Fiduciary duties of investment intermediaries – response to consultation

Background

BIS and the DWP asked the Law Commission to investigate how the law of fiduciary duties applies to investment intermediaries and to evaluate whether the law works in the interests of end investors.

The Law Commission chose the pensions landscape in which to conduct its investigations and, in its present consultation, examines how the law of fiduciary duties applies to investment intermediaries.  It also seeks to evaluate whether the law works in the interests of end investors.

In this response:

• General comments
• Response to specific consultation questions
  

General comments

The consultation is a very well written document which presents a thorough analysis of the current law of fiduciary duties.

Whilst the Law Commission recognises that the law of fiduciary duties is complex and derives from multiple sources, it does not consider that any overhauls to the current position are required.  For the reasons set out below, we support the conclusions reached by the Law Commission.

As advisers to trustees and employers of occupational pension schemes principally, we have restricted our comments to the parts of the consultation that are most relevant to our practice.  As such, we have not sought to answer every consultation question.

Response to specific consultation questions

PENSION TRUSTEES’ DUTIES TO ACT IN THE BEST INTERESTS OF BENEFICIARIES

Question 1: Do consultees agree that Chapter 10 represents a correct statement of the current law? (14.6)

We agree with the analysis of the law set out in chapter 10, relating to the duties of pension scheme trustees to act in the “best interests” of others.

The primary duty of pension scheme trustees is to ensure that the benefits promised under the pension scheme can be paid.  In our view, the legal scope of the phrase “best interests” in this context is sufficiently broad to ensure that members’ long-term interests can be suitably protected.  As such, trustees can (and indeed should) take a longer-term view to ensure that this duty is fulfilled.

In our experience, the phrase “best interests” is not taken to mean that only short-term financial interests can be protected.   Nor are we aware of trustees receiving advice to support the view that “best interests” solely entail a focus on short-term financial gain.

We also agree with the Law Commission’s view that the law is sufficiently wide to allow trustees to take account of environmental, social and governance (ESG) factors where they consider it appropriate to do so.

Question 2: Do consultees agree that the law reflects an appropriate understanding of beneficiaries’ best interests? (14.11)

Agree.

Question 3: Do consultees think that the law is sufficiently certain? (14.15)

Yes.  The law in this area is clear.  It is also sufficiently flexible to allow trustees to adapt their behaviour to respond to changes in circumstances.  In our view, if changes to the law were to be sought, there would be a risk that such flexibility could be reduced and that unintended consequences might arise from any attempt to alter the current legal position.

Question 5: Are there any specific areas where the law would benefit from statutory clarification? (14.15)

As noted above, any attempt to clarify the current legal position (which in our view is unnecessary) carries a risk that changes made may have inadvertent and unintended consequences.

Question 6: Do consultees agree that the law permits a sufficient diversity of strategies? (14.21)

Agree.  For this reason we do not believe any changes to be necessary.

Question 7: Do consultees agree that the main pressures towards short-termism are not caused by the duty to invest in beneficiaries’ best interests? (14.24)

Agree.  To the extent that any short-term positions are adopted by trustees, this is not driven by the existing fiduciary duties or trustees’ perceptions of them.

Question 8: Do consultees agree that the law is right to allow trustees to consider ethical issues only in limited circumstances? (14.28)

Yes.  The current law requires investment in the best interests of members.  As such, this means that personal and ethical views need to be set aside.  If such views are not set aside (and the likely result is lower returns), there is a clear risk of conflicts of interest.

Question 9: Does the law encourage excessive diversification? (14.32)

No, not in our experience.

Question 10: Does the law encourage trustees to achieve the right balance of risk and return? (14.32)

Pension scheme trustees are required to take account of both trust law and statutory provisions, including The Occupational Pension Schemes (Investment) Regulations 2005 which derive from the current EU Pensions Directive.

Both the trust law position and the regulations are framed to allow trustees to reduce the level of diversification in their portfolio if they would otherwise be unhappy with the level of risk.

Question 12: Overall, do consultees think that the legal obligations on trustees are conducive to investment strategies in the best interests of the ultimate beneficiaries?

Yes.

FIDUCIARY TYPE DUTIES IN CONTRACT-BASED PENSION SCHEMES

Question 14: Do consultees agree that the duties on contract-based pension providers to act in the interests of scheme members should be clarified and strengthened? (14.42)

In our view, the imposition of fiduciary duties on contract-based pension providers would not be the most effective way of addressing any policy initiative to increase the duties and responsibilities of such providers to pension scheme members.

Contract-based providers are governed by the regulatory system overseen by the FCA, which includes the requirement for treating customers fairly.  Rather than seek to superimpose the requirements of a different regime, we consider that any additional measures aimed at protecting pension scheme members should build on the provisions already in place for contract-based providers.

Question 17: Should pension providers be obliged to indemnify members of Independent Governance Committees for liabilities incurred in the course of their duties? (14.42)

Yes.  Without such an indemnity, pension providers are likely to find it difficult to recruit governance committee members.

FIDUCIARY DUTIES IN THE REST OF THE INVESTMENT CHAIN

Question 18: Do consultees agree that the general law of fiduciary duties should not be reformed by statute? (14.61)

As noted above, we do not see a need for reform of the existing general law of fiduciary duties.