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Last updated: July 15, 2012 4:25 am
Expectations are mounting over what will emerge this month from the Kay Review, which is investigating whether the UK equity market works effectively “to generate returns for savers and to improve the performance of companies”.
At a review debate last week hosted by UKSIF, the UK sustainable investment and finance association, one of the main issues discussed by the pension funds, asset managers and consultants around the table was fiduciary duty, in the context of the perceived need for more and better engagement by shareholders with the companies they own.
Lack of clarity on who should take responsibility for fiduciary duties in the investment chain prompted the question of how to sort out the confusion and whether codifying the fiduciary responsibilities of the different actors along the investment chain was a possible solution.
Much of the confusion arises between asset owners and asset managers. Paul Lee, a director at Hermes Equity Ownership Services, who chaired the working group for the International Corporate Governance Network model mandate, said fiduciary duty was a responsibility that drew in both parties.
“Asset owners have fiduciary duties to the extent they are stewards of money on behalf of others, their underlying beneficiaries. Fund managers bear fiduciary duties for the same reason,” he said at last week’s event.
Chris Hodge, head of corporate governance at the Financial Reporting Council, comments: “The reason why there is confusion over who is responsible for fiduciary duty is that it is unclear. There are different duties along different parts of the chain.”
Pension funds have a fiduciary duty to scheme members, while asset managers owe a duty to the end investors, and directors of quoted companies have a fiduciary duty to company members or shareholders, says Mr Hodge.
FairPensions, a campaigner for responsible investment, said in a report published in March: “Fiduciary obligations exist to ensure that those who manage other people’s money act responsibly in the interests of savers, rather than serving their own interests.”
According to the Pensions Regulator, pension trustees “have a duty to act in their members’ best interests, and are also required to act in accordance with pension legislation and case law”. The regulator has produced codes of practice and guidance to help them run their schemes in line with these requirements.
All that is well and good but Penny Shepherd, UKSIF chief executive, who chaired last week’s debate, said pension trustees often ignored the issue of fiduciary duty when it came to choosing an asset manager.
“Pension trustees rarely consider during the manager selection process whether their asset managers accept that they too have fiduciary duties,” she said.
Their thinking focuses more on “we will select this asset manager because we like their investment process”, said Ms Shepherd. “There is no mention of prioritising a culture of respect for the interests of members or effectiveness in delivering long-term engagement.
“It is not part of the narrative. As a result, they accept contracts which allow managers to avoid fiduciary responsibility.”
Her viewpoint has support from other investment specialists.
“Fund managers do not think of themselves as fiduciaries. It is essentially written out of the space in the contract, and they in effect contract out of fiduciary duty,” said Mr Lee.
Rory Sullivan, an independent investment adviser and senior research fellow at University of Leeds agreed. “In my experience fund managers are reluctant to say if they have a fiduciary duty. They see their role as a contractual one based on value for the shareholder,” he said at the UKSIF event.
The Financial Services Authority, which oversees asset managers, says fiduciary duties are more of an aspect of common law rather than something established by its rules and regulations. The Association of British Insurers declined to comment on the issue, although its members are asset owners.
So should fiduciary duty and its exercise be laid down by law or regulation?
FairPensions called for legislative action on this in March when it published its report. The group said such a law should apply to all asset managers, consultants and insurance companies when there is a contractual product. The legislative proposal would also help to solve the problem of a narrow financial interpretation of institutional investors’ fiduciary duties.
When the report was launched Catherine Howarth, FairPensions chief executive, told FTfm a lot of trustees believed their fiduciary duty was only to maximise returns.
She argued they needed to broaden their horizons to take in long-term value rather than short-term prices, a point at the heart of the Kay review.
Although fiduciary duty is not mentioned specifically in the review, it is a part of stewardship duty, which is central to the report and the investment industry. Roundtable expectations last week were high. Mr Lee said; “I would be surprised if [the issue of] fiduciary duty did not in some way come out of the Kay review.”
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