Fiduciary standards describe how people should behave when they manage the affairs of others. The key elements of the concept are loyalty – put your responsibilities to others ahead of your own interests – and prudence – discharge your responsibilities with care and skill.
Statutes define the fiduciary duties of company directors. The common law imposes demanding fiduciary obligations on other agents, such as the trustees of pension funds. In 1984, a landmark legal ruling on this matter was made in the UK. A case had been brought by Arthur Scargill, the leader of Britain’s main mining union. He sought the end of coal board investments in overseas businesses. The judge rejected Mr Scargill’s claim, on the basis that it is the duty of trustees to increase the fund’s value for its beneficiaries, regardless of their moral or political views. Some lawyers have adopted a strict interpretation of the ruling.
Such rigour and relative clarity is rare. Common law fiduciary obligations may exist in other areas of finance but the extent is uncertain. Contracts, such as those of asset managers, often attempt to exclude fiduciary obligations.
But in a sector as extensively regulated as financial services, the main determinant of behaviour is the rule book. Perhaps this is as it should be. Regulation should focus on the particularities of the industry, and not mechanically apply principles devised to ensure that Victorian solicitors were properly mindful of the interests of widows and orphans. But whatever the means, the objective of promoting high standards of behaviour remains.
In a modern financial system, fiduciary standards would mean that anyone who manages someone else’s money, or advises how money should be invested, should put their client’s interests first. Their aim should be to do, or recommend, what they would do themselves in the client’s position. Conformity to fiduciary standards also means avoiding conflicts of interest. If conflicts cannot be avoided, they should be disclosed. You might be permitted to profit from the transaction, but not from the conflict.
Standards have fallen short of these requirements: but so have regulatory obligations, which in the UK have until now been governed by principles defined by the Financial Services Authority. One must have “due regard” to the interests of clients. This is not the same as putting clients’ interests first. A further obligation to “treat customers fairly” sounds more promising, but is also inadequate.
The Swansea ballboy who lay on the football in an effort to waste time during a recent League Cup game understood that there was a difference between discharging his duty fairly and supporting his team – and misinterpreted his role. Fairness weighs competing claims, and is appropriate for a referee, but not an agent: the honest intermediary does not balance the client interest with his own, but puts its client first.
The duty “to take reasonable care to ensure the suitability of advice and discretionary decisions” is hardly equivalent to “behave as if it were your own money”. The FSA principle on conflicts of interest demands only that “conflicts should be managed fairly”.
Recent scandals, from Libor fixing to the mis-selling of payment protection insurance, have revealed behaviour which not only fails to meet fiduciary standards but has been so low as to violate everyday requirements of decency and legality. Yet the vast majority of those who work in the financial sector are decent people who want to do a good job for their clients and customers. Most bankers still work in branches, not on trading floors; most asset managers want to perform for the benefit of their investors. The reputation of finance has been degraded by the actions of a few. But the few have been running the show, and have imposed inappropriate values on once respected institutions.
If trust and confidence in financial intermediation are to be re-established, principles of loyalty and prudence are a prerequisite. For most people outside the financial services sector, it is obvious the only people you can trust with your money are those who are willing to pursue your interests rather than their own. The public would be surprised that the imposition of fiduciary standards on those who work in advisory or discretionary roles should even be controversial.