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OBSERVATIONS ON LC CONSULTATION PAPER NO. 215

OBSERVATIONS ON LC CONSULTATION PAPER NO. 215. David Cabrelli: Senior Lecturer in Commercial Law, University of Edinburgh – david.cabrelli@ed.ac.uk. INTRODUCTION. Scope of Consultation Paper No. 215 Focus in this discussion restricted to: Duties of investment managers

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OBSERVATIONS ON LC CONSULTATION PAPER NO. 215

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  1. OBSERVATIONS ON LC CONSULTATION PAPER NO. 215 David Cabrelli: Senior Lecturer in Commercial Law, University of Edinburgh – david.cabrelli@ed.ac.uk

  2. INTRODUCTION • 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

  3. THE PARTIES IN THE ‘INTERMEDIATION CHAIN’ • 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

  4. FIDUCIARY DUTIES AND OTHER DUTIES • Fiduciary Duties: • ‘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 • Duty of Care • Contractual; and • Tortious/delictual

  5. POTENTIAL BEARERS OF FIDUCIARY DUTIES • Professional Trustee – UK DB or DC Pension Fund • Actuary • Investment Consultants • Investment Managers • Broker • Custodian

  6. POTENTIAL BENEFICIARIES OF FIDUCIARY DUTIES • Original Saver/Investor • Professional Trustees – UK DB or DC Pension Fund

  7. CRITERIA FOR IMPOSITION OF FIDUCIARY DUTIES • 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?

  8. DUTIES OF DISCRETIONARY INVESTMENT MANAGERS • 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)

  9. DUTIES OF DISCRETIONARY INVESTMENT MANAGERS • 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

  10. DUTIES OF DISCRETIONARY INVESTMENT MANAGERS • 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.

  11. FACTORS INFLUENCING EXISTENCE, SCOPE AND CONTENT OF DUTIES • 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).

  12. FACTORS INFLUENCING EXISTENCE, SCOPE AND CONTENT OF DUTIES • 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?

  13. FACTORS INFLUENCING EXISTENCE, SCOPE AND CONTENT OF DUTIES • (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

  14. FACTORS INFLUENCING EXISTENCE, SCOPE AND CONTENT OF DUTIES • 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

  15. ROLE/INFLUENCE OF REGULATORY RULES ON CONTENT OF DUTY OF CARE • 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

  16. KAY REVIEW AND UK GOVERNMENT’S RESPONSE • 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?

  17. CONCLUSION • 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?

  18. THE ENDDAS ENDEFINEEL FIN剧终 David Cabrelli: Senior Lecturer in Commercial Law, University of Edinburgh – david.cabrelli@ed.ac.uk

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