Kelly v Cooper [1991] AC 205 and other Commenwealth decisions. It would perhaps have been worthwhile to assert English authorities for this proposition. Particularly since Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 has received positive judicial treatment as has Kelly v Cooper. The proposition from these cases is that contract will shape the fiduciary relationship and the duties will accommodate themselves to the contract. Fiduciary duties cannot be superimposed to alter the contract. The conclusion reached was that where a term is included in the contract, whether express or implied, that allows a fiduciary to act for multiple principals then they are free to do so. In Kelly v Cooper this was in the context of estate agents as fiduciary.
These points, however, lack detail. There are issues not addressed. It is often stated to reason by analogy in the context of fiduciary duties is dangerous and it has recently been approved that implying such terms that allow an estate agent to act for multiple principals is not automatically applicable to other types of fiduciary. See Northampton v Richard Andrew Cowling [2014] EWHC 30 (QB) at [185]. Is the report arguing that such a term is implied in to investment intermediary contracts? If so, does it apply to all types of investment intermediaries? Also, approving through an implied term to allow a fiduciary to act for multiple principals, does this always mean the principal would be prevented from claiming a conflict of interest? There perhaps needs to be a bit more clarity on how duties may be modified by contract in distinguishing between approving conflicts and attempts to stop their application all together. There is a lot more consideration needed to reconcile Professor Kay's view that contract cannot override fiduciary duties and the Reports position that they can. (see 10.48-10.49 of the Report)
There remains the issue of when fiduciary duties arise. Discussed at 3.23 the Report gives acceptance to Edelman's view that the 'greater degree of trust, vulnerability, power and confidence reposed in the fiduciary, the more likely a reasonable person would have such an expectation' [to loyalty]. The Report at 3.24 sees this as a useful way to determine when the relationship arises. Unfortunately, it lacks precision and certainty. How much trust must be placed in one person until they are reasonably entitled to loyalty. This may lead to arbitrary court discretion without true consideration of why loyalty is imposed on an individual. This may have severe consequences either way since someone who owes loyalty must suspend self-interest. Without going in to detail myself here, the issue is not one of a sliding scale based on reasonableness but a binary approach to loyalty. The question that needs to be answered is did you or did you not undertake responsibility for the other person's interests at the expense of your own and anyone else's interests. I do not think, based on this alone, investment intermediaries are any better off in knowing if they owe fiduciary duties. However, chapter 10 of the Report does provide some more detailed insight but at 10.20 of the Report, for example, there is mention that it is possible fiduciary duties might be owed based on legitimate expectations in regards to actuaries. The use of the words 'possible' and 'might' emphasise the uncertainty such a test brings.
The next issue is the content of fiduciary duties from 3.25 (see also 10.43-10.47). The Report notes that not all fiduciaries owe the same fiduciary duties and some relationships may give rise to more onerous duties. However, the very next paragraph states that the distinguishing duty of a fiduciary is loyalty. This appears to be a stark contradiction. How can you owe different duties if the one duty is loyalty? How can you be more loyal than another fiduciary? You can't be a bit loyal. If loyalty is more onerous or different duties are owed in different circumstances the Report does not give one example to support this. If you are in a fiduciary relationship you are subject to the fully expanse of fiduciary jurisdiction. The confusion is mainly based on the notion that it is not fiduciaries owe different duties but they do not owe them in the same circumstances.
My final thought is that if fiduciary duties can be restricted by terms of a contract then this gives considerable power to the stronger party. This may lead to significant abuse and certainly more consideration is needed on this point.
On the whole the report gives a largely accurate portrayal of the law and is a helpful document. There are a few points that I would raise. The main point surrounds what is actually meant by contract first in determining the application of fiduciary duties.
The first point is between 3.33-3.40 in the report on duty-duty conflicts and modifying fiduciary duties. Certainly the position is correct that a fiduciary acting for two principals must obtain authorisation to do so. However, as I pointed out in my response and the Report accepts, this is not the end of the matter as the fiduciary must still comply with their other duties.
With modifying fiduciary duties at 3.37-3.40 the Report adopts a contract first approach, relying strongly on a privy council decision in Kelly v Cooper [1991] AC 205 and other Commenwealth decisions. It would perhaps have been worthwhile to assert English authorities for this proposition. Particularly since Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 has received positive judicial treatment as has Kelly v Cooper. The proposition from these cases is that contract will shape the fiduciary relationship and the duties will accommodate themselves to the contract. Fiduciary duties cannot be superimposed to alter the contract. The conclusion reached was that where a term is included in the contract, whether express or implied, that allows a fiduciary to act for multiple principals then they are free to do so. In Kelly v Cooper this was in the context of estate agents as fiduciary.
These points, however, lack detail. There are issues not addressed. It is often stated to reason by analogy in the context of fiduciary duties is dangerous and it has recently been approved that implying such terms that allow an estate agent to act for multiple principals is not automatically applicable to other types of fiduciary. See Northampton v Richard Andrew Cowling [2014] EWHC 30 (QB) at [185]. Is the report arguing that such a term is implied in to investment intermediary contracts? If so, does it apply to all types of investment intermediaries? Also, approving through an implied term to allow a fiduciary to act for multiple principals, does this always mean the principal would be prevented from claiming a conflict of interest? There perhaps needs to be a bit more clarity on how duties may be modified by contract in distinguishing between approving conflicts and attempts to stop their application all together. There is a lot more consideration needed to reconcile Professor Kay's view that contract cannot override fiduciary duties and the Reports position that they can. (see 10.48-10.49 of the Report)
There remains the issue of when fiduciary duties arise. Discussed at 3.23 the Report gives acceptance to Edelman's view that the 'greater degree of trust, vulnerability, power and confidence reposed in the fiduciary, the more likely a reasonable person would have such an expectation' [to loyalty]. The Report at 3.24 sees this as a useful way to determine when the relationship arises. Unfortunately, it lacks precision and certainty. How much trust must be placed in one person until they are reasonably entitled to loyalty. This may lead to arbitrary court discretion without true consideration of why loyalty is imposed on an individual. This may have severe consequences either way since someone who owes loyalty must suspend self-interest. Without going in to detail myself here, the issue is not one of a sliding scale based on reasonableness but a binary approach to loyalty. The question that needs to be answered is did you or did you not undertake responsibility for the other person's interests at the expense of your own and anyone else's interests. I do not think, based on this alone, investment intermediaries are any better off in knowing if they owe fiduciary duties. However, chapter 10 of the Report does provide some more detailed insight but at 10.20 of the Report, for example, there is mention that it is possible fiduciary duties might be owed based on legitimate expectations in regards to actuaries. The use of the words 'possible' and 'might' emphasise the uncertainty such a test brings.
The next issue is the content of fiduciary duties from 3.25 (see also 10.43-10.47). The Report notes that not all fiduciaries owe the same fiduciary duties and some relationships may give rise to more onerous duties. However, the very next paragraph states that the distinguishing duty of a fiduciary is loyalty. This appears to be a stark contradiction. How can you owe different duties if the one duty is loyalty? How can you be more loyal than another fiduciary? You can't be a bit loyal. If loyalty is more onerous or different duties are owed in different circumstances the Report does not give one example to support this. If you are in a fiduciary relationship you are subject to the fully expanse of fiduciary jurisdiction. The confusion is mainly based on the notion that it is not fiduciaries owe different duties but they do not owe them in the same circumstances.
My final thought is that if fiduciary duties can be restricted by terms of a contract then this gives considerable power to the stronger party. This may lead to significant abuse and certainly more consideration is needed on this point.
Tuesday, 1 July 2014
Fiduciary duties of investment intermediaries: Commission Report published
Today, the Law Commission published its report after consultation on fiduciary duties of investment intermediaries. The four documents published today as well as previous documents leading to the report can be found here.
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