Transcript COMMENT ON CONSULTATION PAPER NO. 215

OBSERVATIONS ON LC
CONSULTATION PAPER NO.
215
David Cabrelli: Senior Lecturer in Commercial
Law, University of Edinburgh –
[email protected]
INTRODUCTION
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
Scope of Consultation Paper No. 215
Focus in this discussion restricted to:
◦ Duties of investment managers
◦ Role and Influence of Regulatory Rules, eg FCA
COBS and MIFID
◦ Kay Review and UK Government’s response – that
fiduciary principle of pursuit of ‘long-term
interests’ should (i) be owed along entire length of
‘intermediation chain' irrespective of status, and (ii)
not be subject to contractual disapplication
THE PARTIES IN THE
‘INTERMEDIATION CHAIN’
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Original Saver/Investor – Scheme Beneficiary
Professional Trustees – UK DB or DC Pension
Fund
Actuary
Investment Consultants
Investment Manager
Sub-investment managers – segregated
mandates for diverse asset classes
Broker
Custodian
Investee Company, OEIC or Unit Trust
FIDUCIARY DUTIES AND OTHER
DUTIES
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Fiduciary Duties:
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‘No Conflict’ Rule
‘No Profit’ Rule
‘Undivided Loyalty’ Rule
‘Confidentiality’ Rule
Power-based Duties:
◦ Proper Purpose;
◦ Exclusion of Ulterior Motives on exercise of power
◦ Not to Fetter Discretion or Exercise Bias
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Duty of Care
◦ Contractual; and
◦ Tortious/delictual
POTENTIAL BEARERS OF
FIDUCIARY DUTIES
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Professional Trustee – UK DB or DC Pension
Fund
Actuary
Investment Consultants
Investment Managers
Broker
Custodian
POTENTIAL BENEFICIARIES OF
FIDUCIARY DUTIES
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Original Saver/Investor
Professional Trustees – UK DB or DC Pension
Fund
CRITERIA FOR IMPOSITION OF
FIDUCIARY DUTIES
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Status-based:
◦ Agent and Principal relationship
◦ Trustee and Beneficiary relationship
Fact-based
◦ Based on ‘discretion, power to act and vulnerability’;
◦ Scots law – party A reposes trust and confidence or
delegates power in favour of party B whom A has employed
to act on his/her behalf. The greater the amount of power
delegated or trust and confidence which A reposes in B, the
more likely it will be that B will be treated by Scots law as a
fiduciary owing fiduciary obligations to A
◦ Independent of consent - Role of mandate(s)/contract(s)?
English law and Scots Law?
DUTIES OF DISCRETIONARY
INVESTMENT MANAGERS
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1. Fiduciary Duties:
◦ Agency law – As main agent and as sub-agent in
Scots law: Liverpool Victoria Legal Friendly
Society v Houston (1900) 3 F 42
◦ Ata v American Express Bank Ltd. (Rix J,
Unreported, 7 October 1996)
DUTIES OF DISCRETIONARY
INVESTMENT MANAGERS
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2. Duty of Care
 Concurrent contractual and tortious/delictual
liability
 Exercise skill and care consistent with that of a
prudent man in managing his own affairs or if
higher, the standard of a reasonably competent
and careful asset manager
 Hunter v Hanley 1955 SC 200:
◦ deviation from a usual and normal practice which
no professional asset manager exercising
ordinary skill and care would have taken if he had
been acting with ordinary care
DUTIES OF DISCRETIONARY
INVESTMENT MANAGERS
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Stewart v McLean, Baird & Neilson 1915 SC 13, 19 (per Lord
Dundas):
◦ The asset manager must provide to the client a sufficient
explanation of the true nature of the investment service and its
attendant risks and dangers, as well as its temptations and
advantages.
◦ The amount, nature, and kind of explanation to be given to the
client must be tailored according to the client’s intelligence and
experience and the nature of the subject that is being discussed.
◦ The steps that the asset manager must take will vary according to
the nature of the client. The less experienced the client, the more
explanation, disclosure, and risk warnings that must be given and
the more information about the client which will be required.
◦ The end result is that the liability of the asset manager will be
conditioned by the steps that the asset manager took and in turn,
the depth of the steps that it must take will be carved by reference
to the sophistication of the client.
FACTORS INFLUENCING EXISTENCE,
SCOPE AND CONTENT OF DUTIES
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1. The role of contract:
◦ Fiduciary duties; and
◦ Duty of care
(A) Fiduciary duties
Criteria for establishment of fiduciary duties:
◦ ‘Status-based’ approach
◦ ‘Contract first’ approach – importance of express and
implied terms in Kelly v Cooper [1993] AC 205, New
Zealand Netherlands Society ‘Oranje’ Incorporated v Kuys
[1973] 1 WLR 1126 at 1131–2 (per Lord Wilberforce),
Henderson v Merrett Syndicates Ltd. [1995] 2 AC 145,
206B-D per Lord Browne-Wilkinson, and Commonwealth
Oil & Gas v Baxter [2010] SC 156, 161, 177 and 179 (per
Lord President Hamilton and Lord Nimmo Smith).
FACTORS INFLUENCING EXISTENCE,
SCOPE AND CONTENT OF DUTIES
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Contractual carving of the scope and content of the fiduciary duties:
◦ Whole or partial disapplication
◦ Clause modifying/carving the scope and content of the fiduciary duty
◦ Full disclosure and express or implied informed consent (strong inference
in commercial context where a commercial practice involving conflict of
interest is intrinsic to the structure of the market - Kelly v Cooper [1993]
A.C. 205)
◦ Acknowledgement of non-reliance
◦ Waiver
Justifiability of prominence afforded to contract:
◦ Disadvantageous to ‘non-contractual’ fiduciaries?
◦ What does it mean to say fiduciary duties arise independent of consent?
◦ Meaninglessness of ‘vulnerability’ criterion?
◦ Relevance of fiduciary law in
Continued relevance of fiduciary law in financial services context?
FACTORS INFLUENCING EXISTENCE,
SCOPE AND CONTENT OF DUTIES
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(B) Duty of care
Criteria for establishment of duty of care: Hedley
Byrne and Caparo v Dickman
Contracting out:
◦ Whole or partial disapplication, e.g. disclaimer
◦ Negation of investment advisory relationship –
usually fatal to existence of duty of care,
notwithstanding the applicability of the COBS
regulatory rules - Green v RBS Plc [2013] EWCA
Civ 1197
FACTORS INFLUENCING EXISTENCE,
SCOPE AND CONTENT OF DUTIES
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2. The relative sophistication of the client
◦ Retail
◦ Professional – JP Morgan Bank v Springwell
Navigation [2008] EWHC 1186 (Comm),
Grant Estates Ltd. v RBS Plc [2012] CSOH
133; 2012 G.W.D. 29-588 and Green v
RBS Plc [2013] EWCA Civ 1197
3. Regulatory rules, i.e. FCA COBS and
MiFID
ROLE/INFLUENCE OF REGULATORY RULES ON
CONTENT OF DUTY OF CARE
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Relationship between s. 150 FSMA and private law
liability/duty of care
Is content of the latter necessarily co-extensive with
regulatory rules?
Loosemore v Financial Concepts [2001] Lloyds PNLR 235, 241
per Raymond Jack QC
Seymour v Caroline Ockwell & Co [2005] EWHC 1137
Shore v Sedgwick Financial Services Ltd. [2007] EWHC 2059
(QB)
Rubenstein v HSBC [2011] EWHC 2304 (QB).
Grant Estates Ltd. v RBS Plc [2012] CSOH 133; 2012 G.W.D.
29-588
Green v RBS Plc [2013] EWCA Civ 1197
KAY REVIEW AND UK
GOVERNMENT’S RESPONSE
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Fiduciary duties ought to be owed along entire length of
intermediation chain to:
◦ Original saver/investor – Scheme Beneficiary
◦ Not only to intermediaries’ immediate client
 Gorham v BT Plc [2000] 1 WLR 2129
 Seymour v Caroline Ockwell & Co [2005] EWHC 1137
Status of client should be irrelevant (retail or professional)
Fiduciary duties should enhance standards rather than be
norm-reflecting
Descriptive of legal position?
Normatively feasible?
CONCLUSION
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Concerns with Kay recommendations:
◦ Indeterminate liability to indeterminate class of
constituents
◦ Insurability?
◦ Disregard of contractual autonomy by imposition of
ius cogens fiduciary duties? Reflective of historical
tension between Equity and the Common Law?
◦ Feasibility of fiduciary duties with scope broader
than regulatory rules in FCS COBS?
◦ Why should professional investors have the same
entitlements as retail investors?
◦ Problems with enforcement of fiduciary duties and
duties of care?
THE END
DAS ENDE
FINE
EL FIN
剧终
David Cabrelli: Senior Lecturer in Commercial
Law, University of Edinburgh –
[email protected]