The Law Commission has announced that it will be looking at the nature and extent of fiduciary duties in the context of investment by trustees. This follows the Kay review on UK Equity Markets and Long Term Decision Making.

The Law Commission commented that:

‘The Report identified widespread concern about how fiduciary duties were interpreted in the context of investment. In particular, some stakeholders felt:

  • it was not clear who in the investment chain was subject to fiduciary duties and what those duties were;
  • their fiduciary duties required them to maximise returns over a short-time scale, precluding consideration of long-term factors which might impact on company performance;
  • their obligations were entirely defined and limited to their contractual obligations or required no more than a duty of care.

Accordingly, one of the Report’s recommendations was that:

The Law Commission should be asked to review the legal concept of fiduciary duty as applied to investment to address uncertainties and misunderstandings on the part of trustees and their advisers.’

The Law Commission has stated:

‘Our full terms of reference are available here. In broad terms they ask us to set out what the current law requires pension trustees, investment managers and other financial intermediaries to consider in deciding an investment strategy. In particular, do fiduciary duties apply to all those in the investment chain? And how far must fiduciaries focus exclusively on maximising financial return, to the exclusion of ethical, social and environmental factors?

We are not asked to look at the law in isolation. Instead, the project will consult stakeholders about their understating of the law and how it impacts on them.

Next we will evaluate the law according to a variety of criteria. In particular, is the law sufficiently certain? And does it do enough to encourage long-term investment strategies? If we think changes are needed we will make broad recommendations for reform. However, we have not been asked to draft legislation.

The project is limited by our terms of reference and we will not be considering broader failings in the equity markets. We will refer any broader concerns to BIS and DWP.