Is it the right time for a fiduciary duty?
15 / 06 / 2017
Too much emphasis is being placed on how we can continue to sell financial products to Europe once we leave the EU, rather than the more important question of whether the products promoted are any good.
In particular, those that are likely to be of interest to high-net-worth private investors.
The financial crisis is already a distant memory for many, but regulatory reform is a slow moving beast.
As momentum slows, the question needs to be asked whether the needs of investors are going to be neglected in light of a regulatory focus on the passporting of authorised products.
We have seen a tide of regulation on the badging of authorised products: requiring disclosure and transparency; enforcing responsible business conduct of financial service providers and their authorised agents; and effecting complaint handling and redress processes to resolve disputes.
While these are all laudable aims, can we really claim that there is sufficient protection for those private investors who are wealthy, but not wealthy enough to afford discretionary wealth management advice?
There are very many high-net-worth investors looking to live off a capital sum which is more than the average person would have.
The former owners of a family businesses, the smaller employer pension funds and retired professionals need to invest in products which generate income andso we are seeing them taking on more and more risk in the current macroeconomic environment.
While these investors would not be viewed as ‘vulnerable’, is the industry mistaken in assuming that business competence means they are able to assess the financial markets and associated risks adequately?
The current approach of disclosure and ‘buyer beware’ does not address the key issues of information asymmetry: lack of knowledge of risk being undertaken, lack of equivalent bargaining power and, critically, lack of proper independent advice.
But the needs of these customers should now be addressed by the G20 and OECD investor protection programme.
Bridging the gap
One way that could bridge the gap in protection that currently exists would be to move towards the creation of a fiduciary duty which goes over and above the existing duty of care.
Those who argue against the imposition of a fiduciary duty cite the increase in costs which would occur if a higher standard of care was to be adopted as the reason such a duty should not be imposed.
However, the reality is as an industry the financial services sector is already doing many of the things that a fiduciary duty would require. So it would not take a huge amount of additional effort to go that little bit further to ensure everyone advising private investors was adhering to an agreed set of standards that represent not just best practice, but exceptional practice.
The bottom line is we need to get to a position whereby, irrespective of the characteristics of the individual investor, those advising on financial products stand up and take responsibility for proper product selection.
If we look at introducing a fiduciary duty for those advising on unauthorised products first, this could be used as a pathfinder exercise to create a standard which could eventually be filtered down to those selling authorised products. The legislation in this area is geared too heavily towards the protection of fund managers rather than private investors; and this is not just the case in the UK but in other jurisdictions too.
The regulatory agenda needs to shift from ‘look, here is a bunch of products you can sell, and here is who you can sell them to’ to ‘look, here is a group of investors who have defined objectives they need to meet (capital protection, income for when they reduce work and provision for care in later life) and it is up to you to advise them on the products available to them to meet those needs’.
The emphasis should be on advice not products, and there should be a defined path of recourse where an adviser fails to give them advice of a sufficiently high standard.
Brexit provides the perfect opportunity for the UK to review investor protection and, in effect, act as a trailblazer for other countries to follow.
There is a real opportunity here for the UK to set itself apart and to lead the way in safeguarding the interests of private investors.
This article was first published in Investment Week on the 7 June 2017