Fiduciary Duties of Investment Intermediaries

Current project status

  • Initiation: Could include discussing scope and terms of reference with lead Government Department
  • Pre-consultation: Could include approaching interest groups and specialists, producing scoping and issues papers, finalising terms of project
  • Consultation: Likely to include consultation events and paper, making provisional proposals for comment
  • Policy development: Will include analysis of consultation responses. Could include further issues papers and consultation on draft Bill
  • Reported: Usually recommendations for law reform but can be advice to government, scoping report or other recommendations

This project is complete. In October 2014, the Government accepted the majority of our recommendations

Our report, published on 1 July 2014, looks at the investment market through the lens of pensions.  It considers how fiduciary duties currently apply to those working in financial markets, and clarifies how far those who invest on behalf of others may take account of factors such as social and environmental impact and ethical standards.

The Government’s response is set out in its Progress Report on Implementing the Kay Review.

The reasons for the project

In July 2012, Professor John Kay published his Review of UK Equity Markets and Long-Term Decision Making.  This concluded a year-long review, commissioned by the Department for Business Innovation and Skills, tasked with considering the functioning of UK equity markets.

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

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

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

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

On 22 November 2012, the Government published its response to the Review, in which it stated it supported the Kay Review’s analysis and conclusions. This project is commissioned jointly by BIS and DWP to give effect to the Review’s recommendation. The scope of our project is set out in the terms of reference.

Initial work

We started this project in March 2013.  We began with a short paper setting out our project and seeking initial views.  We are grateful to those who responded.  Details of the responses are set out in the consultation paper.

The consultation

We published a Consultation Paper in October 2013. During the consultation period we attended several consultation events, where we received a wide range of views on various aspects of our proposals.

We received 96 responses to the Consultation Paper, from a range of different individuals and organisations. These responses are available on this page.

Our recommendations

The report does not focus on recommendations for legislative reform. Its primary aim is to explain the nature of fiduciary and other duties to act in the best interests of savers, and to describe how these duties apply to investment intermediaries.

The report concludes that trustees should take into account factors which are financially material to the performance of an investment. Where trustees think ethical or environmental, social or governance (ESG) issues are financially material they should take them into account.

However, while the pursuit of a financial return should be the predominant concern of pension trustees, the law is sufficiently flexible to allow other, subordinate, concerns to be taken into account. We conclude that the law permits trustees to make investment decisions that are based on non-financial factors, provided that:

  • they have good reason to think that scheme members share the concern; and
  • there is no risk of significant financial detriment to the fund.

Guidance for trustees

Alongside the report, we have published a short guidance document of six pages. We would encourage people to circulate this document to trustees and other interested parties.

We recommend that the Pensions Regulator consider how the guidance we have set out can be given greater exposure and authority. In the longer term, we recommend that that the Pensions Regulator include our guidance in one of its codes of practice.

Other recommendations: pensions

Our report does not recommend statutory reform of the general law of fiduciary duties, or its codification. However, we do recommend some changes to the Occupational Pension Schemes (Investment) Regulations 2005 and the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009.

Our report also welcomes the Government’s announcement that from April 2015, all providers of contract-based pensions will be required to operate independent governance committees (IGCs) to assess the value for money delivered by these schemes and report on how they meet quality standards.  We recommend that:

  • IGCs should owe a statutory duty to scheme members to act, with reasonable care and skill, in members’ interests. This duty should not be excludable by contract; and
  • pension providers should be required to indemnify members of their independent governance committees for any liabilities they incur in the course of their duties.

We also recommend that the Financial Conduct Authority consider whether IGCs need further guidance in interpreting the interests of members in default funds.

The Government has also announced that, from April 2015, there will be a charge cap for default funds in schemes used for auto-enrolment in April 2015. This cap will not apply to transaction costs. We think that here is a possibility that this may create inappropriate incentives to trade. We recommend that, as part of its review of the charge cap in 2017, the Government should specifically consider whether the design of the cap has incentivised trading over long-term investment.

Other recommendations: the rest of the investment chain

Our report also considers the rest of the investment chain, looking in particular at investment consultants, stock lending and intermediated shareholding.  We have decided not to recommend a review of the regulation of investment consultants. However, we recommend that:

  • stock lending fees should be considered alongside the review of the default fund charge cap in 2017; and
  • the Government should review the current operation of the system of intermediated shareholding, with a view to taking the lead in negotiating solutions at a European or international level.


Former Law Commissioner David Hertzell, who led on the project, discusses the conclusions of our report.
Documents and downloads

Project details

Area of law

Commercial and common law


Stephen Lewis