UK panel starts Kay-recommended review of fiduciary duty and institutional investors

Law Commission plans final report next year

The Law Commission, the UK’s independent legal review body, has started its work investigating the fiduciary duty of institutional investors to pension savers as recommended by the Kay Review of UK Equity Markets and Long-Term Decision Making.
The Commission plans to publish a consultation paper in October 2013 and a final report in June 2014 in what will likely be a widely studied review both in the UK and internationally.
The Commission has been charged with making broad recommendations for reform if it deems them necessary, but it has not been asked to draft legislation.
In his July 2012 report commissioned by the UK’s Department for Business Innovation & Skills (BIS), John Kay, the economist and Financial Times columnist criticised the concept of fiduciary duty as being too fluid and lacking in focus. He said it fell “materially below the standards necessary to establish” trust, confidence and respect amongst savers. Kay recommended a shift towards fiduciary standards, requiring prudence and loyalty to the customer.
To this end, one of the UK government’s responses to the Kay Review was to ask the Commission to review the legal concept of fiduciary duty to address uncertainties and misunderstandings on the part of trustees and their advisers.
In its preparatory statements, the Commission cites Kay’s reference to a statement from FairPensions (now ShareAction) that current fiduciary duties may actually require investment intermediaries to act badly by maximising short term financial returns and precluding consideration of long-term factors which might impact on company performance.In its Terms of Reference for the current review, which will consult various stakeholders regarding how the current rules affect them, the Commission says that top-level issues it will look at include:

  • Do fiduciary duties apply to all those in the investment chain?
  • How far must fiduciaries focus exclusively on maximising financial return, to the exclusion of other factors?
  • Is the law sufficiently certain?
  • Does it do enough to encourage long-term investment strategies?

Elsewhere in the UK, pension lifeboat scheme the Pension Protection Fund has unveiled an enhanced Responsible Investment framework. Martin Clarke, the PPF’s Executive Director of Financial Risk (who also chairs social investment forum UKSIF), said there’s been a “vast improvement” in the adoption of RI by its external managers over the past three years: 30% are now rated higher on their RI commitment than when they were hired. The PPF, and its engagement provider Hermes Equity Ownership Services, will now exercise “closer scrutiny and oversight” of the stewardship activities conducted on its behalf, with a new Statement of Stewardship Principles published on the PPF’s website.
And in a separate development, the Investment Management Association said institutions continue to prioritise corporate strategy and objectives when engaging with companies. The findings come in the IMA’s latest report on adherence to the Stewardship Code, which had responses from 103 institutional investors.