As recently reported in Money Marketing, two MPs, Chris Leslie and Cathy Jamieson, proposed an amendment to the Financial Services Bill, now on its third reading in the House of Commons, to introduce the principle that authorised persons should have a fiduciary duty towards consumers who are their clients.
The thinking behind the amendment – and its wording – seems a bit muddled but it is worth examining the amendment and what is meant by a fiduciary duty to understand the implications for authorised persons if it becomes part of the bill.
The bill itself is structured so that the current regulatory functions of the FSA are split between the Bank of England, the Financial Conduct Authority and the Prudential Regulation Authority. Both the FCA and the PRA are given the general functions of making rules, issuing codes and guidance and determining the general policy and principles applicable to doing their jobs.
There are a number of general regulatory principles to which both bodies are required to have regard, such as the need to use their resources in the most efficient and economic way, that the burden of regulation should be proportionate to the expected benefits and consumers should take responsibility for their decisions.
The amendment would add to that list of principles the requirement that the FCA and the PRA, when carrying out their general functions, must have regard “to the principle that, where appropriate, authorised persons should have a fiduciary duty towards the consumers who are their clients”.
The concept of a fiduciary duty is not defined in the bill and one must turn to the ordinary law to work out what that means. The word fiduciary is derived from the Latin fiduciarius, meaning relating to something held in trust and from fiducia, meaning trust.
A good starting point for the modern definition of fiduciary duty is the judgment of Lord Justice Millett in the case of Bristol & West Building Society v Mothew which was decided in the Court of Appeal in 1996.
The judge said: “This branch of the law has been bedevilled by unthinking resort to verbal formulae. It is therefore necessary to begin by defining one’s terms.The expression ’fiduciary duty’ is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent upon the breach of other duties. Unless the expression is so limited, it is lacking in practical utility. In this sense it is obvious that not every breach of duty by a fiduciary is a breach of fiduciary duty.”
He went on to say: “A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary.
“This core liability has several facets. A fiduciary must act in good faith, he must not make a profit out of his trust, he must not place himself in a position where his duty and his interest may conflict, he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. He is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.”
There are several things to note from those passages. The first is that, as things stand today, some authorised persons are already in fiduciary relationships with their clients but others are not.
An IFA acts for his or her client in respect of the transactions carried out on behalf of the client. The IFA is the agent of the client. The relationship of principal and client is one of trust and confidence and is an example of a fiduciary relationship. All IFAs owe their clients a duty of single-minded loyalty and the consequential range of duties described above in any event.
Second, IFAs are also under a range of duties to their clients that are not fiduciary in nature. The most important of these is the duty of skill, care and diligence, which is central to what an IFA does for a client and has nothing to do with the fiduciary relationship between them.
On the other hand, a bank is not in a fiduciary relationship with its customers. Banks provide a range of services to their customers and, in relation to some of those duties, a duty of care to the customers arises. But a significant part of a bank’s business consists of lending or other activities where the parties will have their own separate interests, meaning there will be no duty of care.
What would the regulators do when considering how to apply the general principle introduced by the amendment to banks? Would they simply say it is not appropriate to impose a fiduciary duty on a bank because the amendment would specifically permit that conclusion? Or would the regulators make rules that, in effect, create a fiduciary relationship?
How would that affect the separate interests of the bank, for example, to lend the money deposited by one customer to another? Would the bank have to make full disclosure to the first customer from whom it borrowed the money deposited and account to that customer for the profit made from the second? Surely not.
That said, there are some duties that it would be in the general interests of all customers of banks to impose on the banks. For example, a duty not to sell a product provided by a company in the same group as the bank unless, on a proper review of the market, the product is not only the best available but is also the most suitable for the customer. Such a rule would not necessarily be required by the proposed amendment. It could be introduced whether or not the amendment becomes part of the eventual act.
An insurance company does not owe any fiduciary duties to its policyholders. There are mutual duties of the utmost good faith in relation to disclosure of material facts but those do not create a fiduciary relationship between the parties. When a product provider such as an insurance company sells one of its products, there are already extensive duties imposed by the FSA’s rules relating to establishing the need for and suitability of the product being sold. Those duties could be strengthened but to do so would not be a necessary consequence of the amendment.
If the motivation behind the amendment is to strengthen the rules designed to protect customers, imposing a fiduciary duty is unlikely to be necessary or appropriate.
Those firms that need to be in a fiduciary relationship with their clients are already in one and nothing more needs to be done. The amendment will therefore do no more than create confusion and the risk that the principles to which the regulators are to have regard are “bedevilled by unthinking resort to verbal formulae”.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and cofounder of moneymatterslegal.co.uk