Jump to Content Jump to Main Navigation
Signed in as:

4 Legal and Regulatory Duties to Protect the Client’s Interest

From: The Law of Financial Advice, Investment Management, and Trading

Lodewijk van Setten

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Regulation of banks — Capital markets — Investment business

(p. 147) Legal and Regulatory Duties to Protect the Client’s Interest

A.  Information about the Financial Asset and the Investment Service

1.  The investor relies on information from the investment firm

4.01  During the investment cycle, the investor relies on the skills and knowledge of investment firms in the context of the acquisition or disposal of financial assets. Consequently, at each stage in the investment cycle, information will be exchanged between the investor and the investment firm. In this context, ‘information’ may range from the objective, facts and figures, to the subjective, opinions and recommendations. If the transaction or series of transactions result in a loss for the investor, questions may arise about the scope of the responsibility of the investment firm for the quantity and quality of information provided, or the omission to provide information, or omissions in the research or consideration of the investor’s purpose and situation so that the information would be provided based on an accurate and complete set of data.

(p. 148) 4.02  In the absence of an express undertaking, the question turns on the facts, including to what extent the circumstances justify investor reliance. The scope of that responsibility can be plotted on a spectrum: at one end, the responsibility is not to make misrepresentations; at the other end, the responsibility is to consider all circumstances and consequences that are material to the investor and the course of action contemplated by the investor. At law, outside breach of express contractual agreement, actions may be based on misrepresentation or the principle of assumption of responsibility. As will be discussed in section 4 below, the duties at law appear to correspond closely to the investment firms’ regulatory obligations under MiFID II.1

2.  Misrepresentation

4.03  As a matter of general law, the investment firm must not provide information unless there are reasonable grounds to believe that the information is not false, that is, is correct and not misleading. It will not be difficult for the investor to establish that statements of fact made by the investment firm in reply to the requests, provided they were material to the appointment,2 were relied on reasonably in connection with the appointment.3 Should they be false, and should that be due to the investment firm’s carelessness, that is, should the investment firm not have had reasonable grounds to believe that the representation was true, then that would be an actionable misrepresentation.4

4.04  The information that an investment firm provides to an investor may include general statements of opinion about the risk and return properties of the financial asset, or more generally, about future economic trends. These opinions may be based on specialist research relating to the financial asset class and the relevant markets. Although as a rule, honestly held opinions or intentions that turn out to (p. 149) be unfounded will not invalidate a contract,5 the general rule knows many exceptions. In particular, following Esso Petroleum Co v Mardon,6 it would appear that a statement of opinion made by a person with a special skill, who has relied on that skill and his/her judgement to arrive at that opinion in the course of a business proposition, may give rise to an action for damages for misrepresentation if the opinion was not prepared with due skill and care.7

4.05  Chitty on Contracts, summarizes the position as follows:8

“[A] statement of opinion or of intention may itself be a misrepresentation if the maker does not in fact hold the opinion or have the intention stated. Also a statement of opinion may amount to an implied representation that the maker has reasonable grounds for the opinion, and a statement of intention that he reasonably believes that he can carry out his intentions. … The question is whether the statement is one upon which the representee was intended, and was entitled, to rely.”

In that context it is worth noting that the regulatory rule requires the investment firm to ensure that ‘marketing communications shall be clearly identifiable as such.’9 In other words, reasonable reliance in the circumstances determines liability for a statement, whether of fact or of opinion.10 According to Esso Petroleum Co,11 it is clear that special skill or knowledge of the person that gives the opinion is a relevant factor in determining whether reliance was reasonable. In the context of financial services, it will therefore be important to distinguish between different investment services and the associated skillsets. It matters whether an opinion about investment risks associated with any financial asset is offered by a broker or by a portfolio manager. The former’s role is to trade the asset in the market pursuant to a client’s instruction; the latter’s role is to research the financial asset and make long-term investment decisions on that basis. The skill and care that may reasonably be associated with the preparation of the opinion is commensurate to the scope of each role.

(p. 150) 4.06  Notwithstanding the responsibility of the maker of a statement for the content of that statement, the sophistication of the recipient of the statement of opinion or intent acts as a counterbalance by limiting the scope of what, in the circumstances, is justifiable reliance. Esso Petroleum Co involved a plaintiff who was less sophisticated and informed than the defendant. Where plaintiff and defendant are, or are presumed to be, on a level playing field, reliance on statements of opinion is not easily judged reasonable. In Bankers Trust v Dharmala Sakti Sejahtera Mance J observed, what may perhaps be classified as ‘the conspicuously obvious truth’:12

The meaning and effect of words never falls to be viewed in a vacuum. It is shaped by the context of their communication, including the parties’ respective positions, knowledge and experience. A description or commendation which may obviously be irrelevant or may even serve as a warning to one recipient, because of its generality, superficiality or laudatory nature, or because of the recipient’s own knowledge and experience, may constitute a material representation if made to another less informed or sophisticated receiver. Even in the case of a written description, there may be cases where a proposal or presentation misrepresents the nature or working of a transaction to a particular reader, although another sophisticated, more analytical or legally qualified reader would have been expected to appreciate the real nature or working of the transaction. What is fair and adequate presentation in one context between one set of negotiating parties may be unfair or inadequate in another context. Whether there was any and if so, what particular representation must thus depend upon an objective assessment of the likely effect of the proposal or presentation on the recipient. In making such an assessment, it is necessary to consider the recipient’s characteristics and knowledge as they appeared, or ought to have appeared, to the maker of the proposal or presentation. A recipient holding himself out as able to understand and evaluate complicated proposals would be expected to be able to do so, whatever his actual abilities. These are problems on which it is commonly not necessary to focus in a commercial context. The assumption on which most business is conducted is that both parties understand, or avail themselves of advice about, the area in which they are operating and the documentation which they use. Business could not otherwise be carried on.13

4.07  The case concerned a dispute in relation to two interest rate-swap transactions. Dharmala argued, among other things, that Bankers Trust’s pre-contractual statements in relation to the swaps amounted to misrepresentations, particularly negligent statements of opinion. Mance J held in relation to the first swap, which preceded the second swap in time, that there was no basis on which the defendants could be said to have represented that the swap was ‘suitable’ or ‘safe’. In relation to the second swap it was held that, although the representations were formulated in a manner which created a risk that the statements would be accepted without an appreciation of all the implications, the plaintiff had failed to establish that this fact actually made any difference to its decision to enter into the second swap, but the judicial considerations confirmed that in some (p. 151) circumstances lack of clarity, rather than a misleading or suggestive presentation, may constitute a misrepresentation.

4.08  The underlying rationale for the findings in Dharmala appears to be that the plaintiff ‘was by and large capable of evaluating and looking after its own position and, in [Mance J’s] judgment and contrary to its own case, did so’.14 The fact that, at the time Dharmala entered into them, the swap transactions were considered novel and complex did not change that conclusion. The sophistication of the investor, therefore, will be relevant both in relation to the question whether, in the circumstances, the representation should be considered false or misleading, and in relation to the question whether, in the circumstances, the recipient should be considered to have relied on that statement. On the facts and the decisions of Dharmala it may well be argued that, in a commercial context, there is a presumption of sophistication so that the professional client claiming to be ‘able to understand and evaluate complicated proposals would be expected to be able to do so, whatever his actual abilities’.15

4.09  Clearly, liability based on misrepresentation will arise if the investor relied on a statement of fact that is subsequently proved to be false and the investment firm did not have reasonable grounds to believe that the representation was true. The threshold will be higher if a professional or commercial investor seeks to rely on Esso Petroleum Co and treat a statement of opinion or intent as a misrepresentation on the grounds of an investment firm’s special skill. Prima facie, a professional or commercial investor ought to be able to understand and evaluate complicated investment products and, therefore, may not rely on the investment firm’s opinion or statement of intent as constituting representations, regardless of the investment firm’s special skill and knowledge. However, that does not mean that the facts and circumstances could not provide grounds for a different conclusion.

4.10  A clause or provision which states that neither party has relied on any statements or representations during the negotiations other than those expressly incorporated into the agreement will generally be construed as precluding either (p. 152) party from bringing claims in respect of misrepresentation made during the negotiations.16

4.11  The general liability at law for misrepresentation, that is, the duty not carelessly to provide false information, aligns only partly with the principle-based regulatory duty set out in Article 14(3) of MiFID II: ‘all information, including marketing information, addressed by the investment firm to clients or potential clients shall be fair, clear, and not misleading.’17 Although a representation may be considered false at law if it lacks clarity as a result of its complexity, or if it is misleading or suggestive, it would appear that a responsibility to ensure that the communication is fair, clear, and not misleading exceeds that duty at law. The reason is that unless the relationship concerns a contract uberrimae fidei in which knowledge of the facts lies with one party alone,18 mere non-disclosure does not normally constitute misrepresentation for there is no general duty at law on parties to a contractual relationship to disclose material facts to each other,19 unless the omission results in a misleading statement but that will usually require some element of concealment.20 The MiFID II obligation would appear to reach further than that, in particular as it requires the communication to be ‘fair’.21 Notwithstanding, in circumstances where one party uses a special skill or knowledge to provide a service to another party, a duty may be implied beyond the responsibility not to make misrepresentations. This is discussed next, in section 3.

(p. 153) 3.  The notion of ‘assumption of responsibility’ at law

4.12  Given the professional nature of the services offered by an investment firm, liability may arise in tort, in concurrence with contractual duties, for negligent omission of material information if that omission would fall within the scope of an assumed responsibility within the meaning of Hedley Byrne & Co Ltd v Heller & Partners Ltd,22 as confirmed and clarified in Henderson v Merritt Syndicates Ltd.23 These cases established a broad principle of liability for negligently providing information or negligently omitting to provide information that is material to the recipient. Liability centred on the notion of assumption of responsibility—a test that appears to be satisfied whenever a person, who possesses or holds out as possessing a special skill or knowledge—undertakes in some form, whether in contract or otherwise, to perform a service for another party, using that special skill or knowledge, and this other party justifiably relies on the provider of that service to use the skill and know-how for a specific purpose. The cases may be divided into those that deal with the responsibility for information, or lack thereof, provided by a professional who agreed to arrange a transaction, and those that deal with responsibility for information, or lack thereof, provided by a professional who agreed to provide advice-oriented information in the form of technical data, an opinion or a recommendation in view of a transaction that the client intends to enter.

4.13  In Hedley Byrne, the professional or quasi-professional defendants provided an advice-oriented service. The question arose whether bankers could be held liable in tort for the gratuitous provision of an unduly favourable reference in respect of one of their customers. Prior to Hedley Byrne it was accepted in England and Wales that, in the absence of contract or a fiduciary relationship, the maker of a statement of fact or opinion owed to a person whom he could reasonably foresee would rely on it in a matter affecting his/her economic interest a duty to be honest in making that statement, but not a duty to be careful.24 Hedley Byrne changed that understanding. Lord Morris summarized the governing principle as follows:25

My Lords, I consider that it follows and that it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. The fact that the service is to be given by means of or by the instrumentality of words can make no difference. Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgement or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, (p. 154) another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise.

Although it was held that an action could be upheld in such circumstances, in casu a duty of care did not arise because the bankers supplied the reference under cover of a disclaimer of responsibility.

4.14  In Henderson, the defendants provided an execution-oriented service. Lord Goff had to consider the principle upon which a duty of care in tort based on the principles set out in Hedley Byrne could be imposed in concurrence with contractual duties. The defendants were Lloyd’s managing agents who were sued by members of the underwriting syndicate, the ‘names’, for failure to take sufficient care in the performance of their underwriting services. Lord Goff reviewed the speeches given in Hedley Byrne and concluded that defendants may be held to have ‘assumed a responsibility’, so that a duty of care may be incurred, if they acted in a professional or quasi-professional context.26 The duty may include a responsibility not to omit to do or say things negligently.27 If plaintiff and defendant are in a contractual relationship, the remedies in contract and tort may exist concurrently, provided that the contract does not preclude this.28 Accordingly, where the Hedley Byrne principles operate in a contractual relationship, it could be described as a gap filler, that is, as a vehicle to imply terms where consideration may otherwise have failed.29

(p. 155) 4.15  Lord Goff also clarified in Henderson that the Hedley Byrne principle cannot operate unless the beneficiary of the service actually and justifiably relies on the assumption of responsibility to use the skill and know-how in the performance of a particular task:30

It follows, of course, that although, in the case of the provision of information and advice, reliance upon it by the other party will be necessary to establish a cause of action (because otherwise the negligence will have no causative effect), nevertheless there may be other circumstances in which there will be the necessary reliance to give rise to the application of the principle. In particular, as cases concerned with solicitor and client demonstrate, where the plaintiff entrusts the defendant with the conduct of his affairs, in general or in particular, he may be held to have relied on the defendant to exercise due skill and care in such conduct.

It follows that not all special skills qualify. It must be a special skill of a particular kind,31 a relationship ‘where the plaintiff entrusts the defendant with the conduct of his affairs’; that is, it must concern a professional or quasi-professional service. The special skills possessed or held out to be possessed by investment firms, since the investment firm is entrusted with the financial affairs of the investor,32 qualify prima facie.

4.16  It also follows that in the absence of a specific undertaking, the mere existence of a special skill or ability in a qualifying relationship does not equate to an assumption of responsibility to use it in any manner. For instance, in Customs and Excise Commissioners v Barclays Bank plc,33 it was not so obvious whether the defendant bank, served with an order freezing a customer’s account, had assumed responsibility to the claimant-beneficiary of the freezing order to take reasonable care to ensure that no payments would be made from the account after the order took effect. The Court of Appeal held that the bank did, but the House of Lords held that it did not. Lord Hoffman, in search of a guiding principle, considered the authorities that applied the Hedley Byrne principle34 and concluded that the (p. 156) determination that a person has assumed responsibility within the meaning of the principle in Hedley Byrne ‘does not depend upon what the defendant intended but, as in the case of contractual liability, upon what would reasonably be inferred from his conduct against the background of all the circumstances of the case’.35 It must be observed that Customs and Excise Commissioners v Barclays Bank plc, unlike Hedley Byrne, Henderson, and Clark Boyce v Mouat, discussed next, did not involve complaints about the negligent provision of information or negligent omission to provide information.

4.17  A relevant circumstance is the appearance and position of the client who seeks to rely on the assumed responsibility. In Clark Boyce v Mouat,36 which concerned an execution-oriented service, Lord Jauncey held:

[W]here a client is in full command of faculties and apparently aware of what he is doing seeks the assistance of a solicitor in the carrying out of a particular transaction, that solicitor is under no duty whether before or after accepting instructions to go beyond those instructions by proffering unsought advice on the wisdom of the transaction.

Similar reasoning prevails in Springwell,37 a mixed case of execution and advice-oriented services:

My conclusion, as a matter of fact, and on the evidence restricted to the role discharged by [the employee of the bank] in practice, without regard to the terms of the contractual documentation, is that, [the employee of the bank], in his capacity as salesman, did give investment advice, in the sense of personal recommendations to [the employee of the client] about what emerging market investments [the client] should buy and sell, and, in a very generalised way, about the state of, and strategy for, its emerging markets portfolio. However, I find that, at all times (save in relation to relatively few and unimportant instances, where, largely for practical reasons, a decision was taken by [the employee of the bank], eg to roll over a particular investment), [the employee of the client] retained control over the decision-making and all decisions as to whether to initiate trades were taken by him on [the client’s] behalf.

It may be concluded that in the context of an execution-oriented professional service, if the client reasonably appears able to evaluate the proposed transaction (p. 157) or transactions and does so without requesting advice, the courts are reluctant to imply a duty beyond a responsibility not to make misrepresentations.

4.18  The scope of the assumed responsibility in the context of an advice-oriented service was at the core of the decision in South Australia Asset Management Corporation (SAAMCO) v York Montague Ltd.38 It concerned three appeals before the House of Lords which raised a common question: what the extent of the liability of a valuer is who provided a lender with a negligent overvaluation of the property offered as security for a loan?39 Lord Hoffman observed:40

The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong.

4.19  Lord Millett examined Lord Hoffman’s considerations in Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd,41 which concerned execution-oriented services. The plaintiffs, reinsurers, claimed damages from the insurance brokers for breach of contractual duty and negligence, arguing that the brokers did not make fair representations of the risk and all material circumstances to the reinsurers as underwriters. Lord Millett concluded that Lord Hoffman’s observations in SAAMCO on the distinction between information and advice were misunderstood. He noted:42

Lord Hoffmann drew a distinction between ‘a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take’… This has been widely misunderstood. Lord Hoffmann was not distinguishing between a duty to provide information and a duty to give advice. That is a distinction without a difference, for the terms are interchangeable. He was distinguishing between a duty to provide particular information or advice on request and a duty to advise generally when (p. 158) it is left to the adviser to decide what matters he should consider. Even where the defendant assumes responsibility for advising generally ‘whether or not a course of action should be taken’ it is still necessary to identify the particular course of action in question. Where the question is whether to enter into a particular transaction, it is necessary to identify the relevant transaction, for the defendant is not responsible for loss arising from any other transaction. … It is never enough to say: the defendant was responsible for advising the plaintiff what action he should take. It is necessary to ask: in relation to what? … As always, in Lord Roskill’s words in Caparo at p. 628 it is necessary to determine ‘for what purposes and in what circumstances the information in question is to be given’.

4.20  Lord Millett, following Lord Roskill’s approach in Caparo,43 confirms that the scope of the responsibility the professional or quasi-professional service provider may have assumed in Hedley Byrne and Henderson terms is defined by an interpretation of the purpose of the service against the background of all the relevant circumstances, including the conduct of the parties, in particular whether the recipient relied, and could have reasonably relied, on the provider applying a special skill in view of that particular purpose.44 The prevalence of the factual matrix was reaffirmed by Lord Sumption in BPE Solicitors v Hughes-Holland.45 Lord Sumption, surveying Lord Hoffman’s observations in SAAMCO and extrapolating the line set out by Lord Roskill in Caparo and Lord Millett in Aneco, concluded that ‘every case is likely to depend on the range of matters for which the defendant assumed responsibility and no more exact rule can be stated’.

4.21  It may be concluded that the assumption of responsibility for the provision of information in the form of facts or professional judgement that considers the interest of the investor in the context of the situation and purpose of the investor is entirely fact-bound. According to Lord Sumption, the scope of responsibility will very much depend on the circumstances of the case and ‘no more exact rule can be stated’. It cannot be said, therefore, that the question turns on whether a defendant can be categorized as an adviser or not. Nevertheless, the purpose and character of the professional service in context of which information was provided by the investment firm are important factors: if the service is execution-oriented, that is, the investment firm is engaged to arrange a transaction and gives information in that context, the courts are reluctant to imply a duty beyond a responsibility not to make misrepresentations. This is true even in situations where the investment firm gave certain opinions on the desirability of a course of action.46 If the service is advice-oriented, that is, the investment firm is engaged to provide (p. 159) information about an investment or transaction based on a consideration of the investor’s investment objective and situation, the courts are more inclined to find an expanded scope of the responsibility as ‘the adviser must take reasonable care to consider all the potential consequences of [the] course of action’ that is the subject matter of the advice, vide SAAMCO. This bifurcation makes eminent sense. The skills, know-how, and resources needed to arrange a transaction are of a different nature than the skills, know-how, and resources needed to provide an advice-oriented service. In determining whether reliance was reasonable, that purpose should be considered. The bifurcation, naturally, does not prevent a conclusion that, in certain circumstances, an investment firm has been engaged to provide both an advisory service and an execution service

4.22  As is true for claims based on misrepresentation,47 a claim based on assumption of responsibility may be negated by contract.48 Depending on its scope and constitution, it will have to pass the fairness test of the Unfair Contracts Terms Act 1977 (UCTA).49 The operation of that principle is on display in the mis-selling of swaps decisions, as demonstrated in Crestsign v NatWest and RBS.50 The judge found that the bank had assumed a responsibility, according to Hedley Byrne, to advise on the suitability of the proposed swap transaction and that the advice was given negligently. Nonetheless, he held that the banks were not liable because: ‘they successfully excluded any duty not to do so’.51 The banks, he said, ‘did not show themselves worthy of the trust Mr Parker had placed in them, but unfortunately for Crestsign, the common law provides it with no remedy because the banks successfully disclaimed responsibility for the advice they gave on the suitability of the swap, which was negligent but not actionable’. The judge concluded his judgment with the comment that ‘[w]hile the result may seem harsh to some, it is not the role of the common law and the court to act as a regulator’.52

4.  ‘Assumption of responsibility’ versus ‘appropriateness’ and ‘suitability’

4.23  Based on the notion of assumption of responsibility discussed in the previous section, an investment firm may find that its responsibility to the investor in relation to the provision of information is not limited to a duty not to (p. 160) misrepresent. Notwithstanding, in the context of services and activities other than investment advice and portfolio management,53 if a reasonably sophisticated professional or corporate investor engages an investment firm for one or more broker-dealer or other execution-oriented services, the cases do not seem to support an investor argument ex post that the investor had placed justifiable reliance on an implied assumption of a responsibility that goes beyond the reasonable care to provide accurate and not misleading information. In other words, the professional investor and not the investment firm is prima facie responsible for ensuring the investor’s broader investment interests are served with the proposed transaction.

4.24  The position at law re the combined operation of the notions of misrepresentation and assumption of responsibility on execution-oriented investment services appears mostly in line with the fair, clear, and not misleading rule under MiFID II, except that MiFID II insists explicitly that the investment firm investigates what level of understanding persists. Article 25(3) of MiFID II requires an investment firm that provides services other than portfolio management or investment advice to ask the client to provide information that enables the firm to assess whether the investment service or the investment product is ‘appropriate for the client’. The appropriateness test requires that the investment firm satisfies itself, based on information requested from and provided by the investor, that the investor has the knowledge and experience to understand the investment service and the investment product.54 Article 25(4) excludes from the art 25(3) obligation certain specified non-complex investment products provided the investment service concerns ‘execution only’ services, that is, execution without any ‘ancillary service’ that consist of financing of the trade. The investment firm may assume that the information provided by the client is correct, unless it is manifestly out of date, inaccurate, or incomplete.55 Further, an investment firm may assume, in line with the position at law, that a professional client has the necessary level of experience and knowledge to understand the risks involved with the investment services or products for which that client is classified as professional.56

(p. 161) 4.25  Although the cases on assumption of responsibility do not appear to address the existence of an explicit duty to investigate what level of sophistication the investor possesses, in view of the confirmation in BPE Solicitors v Hughes-Holland57 that every case is likely to depend on the range of matters for which the investment firm assumed responsibility, it is conceivable that the courts may in the context of an execution-oriented investment service find that the MiFID II distinction between complex and non-complex investment products is very persuasive. That would support a determination that the investment firm has assumed responsibility not only for ensuring that the information provided to the investor in connection with the execution-oriented investment service is fair, accurate, and not misleading, but also for satisfying itself that there is a reasonable basis to conclude that the investor has the knowledge and experience to understand the investment service and the investment product, which would include a duty to ask the investor to provide relevant information about the investors’ circumstances.

4.26  The position at law ought equally to be informed by the regulatory position in the context of advisory rather than execution-oriented investment services relationships. A person who provides information to another person would be considered to be giving investment advice within the meaning of MiFID II if the information is provided by way of a personal recommendation to an investor or potential investor, or an agent for that investor, in relation to a specific transaction or transactions in, or the exercise of rights attaching to, a financial asset.58 A recommendation is considered to be personal if it represents either that the recommended transaction is suitable for the recipient, or that it is based on a consideration of the recipient’s circumstances.59 The maker of the personal recommendation is providing investment advice and will be under a duty pursuant to art 25(2) of MiFID II to ensure that the firm obtains information from the client necessary to determine whether an investment is suitable.60 The adviser ‘must take reasonable steps’ to ensure that the situation of the investor is sufficiently understood, so that the consideration of the investor’s purpose and situation can be carried out properly.61 The investment firm may assume that the information (p. 162) provided by the client is correct, unless it is manifestly out of date, inaccurate, or incomplete.62 An investment firm may assume, in line with the position at law, that a professional client has the necessary level of experience and knowledge to understand the risks involved with the investment services or products for which that client is classified as professional.63

4.27  A personal recommendation must be distinguished from a general recommendation about the desirability of an investment product, a marketing communication, or simply information given on request. A communication may involve an overlap between two or more categories. For example, where the maker of the communication prepares a brochure, a leaflet, or a prospectus that constitutes a general recommendation, a marketing communication, and/or involves the provision of information, this document may also be used as a basis for a personal recommendation. Equally, a general research report may be sent by way of a personal recommendation to a specific client.64

4.28  The link between the regulatory concept of investment advice and the concept of ‘personal recommendation’ ensures a relatively circumscribed scope. It was deemed not to be in the public interest to cast the net too wide and catch the provision of technical investment data in the form of marketing materials, including investment research, or other sales and marketing communications that include general recommendations about the desirability of an investment product, as ‘investment advice’ within the meaning of the regulatory framework. A ‘personal recommendation’ implies some form of consideration of the personal circumstances and purpose of the recipient in relation to a certain investment. There must be a relationship between the investor and the investment firm that justifies reliance by the investor on the fact that the investment firm would consider all material facts in the context of the investment service and inform the investor accordingly. That means there must be a relationship that comprises more than generic communications about investment services and products, and is relatively specific about its purpose, that is, to include a determination whether an investment is suitable.

(p. 163) 4.29  The regulatory approach to the facts and circumstances that impose the duties of a firm that provides ‘investment advice’ appears to reconcile to Lord Millett’s stipulation in Aneco that ‘[i]t is never enough to say: the defendant was responsible for advising the plaintiff what action he should take. It is necessary to ask: in relation to what? … As always, in Lord Roskill’s words in Caparo at p. 628 it is necessary to determine “for what purposes and in what circumstances the information in question is to be given” ’.65 Equally, it levels with the observations of Gloster J in Springwell that the employee of the bank ‘did give investment advice, in the sense of personal recommendations … about what emerging market investments Springwell should buy and sell’, but found that there was no reliance on those recommendations, as the employee of Springwell ‘retained control over the decision-making and all decisions as to whether to initiate trades were taken by him on Springwell’s behalf’.66 Reliance is likely not to be justifiable if the investment firm is reasonably entitled to expect either that the investor, taking into account the level of sophistication of the investor in the relevant matter, will make an independent evaluation, including the information, opinion, or recommendation received from the investment firm, or that the investor otherwise has assumed responsibility for how his/her interests are best served.

4.30  If the relationship in which an investment recommendation is made meets the threshold requirements that lead to duties that exceed the responsibility not to negligently or carelessly provide information, the possibly more vexing question of scope arises. The judicial reasoning in Martin v Britannia Life Ltd (Martin),67 unsurprisingly, illustrates that the courts are inclined to analyse that scope as a function of the purpose of the relationship against the background of all the relevant facts. Therefore, the scope of the responsibility at law may potentially be wider than the regulatory scope. In Martin, the defendant, a financial adviser within the meaning of the (then) applicable regulatory rules, had recommended that the plaintiff enter into a package of transactions consisting, among other things, of a remortgage of his home. The defendant sought to escape liability for breach of statutory duty; the claim was for negligent financial advice, based on the argument that the advice on the remortgage transaction was not ‘investment advice’ for the purposes of the Financial Services Act 1986, the predecessor of the FSMA,68 since a remortgage did not constitute ‘investment business’ within the meaning of that Act. In rejecting this submission, Parker J held that ‘investment advice’ comprehends all financial advice (p. 164) given to a prospective client, not only in relation to the purchase, sale, or surrender of an ‘investment’ as defined, but also in relation to any ancillary or associated transaction, notwithstanding that such transaction was itself outside the definition of ‘investment business’ as provided in the Financial Services Act 1986. Therefore, the adviser had to consider all circumstances relevant in view of the ‘wider financial context’:

In my judgment, advice as to the ‘merits’ of buying or surrendering an ‘investment’ cannot be sensibly treated as confined to a consideration of the advantages or disadvantages of a particular ‘investment’ as a product, without reference to the wider financial context in which the advice is tendered. … In my judgment it is neither appropriate in the context of the 1986 Act, nor for that matter would it be realistic, to seek to limit the concept of ‘investment advice’ by reference to the extent to which the advice relates to the ‘merits’ (ie to the advantages or disadvantages) of a particular ‘investment’ as defined; and if that be accepted, it seems to me that it must follow that the concept of ‘investment advice’ will comprehend all financial advice given to a prospective client with a view to or in connection with the purchase, sale or surrender of an ‘investment’, including advice as to any associated or ancillary transaction notwithstanding that such transaction may not fall within the definition of ‘investment business’ for the purposes of the 1986 Act.69

Accordingly, the courts look for conduct and reliance in the relationship between adviser and recipient. If justifiable reliance on a personal recommendation is found, a commensurate level of responsibility will be assigned to that adviser, which will mean that the investment firm will have to research the situation and purpose of the investor in a wider context.

4.31  In conclusion, it is likely:

  1. (a)  that the courts will find that the circumstances that bring the activities of an investment firm within scope of the regulatory concept of investment advice—that is, making a recommendation that represents either that the recommended transaction is suitable for the client or that it is based on a consideration of the client’s circumstances—and that trigger a regulatory duty to investigate the client’s situation and purpose to inform the firm’s suitability analysis, will give rise to a similar responsibility at law based on the notion of assumption of responsibility;

  2. (b)  that the scope of the responsibility will depend on the scope of the permitted reliance, which in turn depends on the facts and circumstances, that is, without limitation, the nature and complexity of the investment product, the nature of the advisory relationship, the conduct of parties, the sophistication of the investor, and the documentation and information exchanged between them.

(p. 165) 5.  Suitability in the context of portfolio management

4.32  In addition to ‘investment advice’, art 25(2) of MiFID II identifies ‘portfolio management’ as an investment service that subjects the investment firm to the suitability duty. Asset management concerns discretionary investment and reinvestment of the investor’s capital.70 Discretionary means that investment decisions are made independently from the investor, although within the investment parameters of the mandate. The investment parameters will be informed, predominantly, by the specialist investment strategy that is chosen by the investor from the suite of investment strategies that the investment manager has on offer. In practice, therefore, the relationship between the investment manager and the investor is akin to a, albeit complex and long-term, execution-oriented investment service. The discussion at the time of engagement bears that dynamic out. Typically, the investor seeks the investment manager out for some special skill, such as emerging markets. The investment manager will explain the available investment strategies and the associated risks, not by way of a personal recommendation, but by way of a description of the risk and return properties of the investment strategy and its resulting portfolio, independent from the situation of the investor. On those facts, it is not immediately obvious why the regulatory regime equates portfolio management to investment advice. The development, offering, and maintenance of a specialist investment strategy concerns the creation of an investment product, which is then offered to the investor. In fact, the purchase by an investor of an investment management product, be it in the form of an investment fund or discretionary mandate, is more likely to be the result of investment advice. An investment manager may, of course, offer bespoke mandates based on a review of the investor’s situation. However, it is suggested that the design of the bespoke mandate ought to be characterized as a pre-contractual investment advisory service that is separate from the execution-oriented investment mandate itself.

4.33  The practical implication of Article 25(2) of MiFID II for investment firms that offer individual, rather than collective, portfolio management services is that such firms are per se investment advisers in respect of their proprietary investment product. Consequently, the manufacturing investment firm must consider the risk and return properties of the selected asset management product in the context of an individual investor’s situation before executing the mandate. It is not sufficient to be satisfied that the investor can understand the risk and return properties of the asset management product. That requirement to some extent duplicates the product governance obligations, which already require a manufacturing firm to consider the suitability of the product for a target market. It also leads to different (p. 166) regulatory treatment of investment products which have the same risk and return properties: a manufacturing investment firm that offers an otherwise identical investment strategy in the form of a collective investment scheme or a structured note rather than an individual mandate would be subject to Article 25(3), and an appropriateness test would suffice.

4.34  There appears to be no good reason for this differentiation.71 Discretionary portfolio management, collective portfolio management, and certain structured products may all offer the same embedded discretion and risk-return properties. The better position would be to approach suitability-based investor protection in the context of the offering of an investment management product (whether by way of separate mandate, collective investment scheme, or structured product) from a product regulation perspective and prescribe such as that certain asset management products may not be offered without there having been investment advice. Where investment management products are comparable to other investment products, those other products should be treated the same.

4.35  The position at law would not appear to support the implication of a status-based, or per se, advisory duty in case of individual portfolio management. It is conceivable, of course, that the investment manager has considered facts and circumstances personal to the investor and has made a recommendation to the investor to invest in the manager’s proprietary strategy on the basis of those facts. If it was clear, or ought to have been clear, to the investment manager that the investor placed reliance on that personal recommendation in deciding to appoint the manager, the investment manager may be held to have assumed responsibility to the investor to advise the investor on whether the investment strategy is right and appropriate for the investor’s purpose and situation. That responsibility could include a duty to ensure that all facts and circumstances relevant to that purpose and situation have been discovered and considered. But that will certainly not be true in all cases, least so in the event of a professional or corporate investor who will often select the investment manager with the assistance of a third-party consultant.

(p. 167) 6.  Effect of client classification on the scope of the regulatory responsibility

4.36  The investor’s rationale for, and understanding of, the investment risk associated with a certain acquisition may affect the scope of the duty of care of an investment firm engaged by the investor with a view to the acquisition of a financial asset. MiFID I implemented, and MiFID II continued, a division of client relationships into client ‘categories’ to recognize that investors have different levels of experience, knowledge, and expertise, and divided investment firms’ client relationships into three regulatory categories: ‘retail clients’, ‘professional clients’, and ‘eligible counterparties’.72 Investment firms must provide their clients with one of these categorizations at the start of the relationship and keep the classification under review.73 Investors will automatically be categorized upon meeting certain criteria, ‘per se categorization’, or may ask to be treated as a more sophisticated client, resulting in a lower level of regulatory restrictions on the investment firm and permitting the investor access to a wider range of products or services, subject to meeting applicable opt-out criteria .74

4.37  Certain developments since the implementation of MiFID I gave the European legislator cause for recalibration of the client categorization in relation to those investors who would previously be categorized as per se professional clients, or even eligible counterparties, and to broaden the regulatory information responsibilities of investment firms to eligible counterparties. Recital (104) of MiFID II is most instructive:

The financial crisis has shown limits in the ability of non-retail clients to appreciate the risk of their investments. While it should be confirmed that conduct of business rules should be enforced in respect of those investors most in need of protection, it is appropriate to better calibrate the requirements applicable to different categories of clients. To that extent, it is appropriate to extend some information and reporting requirements to the relationship with eligible counterparties. In particular, the relevant requirements should relate to the safeguarding of client financial instruments and funds as well as information and reporting requirements concerning more complex financial instruments and transactions. In order to better define the classification of municipalities and local public authorities, it is appropriate to clearly exclude them from the list of eligible counterparties and of clients who are considered to be professionals while still allowing those clients to ask for treatment as professional clients on request.

(p. 168) 4.38  Accordingly, MiFID II has brought some conduct of business requirements back in scope for clients that are eligible counterparties. If an investment firm supplied brokerage, order routing, or dealing services to an eligible counterparty, then MiFID I permitted the investment firm to derogate from certain communication, informational, and know-your-customer requirements, as well as order execution and order-handling requirements. MiFID II chiefly continues those exemptions,75 but introduces a few carve-outs regarding information and reporting requirements. In addition, MiFID II introduces a ‘client’s best interest’ obligation that applies notwithstanding the exemptions for investment services to eligible counterparties.76 Investment firms must ensure that, in dealing with eligible counterparties, they ‘act honestly, fairly and professionally and communicate in a way which is fair, clear and not misleading, taking into account the nature of the eligible counterparty and of its business’.77

4.39  In summary, classification as an eligible counterparty under MiFID II means that brokers, dealers, and firms that receive and transmit client orders, may execute transactions with or for such clients without being obliged to comply with the obligations under Article 24 (general principles and information to clients), with the exception of paras 4 and 5 (disclosure requirements in respect of products, services, and costs and charges);78 Article 25 (assessment of suitability and appropriateness and reporting to clients), with the exception of para 6 (client reporting);79 Article 27 (best execution); and Article 28(1) (fair and expeditious execution of client orders) of MiFID II. Classification as ‘professional client’ will (p. 169) result in tailored levels of regulatory requirements under Articles 24,80 25,81 and 2782 of MiFID II. Classification as retail client will impact on the ability of investors to access more complex, risky investments.

4.40  Curiously, the regulatory rules typically prescribe that the classification communication refers to a ‘higher degree of protection’ that may be obtained if a different client classification is applied. Regulatory classification per se, however, does not offer protection to a client, except, perhaps, to the extent that the client would be eligible for different collective insurance protection. If the intention is to inform the client that the firm is subject to different conduct of business requirements depending on the regulatory classification, and therefore, that the client should expect different levels of information or advice, it would be better if regulators required firms to use language that refers to those differences in regulatory responsibility, rather than insisting on institutionalizing a misrepresentation.

4.41  Firms that supply portfolio management services may not treat clients as eligible counterparties for purposes of the exemptions set out in Article 30(1) of MiFID II. (p. 170) Often a broker will seek to treat an investment manager as an ‘eligible counterparty’ for purposes of an order or a trade that the manager places, or enters into, with that broker for the account of a client, but, if the client is a professional client, the manager will be subject to a regulatory duty of best execution as it is owed to professional clients and therefore, practically, may not be in a position to comply with the broker’s request.

B.  Caveat Emptor versus the Client’s Interest

1.  The client’s best interest rule of MiFID II

4.42  It is common ground in commercial relationships that parties look after their own interest. There is ordinarily no expectation, subject to the boundaries of vitiating factors, that one party protects the interest of the other party; caveat emptor prevails.83 The business of an investment firm, however, comprises more than an arms’ length commercial arrangement. The investor would expect that the investment firm acts in accordance with high standards of competence and integrity and puts the investor’s interest at the heart of the service.84

4.43  To undertake by way of business to act in someone’s interest rather than at arm’s length connotes professionality. Article 24(1) of MiFID II places the responsibility to act professionally and in the interest of the investor at the core of the investment firms’ regulatory responsibilities. Investment firms must ‘act honestly, fairly, and professionally in accordance with the best interest of the client’ when providing an investment service. The United Kingdom’s FCA refers to this duty as ‘the client’s best interest rule’.85 Article 24(2) supports the best interest rule with a duty not to offer financial instruments unless that is in the investor’s interest, which can be described as an overarching obligation to consider clients’ interests when distributing products through any distribution channel.86 In simple terms, therefore, Article 24(2) can be said to be a prohibition on ‘mis-selling’, that is, it aims to remove the arm’s length sales dynamic from the offering of investment products and, in doing so, to redress the significant imbalance between the parties’ skills, knowledge, and understanding. In summary, the consideration of the investor’s interest must permeate the way investment services are offered and performed. Caveat emptor suspended, so to speak.

(p. 171) 4.44  Although the rationale and justification of the client’s best interest rule is easily argued, the operative scope of the best interest rule remains elusive. A person has an ‘interest’ if circumstances or an arrangement bring or could bring a benefit or disadvantage, or, more broadly, could affect that person or something connected with the person. Which of these myriad potential interests are in scope of the best interest rule and to what extent cannot be answered by reference to a set of rules that approaches any measure of exactitude. There is no meaningful guidance on the scope or nature of the ‘client’s best interest’ within the meaning of Article 24(1) of MiFID II and the drafting structure of the best interest rule and its components does not provide much contextual or systemic support, either. Articles 24 and 25 provide detailed rules that focus on disclosure requirements,87 management of conflicts (independency of investment advice,88 inducements,89 and remuneration90), and duties to obtain information from the investor to assess suitability and appropriateness.91 But these are examples of expected behaviour that is considered fair and in the best interest of the client. They do not constitute a perimeter. The examples are a mixed bag that includes both enhanced duties of care (disclose and advise), service quality standards (requirement to include a ‘sufficient’ range of investment products in the advice92), and restrictions on conflicts (no inducements and restrictions on remuneration). In the United Kingdom, importantly, the best interest rule includes a duty ‘not, in any communication relating to designated investment business [to] seek to (1) exclude or restrict; or (2) rely on any exclusion or restriction of; any duty or liability it may have to a client under the regulatory system.’93

4.45  Accordingly, the best interest rule does not appear to have been designed with any conceptual precision in mind. Niamh Moloney points to its ‘inchoate nature’ and observes that the rule may perhaps be best described as a normative, ‘good outcome’ oriented regulatory tool that permits intervention if a practice develops or behaviour occurs that is considered not to be desirable or permitted:94

Although its inchoate nature carries risks, including with respect to ex post enforcement action, a fair treatment obligation provides NCAs with a useful, catch-all mechanism for reviewing investment firm behaviour, for capturing emerging risks, and for proactively addressing the asymmetry in bargaining power which characterizes the firm/client relationship.

(p. 172) It means that the scope of the best interest rule will need to be determined on a case-by-case basis—by the competent regulator—by considering the client’s interest against the background of all relevant facts, particularly the nature and purpose of the investment service. The words of Lord Sumption in BPE Solicitors v Hughes-Holland95 spring to mind that ‘every case is likely to depend on the range of matters for which the defendant assumed responsibility and no more exact rule can be stated.’ Therefore, the rule imports a measure of uncertainty for regulated firms; they cannot be—entirely—certain of the scope of the operation of the rule in the context of an investment service.

4.46  Regulatory intervention based on empirical grounds that addresses a perceived lack of competence should be distinguished from normative intervention that addresses a perceived lack of fairness. The duty to act fairly and regard to someone else’s interest should be distinguished from duties to act competently with requisite skill and diligence to serve that interest. The former balances the relationship away from caveat emptor. The latter safeguard quality of professional skill. The best execution duty of Article 27 of MiFID II, for instance, primarily relates to competence. When instructing a broker, one reasonably and justifiably expects that the broker seeks to get the best possible result. It is the discerning professional skill of a competent broker. The question of due performance of the characteristic undertaking of a commercial contract is separate and distinct from the question whether the service provider acted fairly by having regard to the interest of the other party. Article 24(1) of MiFID II, which refers to the need to ‘comply, in particular, with the principles set out in this Article [24] and in Article 25’, appears to confirm, also in view of Recital 71,96 that the best interest rule is not intended as a duty of competence, but a duty to consider and protect the investor’s interest in a fair manner.

4.47  Acting fairly in the interest of another aims at the suspension of caveat emptor. It corrals the investment firm into protecting the interest of the investor beyond competent performance of the investment service. The protection manifests in disclosure duties (appropriateness), and duties to research, advise, and to refrain from offering (suitability).97 ‘Fairness’—in the context of protection of the client who relies on the investment firm to exercise professional skill, knowledge, and judgment in the client’s interest—is the driving principle behind the operational scope of the best interest rule. The objective of Article 24(1) of MiFID II appears close to the objective of Regulation 5(1) of the Unfair (p. 173) Terms in Consumer Contracts Regulations 1999, which also seeks to redress imbalance:98

A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.

4.48  Regulation 5(1) recognizes that notions of fairness in contractual relationships derive from the operation of the doctrine of good faith, which is distinctively Continental European in origin. Dalhuisen traces the normative interpretation technique that is embedded in the notion of good faith flawlessly:99

In countries such as Germany, Austria, Switzerland, and The Netherlands, the normative interpretation technique is now indeed closely associated with the good faith notion in the interpretation and supplementation of contracts. Again, good faith may acquire here a specific meaning as an interpretation tool, not any longer merely the opposite of bad faith and interpretation is then governed by it. In appropriate cases, this may lead to contractual supplementation on the basis of duties of care and cooperation, duties of disclosure and of negotiation or renegotiation duties.

4.49  Fairness, or good faith, therefore, in the construction of contracts, may be characterized, based on its derivation, as a source of implied duties. It is a technique to supplement gaps and redress imbalances to conform a contractual relationship to ‘what may be required in a social sense or is morally demanded in an advanced society’.100 That technique appears to lie at the heart of Article 24(1), which imposes regulatory duties of care, disclosure, and negotiation on the professional service provider in the context of the normative concept of investor protection.

2.  Fiduciary duties

4.50  The law’s—or, more properly, equity’s—classic tool to redress the potential imbalance in a relationship where one party’s interest is in the hands of another party is the imposition of fiduciary duties. The core requirement for the recognition of fiduciary responsibilities is the assumption of responsibility for the property or affairs of another.101 The central axiom is that a person who assumes responsibility to serve the interests of another, to the exclusion of his/her own interest, shall owe a duty of loyalty as fiduciary, as far as that other person is entitled to expect this.102(p. 174) The rationale for the implication of fiduciary duties is that in these relationships, one party ought to be able to rely on the other party’s integrity in dealing with the dependent party’s affairs.103 In an Australian case, Hospital Products Ltd v United States Surgical Corporation, Mason J identifies that rationale:104

The accepted fiduciary relations are sometimes referred to as relationships of trust and confidence …; viz trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for, on behalf of, or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions ‘for’, ‘on behalf of’ and ‘in the interests of’ signify that the fiduciary acts in a ‘representative’ character in the exercise of his responsibility. …

4.51  The governing principle for duties arising in a fiduciary relationship is loyalty. A classic American judicial account of that principle was given by Cardozo J, in Meinhard v Salmon,105 a much-cited case in which the New York Court of Appeal held that partners in a business have a fiduciary duty to inform one another of business opportunities that arise:

Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden for those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honour the most sensitive, is then the standard of behaviour. As to this there has developed a tradition that is unbending and inveterate. Uncompromising (p. 175) rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions. Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.

4.52  Loyalty—the ‘punctilio of an honour the most sensitive’—and conduct of a standard ‘higher than that trodden by the crowd’, therefore, may be identified as the guiding principles for the formulation of fiduciary duties.106 It follows that to ‘say that a man is a fiduciary only begins the analysis; it gives direction to further enquiries. To whom is he a fiduciary? What obligations does he owe as a fiduciary?’107 Finn has probably given the most authoritative summary of the consequences for those who owe a fiduciary duty of loyalty to another person:108

A fiduciary (a) cannot misuse his position, or knowledge or opportunity resulting from it to his own or to a third party’s possible advantage; or (b) cannot in any matter falling within the scope of his service, have a personal interest or an inconsistent engagement with a third party—unless this is freely and informedly consented to by the beneficiary or is authorised by law.

4.53  These two themes have given rise to the formulation of a body of fiduciary duties that restricts a fiduciary’s freedom to act in the absence of informed consent, particularly if that fiduciary has powers as agent or trustee to deal with another person’s assets. In the English legal realm, that body of fiduciary duties is commonly divided into four categories. In the absence of informed consent, a fiduciary must:

  1. (a)  not put his/herself in a position where his interests and his duty to the beneficiary conflict (‘no conflicts’);

  2. (p. 176) (b)  not make a profit from his position other than his agreed remuneration (‘no secret profits’);

  3. (c)  not place his/herself in a position where a duty to one beneficiary conflicts with a duty to another (‘undivided loyalty’ or ‘no double employment’);

  4. (d)  not use information obtained in confidence from one beneficiary for any purpose other than the benefit of that beneficiary (‘strict confidentiality’).109

Each of these restrictions can be said to be derived from the general duty of loyalty, that is, the duty that results from the undertaking to act exclusively in another person’s interest.

4.54  Breach of fiduciary duties attracts special legal consequences. It is therefore important to determine carefully which duties owed by a fiduciary are fiduciary in nature. The beneficiary does not have to prove loss. Instead, a breach gives rise to the equitable remedies of rescission, or if rescission is no longer possible, the fiduciary will be liable to account for benefits received as a result of the breach. Therefore, profits from secret commissions, front running, self-dealing, dealing for two principals, and all other benefits which an investment firm may obtain in breach of the duty of loyalty are subject to a claim for disgorgement by the client.110 Fiduciary duties should be distinguished from the equitable duty of skill or care that does not attract special legal consequences.111 Breach of an equitable duty of skill and (p. 177) care does not equate to breach of a fiduciary duty.112 Equity does not impose a general duty of skill and care on a fiduciary that is separate or different in scope from the duty that is to be found at common law.113 As is the case for duties sourced in contract or in tort, the scope of the duty of skill and care sourced in equity is to be determined against the background of all relevant circumstances, including the conduct and reasonable expectations of the parties.114 This means that, in the context of an investment services relationship, one cannot in practice distinguish between a general duty of care that is implied as a matter of equity, contract, or tort.115

4.55  To avoid unintended consequences, the fiduciary may, subject to applicable restrictions,116 seek to vary the duties implied by operation of equity. In one line of authority, emphasis is placed on the primacy of contract suggesting that parties may modify fiduciary duties to the fullest extent possible.117 Other authority suggests that the ‘essence of a fiduciary obligation is that it creates obligations of (p. 178) a different character from those deriving from the contract itself’.118 Bowstead & Reynolds on Agency accepts that there is room for the parties to vary the scope of the fiduciary duties that would otherwise apply by operation of law in an agency relationship,119 but reminds us of the rationale that prompted the development of the fiduciary principle in equity:120

The agreement of the parties or the background of the case may certainly establish that the relationship is to one of agency or otherwise justify modification of the normal standards; but equally a fiduciary relationship may, while consistent with them, increase the contractual duties. A too casual failure to recognise the requirement of a fiduciary position, and sometimes a short-sighted position that all relevant duties are prescribed in a contract, can be and has been responsible for serious misbehaviour in the financial markets and elsewhere, as is shown by many litigated cases in the last quarter-century.

The prudent course would be to draft terms that identify the key components of the investment firm’s operating model with sufficient precision so that the clause operates both as informed consent as well as exclusion of liability.

3.  The client’s best interest rule of MiFID II versus fiduciary duties

4.56  Fiduciary duties arise in equity and derive, historically, from the law of trust. The duties have been developed in equity in response to reliance and vulnerability of a dependent party by formulating a prescriptive framework aimed at controlling the context in which a fiduciary may use powers and discretions: ‘the fiduciary obligation is the law’s blunt tool for the control of the discretion’.121 DeMott describes it, in the context of agency relationships, as follows:122

The fiduciary character of the relationship means that the principal does not have to bear the risk that its stated instructions contain gaps that the agent is free to exploit in a fashion that is either self-interested or oriented to serving interests other than those of the principal.

4.57  The implication of fiduciary duties, therefore, does not start with the question whether a party is a fiduciary.123 It starts with the question whether one party’s exercise of powers or discretions ought to be ring-fenced from self-interest or the interest of third parties to protect the interest of the dependent party. Discretion (p. 179) is the condicio sine qua non for the imposition of fiduciary duties.124 Ergo, the operational range of fiduciary duties depends on the degree of discretion of the fiduciary. It follows that even a presumed fiduciary relationship such as agency may impose very limited or no fiduciary duties;125 for instance, if an agent’s task is limited to mere execution of a contract on behalf and at the direction of a principal, the agent has no discretionary authority and accordingly, the fiduciary duties are limited.

4.58  The imposition of controls is not limited to those who exercise discretion in the context of executory tasks. Advice involves the use of professional judgment and discretion in the selection of available options. An investment advisory relationship, in usual circumstances, is a relationship of trust and confidence in which one party is reasonably entitled to expect that the other party will act in his/her interest, exclusively, when advising on the investment options.126

4.59  The fact that an advisory relationship may be fiduciary in nature, however, does not mean that, inversely, equity will imply advisory duties in a relationship that is not otherwise advisory in nature. In Springwell, Gloster J observed:127

In the absence of any contractual agreement for Chase to provide investment advisory services to Springwell, or any other common law acceptance of an obligation to do so (as I have fond the position to be), I do not see how what was essentially a commercial banking relationship between Chase and Springwell could give rise to extensive fiduciary duties on the part of Chase contended for by Springwell. In effect, Springwell relied on the same facts to support its case that Chase owed investment advisory obligations as it did to support the existence of a fiduciary relationship.

In other words, for fiduciary duties to be implied the relationship must have a degree of trust and confidence that subverts the starting point that the relationship is at arm’s length. The offeror, in this case a banker, is selling a product, which means that recommendations must be treated as representations and not as advice that must be based on a consideration of a wider context. Equity only operates if the relationship moves beyond the confines of marketing and sales into the realm of (p. 180) investment advice. That crossing may result from agreement or from an assumption of responsibility. In such a case, equity will operate to imply, in addition to duties of care and skill in contract or at law, fiduciary duties that will restrict the freedom of the offeror to make recommendations in the context of conflicting interests. But the simple fact that investment recommendations were made to a client by a financial services professional does not in itself lead to that type of relationship.

4.60  Academic writing has referred to MiFID’s client’s best interest rule as ‘fiduciary-style’ duties.128 Is MiFID’s best interest rule fiduciary in nature? To rephrase that question in legal rather than regulatory terms, is it a ‘blunt tool’ aimed at ring-fencing the interest of the investor when the investment firm exercises discretion? There are elements of a fiduciary nature in the body of rules compiled in Article 24: the prohibition on inducements in subparas 7(b), 8, and 9 seek to restrict payments that could be characterized both as a secret profit and as a potential conflict, which would constitute a breach of equitable fiduciary duties. These rules, together with the remuneration rules,129 are unmistakably aimed at ensuring that the investment firm’s nor its employees’ self-interest is at play in the context of the performance of the investment service. On the other hand, the product governance, suitability, and appropriateness duties of Articles 24 and 25 of MiFID II belong to the realm of duties of care. These rules address the scope of the responsibilities of an investment firm; they do not seek to ring-fence the exercise of control.

4.61  Consequently, the best interest rule—as drafted—appears to be of a mixed character. The rule is dominated by ‘fairness’ or ‘good faith’ motivated Henderson-style duties of care that impose responsibilities to investigate the investor’s understanding, purpose, and situation, and to inform the investor in that context about the investment service or product. Product governance, suitability, and appropriateness duties belong to that realm.130 The best interest rule also includes a (p. 181) selective set of control-style duties aimed at mitigating the conduct risks associated with conflicts of interest. Restrictions on inducements and remuneration belong to that realm. These may be characterized as ‘fiduciary-style duties’ that, in the words of DeMott, seek to restrict the investment firm’s freedom ‘to exploit [gaps] in a fashion that is either self-interested or oriented to serving interests other than those of the principal’,131 although as will be seen below,132 the conflict management rules in equity are much less forgiving than the regulatory conflict management rules.

4.62  It is not clear why MiFID II mixes certain conflict-risk management rules into Article 24’s ‘best interest rule’, but not other conflict rules, which are exclusively grouped under Article 23 (Conflicts of interest). In the interest of framing principle-based rules such as the best interest rule in the context of a conceptually coherent legislative rationale and purpose, the fiduciary-style rules currently comprised in Article 24 would have been better grouped exclusively under Article 23, and not, as they are now, dual-grouped in Articles 23 and 24.133 That would have left the scope of the best interest rule, true to its nature and character, singularly directed at fairness, or ‘good faith’, responsibilities. The conflicts framework in MiFID II, much as it is in equity, should be framed as a body of rules that is designed purposefully to clear the work of the investment firm from conflicts independent from duties of competence and care.

4.63  The ordering of best interest and conflict rules in MiFID II ought to have recognized the different nature and character of conflict rules as internal control-type risk management rules. A breach of risk management rules is caused by a failure to put the right risk management framework in place around the conflicting interest, that is, internal and external controls. A question of breach of risk management rules is independent, and, in fact, unrelated to the question whether the risk that the framework seeks to mitigate has materialized. In other words, breach of a conflict rule does not mean per se, or at least in a logical and consistent framework ought not to mean per se that a breach of the best interest rule has occurred. The conflict rules and the best interest rules operate as complimentary investor protection rules. The conflict rules impose a control framework to mitigate a specific category of conduct risk, that is, the risk that the investment firm or its staff or agents do not exercise their responsibilities independently due to a conflicting interest. The best interest rule imposes duties of care that aim to move the conduct (p. 182) requirements beyond mere competent and skilful supply of the investment service or product. It requires the investment firm to use its skill and knowledge to consider the investor’s interest in the context of the investor’s purpose and situation when offering or supplying the investment service or product. It is not helpful to conceptually blur the line between the prohibitive fiduciary notion of control that is abuse agnostic and operates near-mechanically to restrict movement if a conflict occurs, and normative notions of due care, diligence, and good faith, that operate additively to expand the scope of the duty of care.

C.  MiFID II’s Control Framework for Conflicts of Interest

1.  Categories of conflicts: MiFID II versus equity

4.64  As discussed in section B1 above, an investment firm must put the investor’s interest at the heart of its service. That is the—uncontentious—starting point. But what does that mean when potential interests that are not investor interests come into play? As Keith Clark posits poignantly:134

Human affairs generally are laden with conflicts of interest. None of us lives in a world of simply owing duties to a single person. Life is multifarious, and we are all conscious of the different levels of responsibility we have in relation to conflicts of interest in our private lives. Some of these responsibilities are buttressed by the power of law, some by moral and ethical standards, some by social customs and sometimes we have to make difficult personal decisions. The same is true for the business world. And over time the boundaries between the acceptable and unacceptable behaviour have shifted.

4.65  The fact that another interest exists is not wrong per se. It does not follow that the investor’s interest is compromised. In fact, without, for instance, the self-interest of the investment firm to derive revenue from the investment service, the service would not be. Grundmann and Hacker put it as follows:135

[M]any conflicts of interest in general contract law remain fairly untouched by mandatory or even default law. They form part and parcel of the bargaining process which is often entrusted to work as a balancing device between parties … Therefore, the core question is: What distinguishes a conflict of interest worth regulating from one which solution is left to bargaining?

4.66  It is a matter of perimeter. In a relationship where a person who possesses special skills and knowledge undertakes by way of business to use that special skill and knowledge to serve the interest of a client, an interest other than the interest (p. 183) of the client becomes objectionable if there is a risk that the other interest may potentially interfere with the performance of the service to the disadvantage of the interest of the investor. In that vein, MiFID II Delegated Regulation (EU) 2017/565 describes the population of objectionable non-investor interests as follows (emphasis added):136

The circumstances which should be treated as giving rise to a conflict of interest should cover cases where there is a conflict between the interests of the firm or certain persons connected to the firm or the firm’s group and the duty the firm owes to a client; or between the differing interests of two or more of its clients, to each of whom the firm owes a duty. It is not enough that the firm may gain a benefit if there is not also a possible disadvantage to a client, or that one client to whom the firm owes a duty may make a gain or avoid a loss without there being a concomitant possible loss to another such client.

4.67  These are the ‘classic’ categories—firm interest versus client interest, and client interest versus client interest—the regulation of which has been long established in equity in the context of fiduciary relationships.137 Importantly, though, MiFID limits the scope of objectionable other interests to those who could result in the case of a firm interest versus client interest in a ‘possible disadvantage’ to the client, and in the case of a client interest versus client interest in a ‘concomitant possible loss’ to another client. In other words, the mere concurrence of interests is not a matter for regulation. A potential conflict, more precisely, a potential for disadvantage must exist.

4.68  Consequently, the filter for objectionable other interests in the regulatory realm differs from the filter in equity. In equity, the concurrent existence of a conflict is enough to cause a breach of fiduciary duty should the fiduciary act notwithstanding the existence of that other interest. Actual or potential disadvantage to the beneficiary is not the key. The seminal case demonstrating that the test is not whether there is an actual conflict or potential disadvantage but whether the fiduciary is subject to a concurrent interest, is Boardman v Phipps.138 Three trustees held 25 per cent of the shares in a textile company on a trust established pursuant to a will. The trust could not legally purchase the remaining 75 per cent, as the terms of the will did not permit it. The solicitor of the trustees, together with one of the beneficiaries, purchased the remaining 75 per cent at their own expense. In arriving at their investment decision, they relied on information they received from the company whilst acting as proxies of the trustees in their capacity as holders of 25 per cent of the share capital. Prior to concluding the transaction, the solicitor and the beneficiary in question disclosed their plan to the trustees and the other beneficiaries, who did not raise objections. Not only could the trustees (p. 184) not legally purchase the remaining 75 per cent, the trust assets also did not provide the means to do so.

4.69  After the transaction had been completed and it had become clear that it had been a profitable transaction, one of the beneficiaries sued successfully for breach of fiduciary duty. The courts found at each instance that the solicitor and the co-acting beneficiary, as intermediaries and negotiators between the trustees and the company, had placed themselves in a position of trust and confidence to the trustees. Accordingly, they were liable to account for the profits to the trustees, even though the trustees would not have been able to acquire the shares themselves and notwithstanding the fact that the transaction was disclosed to the trustees and the beneficiaries and not objected to.139 Lord Cohen placed the operative dynamic of the equitable fiduciary concept in plain sight:140

I desire to repeat that the integrity of the [solicitor and co-acting beneficiary] is not in doubt. They acted with complete honesty throughout and the [complaining beneficiary] is a fortunate man in that the rigour of equity enables him to participate in the profits which have accrued as the result of the action taken by the [solicitor and co-acting beneficiary] in March, 1959, in purchasing the shares at their own risk.

4.70  Article 16(3) of MiFID II requires a firm to ‘maintain and operate effective organisational and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of interest as defined in Article 23 from adversely affecting the interests of its clients’ (emphasis added). Article 23 of MiFID II requires that a firm (emphasis added):

[T]ake all appropriate steps to identify and to prevent or manage conflicts of interest between themselves, including their managers, employees and tied agents, or any person directly or indirectly linked to them by control and their clients or between one client and another that arise in the course of providing any investment and ancillary services, or combinations thereof, including those caused by the receipt of inducements from third parties or by the investment firm’s own remuneration and other incentive structures.

(p. 185) 4.71  Article 33 of MiFID II Delegated Regulation (EU) 2017/565 provides further guidance to identify conflicts of interests that ‘may damage the interests of a client’. At a minimum, investment firms must consider in respect of ‘the investment firm or a relevant person, or a person directly or indirectly linked by control to the firm’, whether the following circumstances occur:

  1. (a)  the firm or that person is likely to make a financial gain, or avoid a financial loss, at the expense of the client;

  2. (b)  the firm or that person has an interest in the outcome of a service provided to the client or of a transaction carried out on behalf of the client, which is distinct from the client’s interest in that outcome;

  3. (c)  the firm or that person has a financial or other incentive to favour the interest of another client or group of clients over the interests of the client;

  4. (d)  the firm or that person carries on the same business as the client;

  5. (e)  the firm or that person receives or will receive from a person other than the client an inducement in relation to a service provided to the client, in the form of monetary or non-monetary benefits or services.

4.72  Accordingly, an investment firm must be careful to cast the net wide and trawl its business effectively to identify a catalogue of concurrent interests and to determine which of those concurrent interests potentially conflict with, in the sense that there could be detriment to, a client’s interest. Firms must keep a record of the identified conflicts.141 The analysis must go beyond interests at firm level and include interests of individuals employed or otherwise controlled by the firm. Particularly, an investment firm must consider financial and other incentives that influence behaviour in the context of product manufacturing and distribution, including, according to Article 33(a) and (e) of MiFID II Delegated Regulation (EU) 2017/565, staff remuneration and ‘inducements’.142

4.73  The experience-infused words of Sir Howard Davies, former Chairman and CEO of the United Kingdom’s Financial Services Authority, serve as a reminder of the complexity of the system and the resulting challenges to identifying the causes and consequences of conflicts of interest in financial firms:143

The most important and difficult questions in this area relate to the structures of markets and firms. Some of the issues related to the behaviour of individuals, while they make good press copy, are far easier to handle at least at the level of principle. (p. 186) Of course it is wrong to allow one’s personal judgment to be influenced by a kickback or a charitable donation. There may be difficulties in identifying these conflicts, and publicising them, but few of us would find it hard to say which behaviours were acceptable, and which not. In the case of a firm structure, however, the answers are far more complex. Do particular structures of firms create conflicts which, in themselves, represent opportunities for corruption, or at least the temptation to modify objective judgments, in a way which may not always be obvious to people involved? Have we developed a set of markets, and firms, in which conflicts are so inevitable, and unmanageable, that we need to consider wholesale restructuring, perhaps mandated by regulators?

4.74  In conclusion, an investment firm’s primary regulatory responsibility according to art 23(1) of MiFID II is to avoid the conflict. If that is not possible, the subsidiary responsibility according to art 16(3) of MiFID II is to mitigate the risk that the conflict poses to the interest of the investor by ‘maintain[ing] and operat[ing] effective organisational and administrative arrangements with a view to taking all reasonable steps designed to prevent conflicts of interest as defined in Article 23 from adversely affecting the interests of its clients’. If such mitigating measures are insufficient ‘to ensure, with reasonable confidence, that risks of damage to client interests will be prevented’ the investment firm must disclose the relevant facts to the client,144 much in the way informed consent operates in equity. However, express regulatory proviso insists that investment firms should only use disclosure as ‘measure of last resort’.145 Notwithstanding the disclosure, the investment firm remains responsible for ensuring that it acts in accordance with the best interest rule of Article 24(1) of MiFID II.

4.75  A firm’s conflict governance framework must be set out in a specific policy.146 Importantly, the operation of the MiFID II conflicts rules is client category agnostic. Recital (46) of MiFID II Delegated Regulation (EU) 2017/565 observes:

Conflicts of interest should be regulated only where an investment service or ancillary service is provided by an investment firm. The status of the client to whom the service is provided—as either retail, professional or eligible counterparty—should be irrelevant for that purpose.

2.  Special conflict rules: inducements

4.76  Article 24(9) of MiFID II introduces a general prohibition on investment firms to pay fees or commissions or to provide non-monetary benefits to ‘any party’, or to receive fees, commissions, or non-monetary benefits from ‘any party’, unless the payment or benefit ‘(a) is designed to enhance the quality of the relevant service to the client; and (b) does not impair compliance with the investment firm’s (p. 187) duty to act honestly, fairly and professionally in accordance with the best interest of its clients’. Again, the regulatory rule permits a margin not allowed in equity. According to Boardman v Phipps, any profit must be accounted for.147

4.77  Article 11(2) of Delegated Directive (EU) 2017/593,148 identifies the characteristics that a benefit must have to be ‘designed to enhance the quality’ of the investment service within the meaning of Article 24(9)(a). The benefit must be linked to increased service levels to the client (eg access to a wider range of investment options, asset allocation optimization, or value-added tools),149 the investment firm or its connected persons must not receive a direct benefit without the client receiving a ‘tangible’ benefit,150 and if the benefit received by the firm is continuous, then the benefit to the client must match that continuity.151 The prohibition, therefore, essentially reduces any services or goods an investment firm may receive free of payment in the conduct of its investment business, to goods and services that can be linked directly to an increase in service levels to the client. Similarly, an investment firm may not make payments or provide benefits to another investment firm if that inducement does not benefit the underlying client. Given that the question of benefit is entirely subjective, in practice it is not straight-forward to determine whether a benefit has been designed to add value.152 Firms will have to take a view based on their own judgment, and custom and practice.

4.78  The inducement rules affect particularly the commercial relations between product providers and product distributors. Distributor business models often rely on rebates or other payments made by the product provider. In EU jurisdictions that do not, unlike the United Kingdom and The Netherlands,153 ban rebates or other payments between manufacturers and distributors outright, distributors will have to demonstrate enhanced services such as enhanced reporting, market insight services, or value-added tools.

4.79  Article 24(8) of MiFID II introduces a ban on receipt of inducements from any ‘third party’, except for ‘minor non-monetary benefits’, for independent investment advisers and portfolio managers. Accordingly, in providing these investment services, investment firms must not accept and retain benefits from third parties, (p. 188) which includes group companies,154 in the context of an investment service provided to a client. Recital 74 of MiFID II refers specifically to benefits provided by issuers or other product providers. The words ‘must not accept and retain’ implies that benefits may be received, if they are passed on to the client.155

4.80  Pursuant to Article 24(9), an infraction of the prohibition on inducements is deemed to be a breach of the best interest rule in Article 24(1) as well as a breach of the conflicts rule of Article 23 of MiFID II. Interestingly, Article 24(8) lacks such a provision. It is sensible to link the prohibition on inducements to those benefits that establish an interest that could potentially interfere with an investment firm’s ability to act in the best interest of the client. Nevertheless, as noted,156 it is helpful to frame a breach of the prohibition on inducements as an infraction of both the best interest rule and the conflicts rule. The best interest rule defines an expectation of good faith behaviour. Conflict rules prescribe internal controls that aim to avoid or mitigate the risk that service levels are breached due to the existence of a conflicting interest. Risk management and internal control-oriented rules and duties to act in good faith, however, serve different purposes. The existence of a conflict may mean that the conflict rules have been breached, but a breach of the conflict rules does not mean that the client’s best interest has been compromised.

3.  Special conflict rules: remuneration

4.81  Commission Recommendation 2009/384/EC on remuneration policies in the financial services sector recommended that ‘Member States should ensure that financial undertakings establish, implement and maintain a remuneration policy which is consistent with and promotes sound and effective risk management and which does not induce excessive risk-taking’.

4.82  Article 74(1) of CRD IV implements the Commission’s Recommendation by requiring that firms subject to CRD IV157 must establish ‘remuneration policies (p. 189) and practices that are consistent with and promote sound and effective risk management’.158 Articles 92 to 97 of CRD IV place responsibility for remuneration policies in the hands of the management body, and where size and complexity of the firm requires it, a remuneration committee, and are prescriptive as to the structure of remuneration for ‘senior management, risk takers, staff engaged in control functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on their risk profile’.159

4.83  The remuneration provisions of CRD IV are aimed at the management of balance sheet risk-taking. The rules in MiFID II focus on provision of investment services and aim at the management of conduct risk, more specifically, the risk that staff of an investment firm might not act fairly and in the best interest of a client due to a personal interest because of the interference of a conflicting interest caused by the remuneration structure. Accordingly:

  1. (a)  art 9(3)(c) of MiFID II requires the management body to implement remuneration policies that apply to ‘persons involved in the provision of services to clients’ and which aim ‘to encourage responsible business conduct, fair treatment of clients as well as avoiding conflict of interest in the relationships with clients’;

  2. (b)  Article 27 of Delegated Regulation (EU) 2017/565 prescribes further detailed requirements, in particular, Article 27 requires that remuneration policies and practices must be designed to avoid creating ‘a conflict of interest or incentive that may lead relevant persons to favour their own interests or the firm’s interests to the potential detriment of any client’, and ‘remuneration and similar incentives shall not be solely or predominantly based on quantitative commercial criteria’, but must take ‘appropriate qualitative criteria reflecting compliance with the applicable regulations, the fair treatment of clients and the quality of services provided to clients’ into account.

4.84  In summary, investment firms must take a close look at the way those staff who may impact client’s interests are remunerated to determine to what extent such a (p. 190) member of staff is put in a position where s/he must postpone their own interest in remuneration to serve the client’s interest. A sales force cannot be remunerated such that revenue is the only incentive, which increases the risk that a client ends up investing in an unsuitable or inappropriate investment product. Similarly, investment advisers and portfolio managers must not be remunerated such that it would potentially be detrimental to their objective to focus on the best possible investment for their clients. All such actors must be as independent as reasonably possible when they are dealing with client affairs.


1  Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (recast), [2014] OJ L173/349 (MiFID II).

2  See the analysis in Hugh Beale (ed), Chitty on Contracts—General Principles (32nd edn, Sweet & Maxwell 2017) paras 7-006, 7-008, 7-032 (the statements must not have been mere ‘puff’ or sales-oriented commendatory remarks because reliance based on those would not be reasonable) and in Jack Beatson, Anson’s Law of Contract (30th edn, OUP 2016) 319–320.

3  Caparo Industries plc v Dickman [1990] 2 AC 605 (holding that reliance, or the fact that the statement is material to the effect that it induced the contract, must be shown by the relying party and must be reasonable) and South Australia Asset Management Corporation Respondents v York Montague Ltd [1997] AC 191 (holding that reliance may be inferred from the factual context). See the analysis in Chitty on Contracts (n 2) paras 7-006, 7-032, 7-034, and in Anson’s Law of Contract (n 2). There is a presumption that a material misrepresentation will have induced the representee’s entry into the contract, see in Alistair Hudson, The Law of Finance (2nd edn, Sweet & Maxwell 2013) 18–49 in, citing Smith v Chadwick (1884) 9 App Cas 187.

4  Section 2(1) Misrepresentation Act 1967. Of course, a misrepresentation could have been made fraudulently, that is, knowingly, or without belief in its truth, or recklessly, careless whether it was true or false; see Derry v Peek (1889) 14 App Cas 337, and Chitty on Contracts (n 2) para 7-049ff.

5  Chitty on Contracts (n 2) para 7-010 to 7-014.

6  [1976] QB 801. (A petroleum company negotiated a lease with a prospective tenant. It was held to be liable for negligently giving overly optimistic estimates of potential revenues from petrol sales. The forecast was based on a detailed evaluation by an expert employee of the company and would probably have been correct but for changed circumstances, of which the company was aware. It was clear that the tenant was not able to make the assessment on an equal footing and was relying on the company’s expert forecast.) See for a discussion of the decision Anson’s Law of Contract (n 2) 145ff.

7  Depending on the circumstances, the opinion could also give rise to an action in tort based on the principle of assumption of responsibility of Hedley Byrne & Co Ltd v Heller and Partners Ltd [1964] AC 465, discussed in paras 4.11ff below.

8  This argument is put forward in Chitty on Contracts (n 2) para 7-007.

9  Article 24(3) of MiFID II.

10  Caparo (n 3).

11  [1976] QB 801.

12  [1996] CLC 518.

13  Dharmala (n 12) 531.

14  Dharmala (n 12) 573.

15  A position that was very much confirmed in JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm) in which the plaintiff argued that the bank, acting through several sales representatives over several years during which the plaintiff was a client of the bank and its predecessors, owed advisory duties or responsibilities in respect of investment decisions. Although it was accepted that the relationship between plaintiff and defendant extended beyond ‘execution only’, and that regular discussions about the merits of certain investments took place, Gloster J did not accept that the bank’s duty of care extended beyond ensuring that the description of the investments was accurate, based on the notion that the plaintiff was a ‘sophisticated investor with commercial acumen and with significant experience in capital market investments’. In addition, it was relevant that the plaintiff acknowledged that it had placed no reliance on any information from the bank in connection with decisions to invest, while the bank had expressly disclaimed liability for its recommendations.

16  Gerard McMeel, McMeel on the Construction of Contracts (3rd edn, OUP 2017) paras 26.03, 26.42–24.76, discussing Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317; Peekay Intermark Ltd v Australia & New Zealand Banking Group Ltd [2006] EWCA Civ 386; and Springwell Navigation Corp v JP Morgan Chase Bank [2010] EWCA Civ 1212. See further Hudson (n 3) paras 17-29 to 17-37, discussing particularly Peekay.

17  This rule was inspired by the similar rule in the Financial Conduct Authority’s (FCA’s) Handbook, the Conduct of Business Sourcebook (COBS), be it that the original FCA rule required less strictly that a firm ‘take reasonable steps’ rather than ‘ensure’. The new and stricter rule in COBS 4.2.1R will be actionable in accordance with the policy decision to apply s 138D of the Financial Services and Markets Act 2000 (FSMA) (formerly s 150 of FSMA as substituted by the Financial Services Act 2012) to all rules in COBS, FCA PS 07/6, ‘Feedback on CP06/19’ paras 26.9 and 26.10, see Gerard McMeel and John Virgo (eds), McMeel and Virgo on Financial Advice and Financial Products (3rd edn, OUP 2014) paras 1.54–1.5512.41.

18  Chitty on Contracts (n 2) para 7-158.

19  Bell v Lever Bros Ltd [1932] AC 161. See John Cooke and David Oughton, The Common Law of Obligations (3rd edn, Bloomsbury 2000) 186. Chitty on Contracts (n 2) para 7-018.

20  Goldsmith v Rodger [1962] 2 Lloyd’s Rep 249 and Oakes v Turquand (1867) LR 2 HL 325, as discussed by Hudson (n 3) 18–53.

21  See in particular the list of requirements contained in art 44 (Fair, clear and not misleading information requirements) of Commission Delegated Regulation (EU) 2017/565, which includes a requirement in sub-para 2(b) to ensure that information that an investment firm provides ‘is accurate and always gives a fair and prominent indication of any relevant risks when referencing any potential benefits of an investment service or financial instrument’. See also FCA’s rules in COBS, which expect that the fair, clear and not misleading rule must be interpreted in the context of the circumstances, in particular ‘the nature of the client and of its business’, see COBS 4.2.2G (1), and further that eg facts and figures around yield curves give a ‘balanced impression’ as well as that ‘complex charging structures’ are explained sufficiently, taking ‘the needs of the recipient into account’, see COBS 4.2.4G.

22  [1964] AC 465.

23  [1995] 2 AC 145.

24  Lord Diplock in Mutual Life and Citizens’ Assurance Co Ltd v Clive Raleigh Evatt [1971] AC 793, 801.

25  Hedley Byrne (n 7) 502–03.

26  Henderson (n 23) 178 (Lord Goff observed that the ‘concept indicates too that in some circumstances, for example where the undertaking to furnish the relevant service is given on an informal occasion, there may be no assumption of responsibility’).

27  See Lord Goff, Henderson (n 23) 181, noting ‘I wish to add in parenthesis that, as Oliver J recognised in Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] Ch 384, 416F–G (a case concerned with concurrent liability of solicitors in tort and contract, to which I will have to refer in a moment), an assumption of responsibility by, for example, a professional man may give rise to liability in respect of negligent omissions as much as negligent acts of commission, as for example when a solicitor assumes responsibility for business on behalf of his client and omits to take a certain step, such as the service of a document, which falls within the responsibility so assumed by him’.

28  See Lord Goff, Henderson (n 23) 194:

But, for present purposes more important, in the instant case liability can, and in my opinion should, be founded squarely on the principle established in Hedley Byrne itself, from which it follows that an assumption of responsibility coupled with the concomitant reliance may give rise to a tortious duty of care irrespective of whether there is a contractual relationship between the parties, and in consequence, unless his contract precludes him from doing so, the plaintiff, who has available to him concurrent remedies in contract and tort, may choose that remedy which appears to him to be the most advantageous.

29  See Lord Steyn in Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830, 834. This is in line with Lord Devlin’s observation in Hedley Byrne (n 7) 526, that the ‘respondents in this case cannot deny that they were performing a service. Their sheet anchor is that they were performing it gratuitously and therefore no liability for its performance can arise. My Lords, in my opinion this is not the law. A promise given without consideration to perform a service cannot be enforced as a contract by the promisee; but if the service is in fact performed and done negligently, the promisee can recover in an action in tort.’ The principle may therefore be seen to operate also as a tool to find liability where, strictly, there is no consideration and therefore no immediately identifiable bargain. See further Cooke and Oughton (n 19) 203.

30  Henderson (n 23) 180.

31  See also the speech of Lord Hoffman in Customs and Excise Commissioners v Barclays Bank plc [2007] 1 AC 181, 200, who observed in respect of the position of the managing agents in Henderson, ‘[t]o say that the managing agents assumed a responsibility to the Names to take care not to accept unreasonable risks is little different from saying that a manufacturer of ginger beer assumes a responsibility to consumers to take care to keep snails out of his bottles’.

32  See Chapter 1, para 1.15ff (discussing the professional nature of investment services).

33  [2007] 1 AC 181.

34  [2007] 1 AC 181, 198. When reviewing the authorities that applied the Hedley Byrne principle, his Lordship observed that there

is a tendency, which has been remarked upon by many judges, for phrases like ‘proximate’, ‘fair, just and reasonable’ and ‘assumption of responsibility’ to be used as slogans rather than practical guides to whether a duty should exist or not. These phrases are often illuminating but discrimination is needed to identify the factual situations in which they provide useful guidance. For example, in a case in which A provides information to C which he knows will be relied upon by D, it is useful to ask whether A assumed responsibility to D: Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465: Smith v Eric S Bush [1990] 1 AC 831. Likewise, in a case in which A provides information on behalf of B to C for the purpose of being relied upon by C, it is useful to ask whether A assumed responsibility to C for the information or was only discharging his duty to B: Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830. Or in a case in which A provided information to B for the purpose of enabling him to make one kind of decision, it may be useful to ask whether he assumed responsibility for its use for a different kind of decision: Caparo Industries plc v Dickman [1990] 2 AC 605.

35  [2007] 1 AC 181, 199.

36  [1994] 1 AC 428, 437.

37  [2010] EWCA Civ 1212 [373]. Discussed by McMeel and Virgo (n 17) paras 7.130–7.132.

38  [1997] AC 191.

39  See Lord Hoffman, SAAMCO (n 38) 210. (The defendant valuers had undertaken to value properties on the security of which the plaintiff lenders were considering advancing money on mortgage. In each case, the defendants had considerably overvalued the property. Following the valuations, loans were made which would not have been if the plaintiffs had known the true values of the properties. The borrowers subsequently defaulted against a background of a depreciating property market, substantially increasing the plaintiff’s losses. The plaintiffs brought actions against the defendants for damages for negligence and breach of contract.)

40  SAAMCO (n 38) 214.

41  [2002] 1 Lloyd’s Rep 157.

42  Aneco Reinsurance (n 41) 190.

43  Caparo (n 3) 628.

44  Both Lord Hoffman in SAAMCO and Lord Millett in Aneco Reinsurance (dissenting) found reasonable reliance based on the principle outlined in Hedley Byrne (n 7) and Henderson (n 23).

45  [2017] UKSC 21. See for a discussion George Walker and Robert Purves (eds), Financial Services Law (4th edn, OUP 2018) para 19.12.

46  See, particularly, Springwell (n 16). See also the conclusions on advice-related claims based on the tort of negligence in Walker and Purves (n 45) paras 15.68–15.98.

47  See para 4.10 above.

48  See Lord Goff in Henderson (n 23) 178 (observing ‘likewise that an assumption of responsibility may be negatived by an appropriate disclaimer’). See also McMeel and Virgo (n 17) paras 7.133–7.134 citing Springwell (n 16) and Peekay (n 16).

49  See Chapter 5, paras 5.36ff (discussing exclusion clauses).

50  [2014] EWHC 3034 (Ch).

51  Crestsign (n 50) [176].

52  See for criticism of the decision as contrary to public policy and more generally, in relation to the doctrine of ‘estoppel by contract’, Paul Marshall, ‘Humpty Dumpty is Broken: “Unsuitable” and “Inappropriate” Swaps Transactions’ (2014) December JIBFL 679. Similarly in relation to the weak basis for the doctrine of ‘estoppel by contract’, McMeel (n 16) paras 26.73–26.76.

53  See for an argument that ‘portfolio management’ is essentially an execution-oriented service and should be treated differently from investment advice, paras 4.32ff below.

54  See Recital (80) of Delegated Regulation (EU) 2017/565, observing that the appropriateness test concerns ‘the need to obtain information regarding the knowledge and experience of the client in order to assess the appropriateness of the service or the financial instrument for the client’. See further the European Securities and Markets Authority (ESMA), MiFID Practices for Firms Selling Complex Products (ESMA/2014/146) para 22 (observing in relation to appropriateness that ‘when assessing appropriateness, firms consider all elements and features that determine the complexity of the product and the risks involved and should assess the knowledge and experience of the client in that context’.) See also Luca Enriques and Matteo Gargantini, ‘The Overarching Duty to Act in the Best Interest of the Client in MiFID II’ in Danny Busch and Guido Ferrarini (eds), Regulation of EU Financial Markets—MiFID II and MiFIR (OUP 2017) para 4.12.

55  Article 55(3) of Delegated Regulation (EU) 2017/565. See also Recital (80) of MiFID II.

56  Article 56(1) of Delegated Regulation (EU) 2017/565.

57  BPE (n 45).

58  See the definition of ‘investment advice’ provided in art 4(1)(4) of MiFID II in conjunction with art 9 of Delegated Regulation (EU) 2017/565, and art 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, SI 2001/544.

59  See the clarification of the term ‘personal recommendation’ in art 9 of Delegated Regulation (EU) 2017/565. Similarly, FCA’s guidance in the Perimeter Guidance manual (PERG) 5.8.10 that ‘advice’ requires an element of opinion, comment, or value judgement on the part of the adviser. See McMeel and Virgo (n 17) para 14.108. It follows that a recommendation is not a personal recommendation, and therefore not investment advice, for MiFID II or FSMA purposes if it is issued generally to the public or a sector of the public.

60  Article 25(2) of MiFID II in conjunction with arts 54 and 55 of Delegated Regulation (EU) 2017/565, as further elaborated by ESMA in its Final Report—Guidelines on Certain Aspects of the MiFID II Suitability Requirements (ESMA 35-43-869, 2018).

61  Article 54(7) of Delegated Regulation (EU) 2017/565, which lists several matters that the investment firm must take into account. See also ESMA, MiFID practices for firms selling complex products (n 54) para 20, observing that a firm must ensure that ‘before a firm decides to advise clients on complex products, it first applies a high level of due diligence to evaluate those products. This evaluation should assess the intelligibility of the risk-reward profile, the level of leverage, and all the various risk components of the product (including market risk, credit/counterparty risk and liquidity risk)’.

62  Article 55(3) of Delegated Regulation (EU) 2017/565, which applies equally to appropriateness and suitability requirements.

63  Article 54(3) of Delegated Regulation (EU) 2017/565.

64  cf generally on the concept of personal recommendations, the Committee of European Securities Regulators (CESR), CESR’s Technical Advice on Possible Implementing Measures of the Directive 2004/39/EC on Markets in Financial Instruments—1st Set of Mandates where the deadline was extended and 2nd Set of Mandates (CESR/05–290b) 7–11.

65  Aneco Reinsurance (n 41) 190. See para 4.19 above.

66  Springwell (n 16) para 210.

67  [2000] Lloyds Rep 412.

68  The definition of ‘investment advice’ has been retained under the FSMA and its subsidiary legislation: see art 53 of the Financial Services and Markets Act (Regulated Activities) Order 2001, SI 2001/544 (RAO).

69  Quoted, in agreement, by Henderson J, in Walker v Inter-Alliance Group plc [2007] EWHC 1858 [27]–[30].

70  See for an analysis of the characteristics of the investment management service, Chapter 7, paras 7.01ff.

71  See, on a similar lack of regulatory level playing field between (a) Undertakings for Collective Investments in Transferable Securities (UCITS) and UCITS management companies authorized under Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), [2009] OJ L302/32 (UCITS Directive), and management companies authorized under the Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) 1060/2009 and (EU) 1095/2010, [2011] OJ L174/1 (AIFMD), and (b) MiFID II authorized investment managers in the context of MiFID II product regulation: Busch (n 11) paras 5.02–5.05 (noting that ESMA is right to suggest that the UCITS Directive and AIFMD ought to be amended so that the management companies are subject to the MiFID II product governance rules).

72  See the definitions in art 4(1) of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, [2004] OJ L145/1 (MiFID I) and art 4(1) of MiFID II. For a description of the definitions in MiFID II, see the Glossary, Chapter 1, para 1.65.

73  Article 45(1) of MiFID II Delegated Regulation (EU) 2017/565.

74  Article 45(2) of MiFID II Delegated Regulation (EU) 2017/565 and art 30(2), second para, of MiFID II (re trade specific opt down rights for eligible counterparties).

75  Article 30(1), first para, of MiFID II.

76  See paras 4.42ff below (discussing the MiFID II client’s best interest rule in general).

77  Article 30(1), second para, of MiFID II.

78  Recital (74) of MiFID II Delegated Regulation (EU) 2017/565 observes that MiFID II:

strengthens investment firms’ obligations to disclose information on all costs and charges and extends these obligations to relationships with professional clients and eligible counterparties. In order to ensure that all categories of clients benefit from such increased transparency on costs and charges, investment firms should be allowed, in certain situations, when providing investment services to professional clients or eligible counterparties, to agree with these clients to limit the detailed requirements set out in this Regulation. This however should never lead to disapplying the obligations imposed on investment firms pursuant to Article 24(4) of [MiFID II]. In this respect, investment firms should inform professional clients about all costs and charges as set out in this Regulation, when the services of investment advice or portfolio management are provided or when, irrespective of the investment service provided, the financial instruments concerned embed a derivative. Investment firms should also inform eligible counterparties about all costs and charges as set out in this Regulation when, irrespective of the investment service provided, the financial instrument concerned embeds a derivative and intends to be distributed to their clients. However, in other cases, when providing investment services to professional clients or eligible counterparties, investment firms may agree, for instance, at the request of the client concerned, not to provide the illustration showing the cumulative effect of costs on return or an indication of the currency involved and the applicable conversion rates and costs where any part of the total costs and charges is expressed in foreign currency.

79  Recital (93) of MiFID II Delegated Regulation (EU) 2017/565 observes that

[i]n light of the importance of reports and periodic communications for all clients, and the extension of Article 25(6) of [MiFID II] to the relationship to eligible counterparties, the reporting requirements set in this Regulation should apply to all categories of clients. Taking into account the nature of the interactions with eligible counterparties, investment firms should be allowed to enter into agreements determining the specific content and timing of reporting different from the ones applicable for retail and professional clients …

80  Recital (63) of MiFID II Delegated Regulation (EU) 2017/565 observes in relation to the information requirements set out in art 24 of MiFID II that

[i]nformation requirements should be established which take account of the status of a client as either retail, professional or eligible counterparty. An objective of [MiFID II] is to ensure a proportionate balance between investor protection and the disclosure obligations which apply to investment firms. To this end, it is appropriate to establish less stringent specific information requirements with respect to professional clients than to retail clients.

Articles 48(1) and 50(1) of MiFID II Delegated Regulation (EU) 2017/565 permit tailoring of information.

81  Article 54(3) of MiFID II Delegated Regulation (EU) 2017/565 permits the portfolio manager or investment adviser, for purposes of the suitability test of art 25(2) of MiFID II and art 54(2) of MiFID II Delegated Regulation (EU) 2017/565 to assume that a professional client ‘has the necessary level of experience and knowledge’ to understand the risks involved, and if it concerns investment advice, to assume for the purposes of the suitability test ‘that the client is able financially to bear any related investment risks consistent with the investment objectives of that client’. Similarly, for purposes of the appropriateness test of art 25(3) of MiFID II and art 56(1) of MiFID II Delegated Regulation (EU) 2017/565, and art 55(1) of MiFID II Delegated Regulation (EU) 2017/565 permits the investment firm to ‘assume that a professional client has the necessary experience and knowledge in order to understand the risks involved in relation to those particular investment services or transactions, or types of transaction or product, for which the client is classified as a professional client’.

82  Article 64(1)(a) of MiFID II Delegated Regulation (EU) 2017/565 permits a firm in determining the relative importance of the factors referred to in art 27(1) of MiFID II Directive in the context of best execution requirements to consider ‘the characteristics of the client including the categorisation of the client as retail or professional’.

83  See on the operation of caveat emptor in the context of investment services, McMeel and Virgo (n 17) paras 1.67–1.71.

84  See Chapter 1, paras 1.15ff (discussing the professional character of the investment services relationship).

85  COBS 2.1.1R.

86  Niamh Moloney, EU Securities and Financial Markets Regulation (3rd edn, OUP 2014) 800.

87  Article 24(3)–(6) of MiFID II.

88  Article 24(7)(a) of MiFID II.

89  Article 24(7)(b)–(9) of MiFID II.

90  Article 24(10) of MiFID II.

91  Article 25 of MiFID II.

92  Article 24(7)(a) of MiFID II.

93  COBS 2.1.2R.

94  Moloney (n 86) 800.

95  BPE (n 45).

96  Recital 17 places the best interest rule in the context of product governance, appropriateness, and suitability protective duties. See Chapter 1, paras 1.27ff (on product governance).

97  Less so in duties to avoid and/or to manage conflicts (in particular, inducements and remuneration). The existence of a conflict does not equate to a lack of fairness, per se, see paras 4.61ff below re the risk management character of conflict rules and fiduciary duties.

98  SI 1999/2083.

99  Jan H Dalhuisen, Dalhuisen on Transnational Comparative, Commercial, Financial and Trade Law—Volume 2 (6th edn, Hart 2016) 29.

100  Dalhuisen (n 99) 30.

101  See Lord Browne-Wilkinson in Henderson (n 23) [205F]–[205G]; see also McMeel and Virgo (n 17) paras 8.01ff; and Colin Bamford, Principles of International Financial Law (2nd edn, OUP 2015) paras 7.29ff.

102  See Millett LJ, in Bristol and West Building Society v Mothew [1997] 2 WLR 436, [1998] Ch 1, 18 (observing that ‘a fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence’). See for academic analysis, Paul D Finn, ‘Fiduciary Law and the Modern Commercial World’ in E McKendrick (ed), Commercial Aspects of Trusts and Fiduciary Obligations (OUP 1992) 9, and Paul D Finn, Fiduciary Obligations (The Federation Press 1977) 9 noting that ‘for a person to be a fiduciary he must first and foremost have bound himself in some way to protect and/or advance the interests of another’. See further Law Commission, Fiduciary Duties and Regulatory Rules—A Summary (1992) 1–2 observing that ‘broadly speaking, a fiduciary relationship is one in which a person undertakes to act on behalf or for the benefit of another, often as an intermediary with a discretion or power which affects the interests of the other who depends on the fiduciary for information and advice’.

103  cf Ernest J Weinrib, ‘The Fiduciary Obligation’ (1975) 25 University of Toronto Law Journal 1, 7 noting that

the reason that agents, trustees, partners and directors are subjected to the fiduciary obligation, is that they have a leeway for the exercise of discretion in dealings with third parties which can affect the legal position of their principals. … Accordingly, the hallmark of a fiduciary relationship is that the relative legal positions are such that one party is at the mercy of the other’s discretion.

See also Peter HB Birks, An Introduction to the Law of Restitution (OUP 1989) 339, noting that ‘in short, the particular harm to beneficiaries which equity chiefly fears is the harm which consists in the diversion of wealth into the fiduciary’s pocket’.

104  (1984) 156 CLR 41, 96–97.

105  249 NY 458, 164 NE 545 (1928). See for an analysis of the importance of this case, Austin W Scott, ‘The Fiduciary Principle’ (1949) 37 California Law Review 539, 548–49.

106  See Millett LJ, in Bristol and West [1997] 2 WLR 436, [1998] Ch 1, 18 (observing that ‘the distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary’). See also Peter G Watts (ed), Bowstead & Reynolds on Agency (21st edn, Sweet & Maxwell 2017) para 6-034.

107  Much cited American judicial guidance from Frankfurter J, in SEC v Cheney Corp 318 US 80 (1942), 85. American academic authority concurs: see LS Sealy, ‘Fiduciary Relationships’ (1962) 20 The Cambridge Law Journal 69, 73, (noting that ‘the mere statement that John is in a fiduciary relationship towards me means no more than that in some respects his position is trustee-like; it does not warrant the inference that any particular fiduciary principle or remedy can be applied’). Similarly, Deborah A DeMott, ‘Beyond Metaphor: an Analysis of Fiduciary Obligation’ [1988] Duke Law Journal 879, 879, and 923 observing that although ‘one can identify common core principles of fiduciary obligation, these principles apply with greater or lesser force in different contexts involving different types of parties and relationships. Recognition that the law of fiduciary obligation is situation-specific should be the starting point for a further analysis,’ and, further, that fiduciary obligations’ ‘origin in Equity and its continuing tie to Equity’s legacy make it unusually context-bound as a legal obligation’.

108  Finn, ‘Fiduciary Law and the Modern Commercial World’ (n 102) 9, noting that this summary is an adaptation of the formulation of Deane J in Chan v Zacharia (1984) 154 CLR 178, 53 ALR 417, 435.

109  See Millett LJ, in Bristol and West [1997] 2 WLR 436, [1998] Ch 1, 18:

the principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.

See further Kelly v Cooper [1993] AC 205, [1992] 3 WLR 936; Law Commission, Fiduciary Duties and Regulatory Rules (Consultation Paper No 124, 1992) 32.

110  See Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1212 (on rescission) and Gluckstein v Barnes [1900] AC 240 (on account of profits), cited by McMeel and Virgo (n 17) paras 8.14. See also Bamford (n 101) para 7.36 (observing that the fact that someone is a fiduciary may be irrelevant to many issues).

111  See Millett LJ, in Bristol and West [1997] 2 WLR 436, [1998] Ch 1, 16, noting that the

expression ‘fiduciary duty’ is properly confined to those duties which are peculiar to fiduciaries and the breach of which attracts legal consequences differing from those consequent upon the breach of other duties. Unless the expression is so limited, it is lacking in practical utility. In this sense, it is obvious that not every breach of duty by a fiduciary is a breach of fiduciary duty. I would endorse the observations of Southin J in Girardet v Crease & Co (1987) 11 BCLR (2d) 361, 362: ‘The word “fiduciary” is flung around now as if it applied to all breaches of duty by solicitors, directors of companies and so forth. … That a lawyer can commit a breach of the special duty [of a fiduciary] … by entering into a contract with the client without full disclosure … and so forth is clear. But to say that simple carelessness in giving advice is such a breach is a perversion of words.

Similarly, Ipp J in Permanent Building Society v Wheeler (1994) 14 ACSR 109, 157, cited in agreement by Millett LJ in Bristol and West [1997] 2 WLR 436, [1998] Ch 1, 16 as saying that it ‘is essential to bear in mind that the existence of a fiduciary relationship does not mean that every duty owed by a fiduciary to the beneficiary is a fiduciary duty. In particular, a trustee’s duty to exercise reasonable care, though equitable, is not specifically a fiduciary duty.’ See for a discussion of damages for breach of an implied equitable duty of skill and care, Chapter 5, para 5.87ff.

112  See Millett LJ, in Bristol and West [1997] 2 WLR 436, [1998] Ch 1, 16, noting in respect of the concept of ‘fiduciary duties’ that it

is similarly inappropriate to apply the expression to the obligation of a trustee or other fiduciary to use proper skill and care in the discharge of his duties. If it is confined to cases where the fiduciary nature of the duty has special legal consequences, then the fact that the source of the duty is to be found in equity rather than the common law does not make it a fiduciary duty

113  See Lord Browne-Wilkinson in Henderson (n 23) 205, saying that the

liability of a fiduciary for the negligent transaction of his duties is not a separate head of liability but the paradigm of the general duty to act with care imposed by law on those who take it upon themselves to act for or advise others. Although the historical development of the rules of law and equity have, in the past, caused different labels to be stuck on different manifestations of the duty, in truth the duty of care imposed on bailees, carriers, trustees, directors, agents and others is the same duty: it arises from the circumstances in which the defendants were acting, not from their status or description. It is the fact that they have all assumed responsibility for the property or affairs of others which renders them liable for the careless performance of what they have undertaken to do, not the description of the trade or position which they hold, cited in agreement by Millett LJ, in Bristol and West [1997] 2 WLR 436, [1998] Ch 1, 16.

114  The principles that govern the construction of contracts are the same at law and in equity; see Chapter 5, paras 5.01ff (on the principles of construction of contracts).

115  See also McMeel and Virgo (n 17) para 8.07, arguing that there ‘is no duplication of the same duty at common law and in equity. In the modern law the exposition of a duty of care and skill does not require differentiation between different historical foundations of the sources of such duties.’

116  Such as limits imposed by s 2(2) of the UCTA, (‘a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness’), or COBS 2.1.2R, see Chapter 5, paras 5.36ff (on exclusion clauses in client agreements).

117  See Lord Browne-Wilkinson in Kelly v Cooper (n 109) 213–14, observing that agency ‘is a contract made between principal and agent … like every other contract, the rights and duties of the principal and agent are dependent upon the terms of the contract between them, whether express or implied’. See also Clark Boyce (n 36) 437.

118  Lord Mustill in Re Goldcorp Exchange [1995] 1 AC 74, 98.

119  See Chapter 1, paras 1.44ff (on the creation of agency powers for certain investment firms).

120  Bowstead & Reynolds on Agency (n 106) para 6-035.

121  See Weinrib (n 103) 4.

122  Deborah A DeMott, ‘Organisational Incentives to Care about the Law’ 1998 60 Law and Contemporary Problems 101, 110.

123  See the characterization by Finn of the modus of implication of fiduciary duties, as recited by Millett LJ, in Bristol and West Building Society v Mothew [1997] 2 WLR 436, [1998] Ch 1, 18 observing: ‘As Dr. Finn pointed out in his classic work Fiduciary Obligations (1977), p. 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.’

124  cf Finn, Fiduciary Obligations (n 102) 12, observing that, if the principal controls the way the service provider exercises his powers, ‘there is no compelling reason for Equity to protect him by imposing a general obligation on his functionary having a similar object’. See further for a discussion of the American doctrine, Scott (n 105) 540 (noting that ‘the greater the independent authority to be exercised by the fiduciary, the greater the scope of his fiduciary duty’), and DeMott, ‘Beyond Metaphor’ (n 107) 901 (suggesting that ‘even a designated ‘trustee’ may not have fiduciary duties if he entirely lacks authority and thus has no discretionary power’).

125  See paras 1.44ff (on the creation of agency powers for certain investment firms).

126  See Finn, Fiduciary Obligations (n 102) 10. Further, see Lloyds Bank Ltd v Bundy [1975] 1 QB 326 (the court found that the high street bank owed fiduciary duties to a retail customer since the customer had justifiably relied implicitly on the bank’s recommendation to increase the bank’s loan to a family member, which loan was secured by a mortgage on the customer’s residential property). See Bamford (n 101) paras 7.58–7.63 for an insightful discussion of the case.

127  Springwell (n 15) [573]. See for a discussion, McMeel and Virgo (n 17) paras 8.11–8.12.

128  See Moloney (n 86) 800, and Enriques and Gargantini (n 54) para 4.73, who may possibly have been inspired by Moloney’s choice of term. See also Hudson (n 3) 10–17, who observes that

the conception of Millett L.J. that there must be a “relationship of trust and confidence” chimes … with the entire purpose of the conduct of business regulation which is that the investment firm is an organization which must act in the best interests of its client and on whose advice the client is entitled to place reliance: that is a relationship of trust and confidence, which would therefore appear to be fiduciary in nature.

129  Article 24(10) of MiFID II.

130  Notwithstanding the fact that the organizational rules relating to preventions of conflicts of interest of art 16(3) of MiFID II now include organizational rules relating to product governance. It suggests that the EU legislator is cognisant of the fact that management of conflicts of interest is part and parcel of product governance, it does not necessarily change the character of product governance as primarily an instrument aimed at ensuring suitability of the product for a target market. For a different opinion, see Stefan Grundmann and Philipp Hacker, ‘Conflicts of Interest’ in Danny Busch and Guido Ferrarini (eds), Regulation of EU Financial Markets—MiFID II and MiFIR (OUP 2017) para 7.37.

131  See para 4.56 above.

132  See paras 4.68ff below.

133  See art 23(1) of MiFID II, in fine, which provides that investment firms must ‘take all appropriate steps to identify and to prevent or manage conflicts of interest … including those caused by the receipt of inducements from third parties or by the investment firm’s own remuneration and other incentive structures’.

134  Keith Clark, ‘Overview’ in Keith Clark (ed), Conflicts of Interest—Jurisdictional Comparisons in the Law and Regulation for the Financial Services, Auditing and Legal Professions (The European Lawyer 2005) iii.

135  Grundmann and Hacker (n 130) para 7.03.

136  Recital (45) of MiFID II Delegated Regulation (EU) 2017/565.

137  See paras 4.50ff above.

138  [1967] 2 AC 46. See for a discussion Bamford (n 101) paras 7.64–7.71.

139  The earlier decision in Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, took centre stage in the considerations in Boardman v Phipps. Lord Russell of Killowen said in Regal at 144G–145A (emphasis added):

The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.

140  Phipps (n 138) 104.

141  Article 16(6) of MIFID II and art 36 of Delegated Regulation (EU) 2017/565.

142  Rules about remuneration of staff of an investment firm and rules about ‘inducements’, ie monetary and non-monetary benefits received from or provided to third party firms by an investment firm in the context of its investment business, comprise species of conflict rules sub-paras (a) and (e), respectively, of art 33 of MiFID II Delegated Regulation (EU) 2017/565 and will be discussed separately in the sections C2 and C3.

143  Howard Davies, ‘Conflicts of Interests for Banks, Auditors and Law Firms’ in Keith Clark (ed), Conflicts of Interest—Jurisdictional Comparisons in the Law and Regulation for the Financial Services, Auditing and Legal Professions (The European Lawyer 2005) xvi.

144  Article 23(2) of MiFID II.

145  Article 34(4) of Delegated Regulation (EU) 2017/565. See further ESMA, Final Report—ESMA’s Technical Advice to the Commission on MiFID II and MiFIR (ESMA/2014/1569) 80ff.

146  Article 34 (Conflicts of interest policy) of Delegated Regulation (EU) 2017/565.

147  Phipps (n 138).

148  Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits.

149  Article 11(2)(a) of Delegated Directive (EU) 2017/593.

150  Article 11(2)(b) of Delegated Directive (EU) 2017/593.

151  Article 11(2)(c) of Delegated Directive (EU) 2017/593.

152  See Walker and Purves (n 45) para 18.92.

153  See Larissa Silverentand et al, ‘Inducements’ in Danny Busch and Guido Ferrarini (eds), Regulation of EU Financial Markets—MiFID II and MiFIR (OUP 2017) paras 8.18–8.36.

154  Article 24(8) of MiFID II refers to inducement received from ‘third parties’ and art 24(9) to inducements to or from ‘any party’. Although the drafting distinction prima facie suggests that intra-group payments might not be payments from a ‘third party’, it is clear from the use elsewhere of the term ‘independent third party’ that ‘third party’ means a party other than the investment firm itself, see eg Recital 75 of MiFID II, which refers to an ‘independent third party’ as a third party ‘who has no connection with the investment firm regarding the investment service provided to the client and is acting only on the instructions of the client’. ESMA, previously CESR, confirmed that to be the position under MiFID I, see CESR, Inducements under MiFID—Recommendations (Consultation Paper No CESR 07-228b, 2007), and MiFID I best practices document, see CESR, Inducements: Good and Poor Practices (Feedback Statement No CESR/10-29619, 2010) that intra-group payments are in-scope inducements. See for a discussion Silverentand et al (n 153), para 8.10.

155  Silverentand et al (n 153), 8.40.

156  Paras 4.62ff above.

157  Investment firms within the meaning of 4(1)(1) of MiFID II which are authorized to provide the ancillary service referred to in point (1) of Section B of Annex I to MiFID II (safekeeping and administration of instruments), which deal on own account, underwrite, or place instruments, or which are permitted to hold money or securities belonging to their clients and which for that reason may not at any time place themselves in debt with those clients are ‘institutions’ within the meaning of Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, [2013] OJ L176/338 (‘Capital Requirements Directive’, CRD IV) and Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012 (‘Capital Requirements Regulation’, CRR) and therefore subject to prudential supervision under CRD IV and CRR, see art 3(1)(3) CRD IV in conjunction with art 4(1)(2)(c) CRR.

158  Article 74(3) and 75(2) of CRD IV instruct EBA to issue further guidelines on remuneration policies, see European Banking Authority, Guidelines on Sound Remuneration Policies under Articles 74(3) and 75(2) of Directive 2013/36/EU and Disclosures under Article 450 of Regulation (EU) No 575/2013 (EBA/GL/2015/22, 2016).

159  See art 92(2) of CRD IV.