We make a living by what we get, We make a life by what we give.

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Articles and opinion

First published in Investment Week on 7 June, 2017

Is it the right time for a fiduciary duty? 

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 as to whether the products promoted are any good, particularly the sort of products 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, Rosalyn Breedy of Wedlake Bell asks whether the needs of investors are going to be neglected in light of a regulatory focus on the authorisation of 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 and so we are seeing them taking on more and more risk in the current macro-economic environment. While these investors would not be viewed as ‘vulnerable’, is the industry mistaken in assuming that business competence means that 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. Breedy argues that the needs of these customers should now to be addressed by the G20 and OECD investor protection programme.

She suggests that 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 that as an industry the financial services sector is already doing many of the things that a fiduciary duty would require, and it would not take a huge amount of additional effort to go that little bit further to ensure that 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 that we need to get to a position whereby, irrespective of the characteristics of the individual investor, those advising on financial products need to 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.

Breedy concludes that 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 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 the advice of a sufficiently high standard.

Brexit provides the perfect opportunity for the UK to review investor protection and to, in effect, act as a trail blazer 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.