Robin Ellison’s article: Fiduciary obligations: is more regulation good for us? (https://www.portfolio-institutional.co.uk/opinion/friday-view/22-april-2016/fiduciary-obligations-is-more-regulation-good-for-us/) leaves the impression that rafts of new regulation are being proposed by the advocates of strong fiduciary relations applying in the world of pensions, when the truth is that many of the thousands of pages of regulation introduced in recent times were responses to observed failings arising from the changing interpretation of fiduciary relations, the shift to a contractarian approach. When compared to the hundreds of years of fiduciary law, this is the new-born.
This change is rooted in the economic ideology of efficient free markets; law derived from economic theory. The Harvard philosopher, Michael Sandel, has observed: “We have drifted from having market economies to becoming market societies. The difference is this: A market economy is a tool—a valuable and effective tool—for organizing productive activity. A market society, by contrast, is a place where almost everything is up for sale.” It is now, of course, a thoroughly discredited economic and financial theory.
While some may claim pre-echoes of the introduction of the law of contract into fiduciary law in cases such as Hospital Products Ltd v United States Surgical in 1984, a better interpretation of that dissenting judgement may be that it was, in fact, intended to introduce elements of fiduciary law into contract. A major step in the weakening of UK fiduciary law occurred in 1998 with Bristol Building Society v Mothew. Duties of loyalty could now be freely contracted around and eliminated. It is clear that the English Trustee Act 2000, which was expressly concerned with reform of the rules governing Trustees’ delegation of powers, was heavily influenced by the economics school and of course, was the subject of powerful lobbying from financial services suppliers.
Trustees are bound by Fiduciary Law but Robin would have them buying financial services as if they were a used car, with the market regime of caveat emptor applying. The recent Bank of England consultation on Fair and Effective Markets described caveat emptor rather well: “In the general law of sale, caveat emptor expresses the basic principle that a buyer of property purchases it at his or her own risk, and that — unless expressly agreed otherwise — the seller makes no representation, gives no warranty, and is under no obligation to volunteer information, about the property sold. In financial markets, the phrase is often used as shorthand for the more general proposition that market participants contracting with each other should be held to the bargains that they agree, and that the public interest is best served by allowing them to contract freely with each other without regulatory restriction or overlay.
However, caveat emptor has never meant ‘anything goes’. It has always been subject to the general law on fraud and misrepresentation, which has long been relatively strict, embodying the principle that (in the words of a Victorian judge, Lord Macnaghten in Gluckstein vs Barnes [1900] AC 240)
‘sometimes half a truth is no better than a downright falsehood’. And over the years the practical application of the caveat emptor principle has been further qualified by judicial and statutory intervention (for example on implied terms), by disclosure and other provisions of consumer law, and, in the context of investment transactions, by statutory and regulatory rules. For example, caveat emptor does not trump the regulatory obligation on a firm to act ‘honestly, fairly and professionally’.”
It is immediately obvious that much of the regulation that so troubles Robin comes about precisely because of the contractarian regime that Robin advocates. The ‘lemon’ here arises from the term of investment services, asymmetry of information, the impossibility of writing complete contracts and the unobservability of manager actions. With pensions, services not property are being purchased. In fact, the recent US Department of Labour introduction of new fiduciary duties stems from just these failings of market and contract law.
There is also no recognition in Robin’s article that it is perfectly possible to organise markets along different philosophic lines from Caveat Emptor, with the Uberrimae Fidei (Utmost Good Faith) of insurance serving as the obvious illustration.
By contrast, as is appropriate for professional asset managers whose services are marketed and sold on the basis of trust as commonly understood, Fiduciary Law imposes high hurdles seeking to eliminate risky, exploitative and disloyal behaviour. It denies fiduciaries their ill-gotten gains, requires rescission of wrongful actions and restoration as if proper performance had been delivered. To quote the legal scholar, Joshua Getzler: “By treating the fiduciary as if he were honest, fiduciary law helps to make him honest. … It seeks to guide parties to right conduct, not impose sanctions for wrongdoing. We do not punish those whom we hope to trust.”
My notes from long ago, when studying law as a trainee banker, inform me that departures from the onerous standards of fiduciary duty required advice (meeting the same standards) for, and informed consent from, beneficiaries, but that appears also to have gone the way of the dodo.
The remedy in Robin’s neoliberal market vision is resort to competition regulation. How many pages there, I wonder? The problem with this competition prescription is that it fails to recognise that co-operation is economically and socially far more important than competition, and is rooted in well-placed, discriminating trust. Perhaps the most important lesson that might safely be taken from economics is that regulation usually functions as a rivalrous substitute for trust.
It is not John Kay venturing into the domain of law that is problematic, but rather the legal profession, including the Law Commission, in adopting into law ideologies borrowed from the domain of economics, that is at fault. By stealth, the invisible hand seems to have cost us rather a lot of our savings.
Con Keating is head of research at BrightonRock
