By David Clarke, Policy Officer, ShareAction

“Fiduciary duty” is an important term, even though it might sound dull. And confusing. It has historically been used by the investment system to avoid taking ethical considerations into account when managing your money. But that is not the end of that discussion.

At ShareAction, we have engaged with a number of people who have tried to ask simple questions of the people who run their savings, asking, for example, “can we get out of investing in tobacco?” or “can we get out of investing in arms?”, and they’ve been met with a confusing answer that brings up “fiduciary duty” as the reason.

So: The concept of fiduciary duty has, historically, been served up like an all-encompassing defensive shield by the investment industry, in the face of calls upon it to be more accountable to the ethical concerns of people like you – the people who invest.

But if you care about where your money goes, it’s empowering to understand what fiduciary duty means, and what it doesn’t mean, because it’s possible that somebody may use a misguided or outdated concept of fiduciary duty as a way to avoid engaging with you.

What’s so important about ‘fiduciary duty’?

The term “fiduciary” comes from the Latin “fiduciarius”, which means, “of something held in trust.” So fiduciary duty means that you have to be able to trust the people managing your money to look after it in your interests, rather than their own.

Fiduciary duty is a legal obligation that covers several professions and societal roles including lawyers and guardians of children. But it’s in the context of pensions and investments that we’re aware of significant problems with the way it’s interpreted.

Fiduciary duty requires a very high standard of behaviour – higher than is expected in an ordinary contract. Fiduciaries are expected to be loyal; to treat each beneficiary equally and to act prudently in their protection of savers’ interests. All good, right?

BUT. There’s confusion on what fiduciary duties mean. You would think that it takes a lot of the worry off our shoulders – as savers – to know that those trustees in charge of our savings have a legal responsibility to do their job in our best interest.

What’s the problem?

These duties aren’t clearly defined in law, and there’s a lot of debate about what they actually require fiduciaries to do in practice. This has led to some pension funds interpreting their duties in a limited and restrictive way. For many trustees, it simply boils down to a “duty to maximise returns”.

This understanding fails to encompass wider factors that matter to savers in the long run, such as how the fund might be affected by climate change. And it doesn’t give any scope for trustees to consider beneficiaries’ ethical views, such as on issues like tobacco.

But if you’re a pension saver who’d like your concerns to be listened to, help is at hand. The Law Commission – which knows a thing or two about this stuff – has recently published a report on the fiduciary duties of pension trustees. And it has little time for this outdated interpretation of fiduciary duties.

Its final report published in July 2014 helpfully confirmed that investors aren’t required to focus solely on short term profits when making investment decisions, and that they’re free to consider all factors which affect the financial performance of a fund, such as ESG [environmental, social and governance] issues. It also confirmed that non-financial factors, such as members’ views and quality of life, may also be taken into account so long as this does not result in significant financial detriment.

What next?

The Law Commission also recognised that the law in this area is “complex, difficult to find, and not well known.” It warned that “pension trustees may continue to receive risk adverse legal advice on the issue.” This means that even though the Commission set out a clear statement asserting that fiduciary duty in the context of investment can take into account wider factors, such as ESG ones, many trustees may be confused how to do so.

To put an end to this confusion, we’d like the UK government to put the Law Commission’s findings in statute, so that it’s explicit in law that trustees can take a long-term and responsible view of their fiduciary duties. This means that the Commission’s report won’t be forgotten, and that if trustees and lawyers are in any doubt, they just need to look up the regulations that govern them.

Want to know more? Get in touch with David Clarke to have all your Fiduciary Duty queries answered!