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ANALYSIS

Is the financial services sector serving the public interest?

Fiduciary law, which creates the boundaries and rules for asset owners managing other people’s money, is evolving. The short-termism, misaligned incentives and complex and over-supply of services that characterises financial services, is under fire.

Regulators around the world are increasingly looking at how to change the behaviour and supply chain dynamics in the industry, and at the same time the evolution of fiduciary law is also providing something quite different – creating the distinction between doing things right or complying with the legal rules, and doing the right thing. Doing the right thing, or a guiding sense of social purpose, is what is needed if the market system is able to continue to have enormous potential.

These are the views of Ed Waitzer, who is professor and Jarislowsky Dimma Mooney Chair in Corporate Governance at the Osgoode Law School at York University in Toronto, who believes that the finance sector should be proactive in shaping the trend.

He says that the trajectory of the law is clear, that regulators and legislators (and courts) are expanding fiduciary duties based on reasonable expectations that the financial sector should serve the public interest.

In an article in the Rotman International Journal of Pension Management last fall, he and co-author Douglas Saro, who is an associate of Sullivan and Cromwell, outline five initiatives that they believe if implemented “would materially raise the perception and reality of the financial sector’s social utility around the world”.

  1. Rethink fiduciary duty. The fiduciary of the future will recognise and follow through on responsibilities to preserve and support the institutional system in which the fiduciary is embedded, including a duty to ensure that externalities are properly priced and moral failures are addressed. This will require a shift away from the zero-sum perspective that for a financial institution to win the client must lose, and toward a fiduciary culture with a clearly articulated and generally accepted public purpose.
  2. Foster win/win collaborations. This includes collaborations between investors and corporations and the sharing of costs between multiple parties.
  3. Create legal mechanisms to protect future generations
  4. Rethink regulation
  5. Reassert the social utility of the financial sector.

The article Reconnecting the financial sector to the real economy – a plan for action outlines how institutions can shift from reactive to proactive regulatory and compliance strategies.

Ed Waitzer will speak about fiduciary duty and law at the Fiduciary Investors Symposium at the Chicago Booth School of Business from October 18-20.

He will speak on a panel regarding fiduciary responsibility alongside:

Sharan Burrow, general secretary, International Trade Union Confederation

Colin Melvin, chief executive, Hermes EOS

Beth Richtman, portfolio manager – infrastructure and global governance, CalPERS

Martin Skancke, chair of PRI and chair of the expert group on investments in coal and petroleum companies, appointed by the Norwegian Ministry of Finance

www.fiduciaryinvestors.com

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