Where are Fiduciary Standards in Financial Markets?

(February 6, 2013) — Investors are being failed by regulation that does not require their financial partners to conform to fiduciary standards, a leading market commentator has claimed.

Sir John Kay, economist and leader of the UK-government-backed review on short-termism in equity markets, has criticised fiduciary standards in the finance industry – and regulators who do not enough to enforce them.

“In a modern financial system, fiduciary standards would mean that anyone who manages someone else’s money, or advises how money should be invested, should put their client’s interests first,” Kay said in an op-ed published this week. “Their aim should be to do, or recommend, what they would do themselves in the client’s position. Conformity to fiduciary standards also means avoiding conflicts of interest. If conflicts cannot be avoided, they should be disclosed. You might be permitted to profit from the transaction, but not from the conflict.”

He continued that standards in financial markets had fallen, but so had regulatory obligations that should be there to ensure they did not.

Kay said that in the UK, a financial agent must have “due regard” to the interests of clients, but this was not the same as putting a client’s interests first. A further obligation to “treat customers fairly” sounded more promising, but was also inadequate.

“The duty ‘to take reasonable care to ensure the suitability of advice and discretionary decisions’ is hardly equivalent to ‘behave as if it were tour own money’,” Kay said.

He cited recent scandals of Libor-fixing and miss-selling of insurance products to consumers in the UK to highlight how far fiduciary standards have fallen in financial markets.

“The reputation of finance has been degraded by the actions of a few. But the few have been running the show, and have imposed inappropriate values on once respected institutions,” Kay said.

Pension fund and investment board trustees have a fiduciary responsibility, Kay said, but this was not reflected and sustained around the rest of the financial industry. He said some asset management contracts go as far as explicitly attempting to exclude fiduciary obligations.

“If trust and confidence in financial intermediation are to be re-established, principles of loyalty and prudence are a prerequisite,” Kay concluded. “For most people outside the financial services sector, it is obvious the only people you can trust with your money are those who are willing to pursue your interests rather than their own. The public would be surprised that the imposition of fiduciary standards on those who work in advisory or discretionary roles should even be controversial.”

To read the entire op-ed, click here.