Finance & Fiduciaries

The key duties of fiduciaries include the following,

• duty to account for profits and benefit
• duty not to make personal profits, although they were specifically permitted:
• duty not to flatter or discretion
• duty not to get delegation authority.

The issue of whether a financial advisor  or bank, insurance company or intermediary may have been fiduciary duties can be significant. Fiduciaries owe duties to act in the best interest of their principals (cleints). They have duties to avoid conflicts of interest and not to make secret profits. See generally the sections on trustees, who are the most restricted type of fiduciary.

In contrast to a person dealing as a fiduciary, a retailer or arms’ length contractor may subject to consumer protection rules, act in his own best interests. He is at arms’ length from the customer and his obligation are governed by the law of contract, perhaps as supplemented by codes of conduct and consumer protection rules.

Under general contract law, a party will not be liable to the other for the consequences of that other entering a bad contract, unless there has been a breach of a contractual term, misrepresentation (innocent or fraudulent) or some other exceptional circumstances. Apart from consumer protection obligations, there is no obligation to act in the best interests of the other party. Indeed, this is not what the market economy expects as each subject to compliance with law, is free to act in his own interest exlusively.

In the financial services context, recent years have seen greatly increased consumer protection for retail consumers of financial product. Given the risky nature of many financial products, financial institutions  do not usually make explicit promises in relation to successful outcome of their contract. Even there are  implied terms, they are likely only to be  general duties to act in a competent manner. This, combined with the cost and risk of legal action, make it difficult / impossible to succeed in a claim for alleged inappropriate advice or mis-selling.

Recent years have seen an enormous rise in the detailed regulation of financial services. Legislation has effectively recognised that financial advisors, product providers and intermediaries are more knowledgeable position in respect of products than the retail client. To this end, a number of codes of practice,  and latterly, regulations, have been made by the Central Bank and its predecessor financial regulators.

 

These codes of practice are not directly rules of law but they  can be enforced through a low cost ombudsman procedure.The codes of practice have been progressively more detailed and prescriptive and have been made applicable to the consumer financial services industry. In a sense the effect of the codes has been to particularise fiduciary type duties for various financial institutions, financial advisors and similar service providers.

The  Consumer Protection Code  commenced in 2006. It contains very detailed doing business rules which cover banks, insurance companies and intermediaries. It also  covers smaller scale businesses.

In November 2007, the Markets in Financial Instruments Directive (MiFID) it was made law in Ireland. This enhanced the existing doing business rules in relation to investment services.

The codes and MiFID require financial services providers to ensure that products are suitable for their customers. There must fact find, and ensure that they are appropriate. They must keep records for several years..

The consumer protection codes and legal rules are enforceable through  short form, administrative  complaints to the Financial Services and Pensions Ombdsman office. See the separate chapters in that regard. The FSPO can make awards  up to €500,000. This  gives consumers a relatively low risk, low cost mechanism for complaining breach or  both legal duties and the fairness and suitability standards provided by the codes.

The following looks at fiduciary duties in a general way as they may apply to financial services and investments.In the very broadest terms, fiduciary duties may arise where one person acts in a position of trust in the affairs of another.

It is clear that ordinary, most ordinary banking transactions do not occasion  fiduciary duties. The parties deal at arms’ length. In contrast, investment management is more likely to give rise to fiduciary obligations. However, fiduciary duties may be and usually  are, excluded or limited, by the terms of contract between the parties.

A fiduciary acts for  another in circumstances which give rise to a relationship of trust and confident. A fiduciary relationship is more commonly found where there has been a delegation of power and authority to a person to act on behalf of another. An agency relationship for one acts on behalf of another, implies duties of fiduciary duty.The fiduciary has an obligation of loyalty and to act in good faith. He may not act for his own benefit. The extent of fiduciary duties vary depending on circumstances. They maybe excluded or limited by the terms of an agreement.

A fiduciary relationship may arise where the  financial services provider is in a position of power and influence, such that he  or it,  should be treated by the Courts as a fiduciary. This conclusion is more likely where for example, the financial institution holds assets on trust, on behalf of the customer.

A fiduciary duty relationship may arise because of the manner in which the financial service provider deals with the customer. In cases, where a financial service provider behaves inappropriately, by for example pressurizing a vulnerable person into taking unsuitable products, the court may classify the relationship as a fiduciary.In specific circumstances a bank may have found to have exercised due influence. See our separate chapters on source and undue influence.

Where the  bank  holds itself as an expert and performs an advisory role, a fiduciary duty more likely.  For example, fiduciary duties may arise where a bank managers goes beyond ordinary banking business and advises a customer on a particular product. This is now subject to detailed regulations.

Where a  bank has  discretionary control of a customers assets ,  fiduciary duties may arise. For a bank manages a portfolio of investment, in this case it  effectively acts as agent or trustee.

Where a bank assumes the role of a persons advisor in financial matters and creates relationship of trust and confidence in a fact they maybe held to be a fiduciary. Whether this has occurred will depend on the context. Where the customer is more vulnerable, and has relied on the financial institution, it is more likely to be characterized as a fiduciary relationship. For example, if the financial institution fails to explain the risks and persuades the customer to invest all of his life assets then it is likely that the fiduciary relationship seem to exist.

A financial intermediary may or may not be in fiduciary. A financial intermediary stands between two, the product provider, and the customer. This position will depend on the circumstances. Intermediaries are also subject to detailed codes and regulations.

Fiduciary liability maybe limited by a clause excluding liability in terms of appointment. Fiduciaries may be authorized to receive remuneration. Indeed , but for that authority they would not be entitled to remuneration.

Financial institutions and intermediaries will seek to exclude liability or minimise their liability. However, there are limits and some obligations and duties may not be excluded. e.g.  mandatory code of conduct rule.The mandatory obligations in financial services regulations and codes of conduct  probably cannot be overwritten by exclusive clauses excluding or limiting liability. It is not possible to exclude liability for dishonesty or fundamental breach of contract.

Fiduciary obligations also imply a  duty to care and to use the requisite skill.  It entails a duty to maintain confidentiality.In extreme cases the Courts may impose a constructive trust because the financial service provider has acted in an unconscionable way.

Where a financial services provider acts as trustee or agent, or partner then he is automatically a fiduciary. A fiduciary relationship may arise for the bank and chooses the transaction by becoming advisor, this is especially more likely for the customer is in experienced and places reliance on the bank’s expertise or the bank exercises undue influence.

When a fiduciary relationship is found the principles of constructive trust may apply. Any unauthorized profit must be held on trust for the beneficiary of the relationship. For profits are earned on the relationship by the party owing the duties and just hold the trust.