Banking Law Typical Case - Essay Example

? Essay Question 2: Alice vs Beatrice When Alice deposited 100,000 pounds with Beatrice’s firm and appointed Beatrice to act as her financial advisorin building her investment portfolio, a fiduciary relationship was created. A fiduciary relationship typically arises when one party transfers money to another and confers upon the recipient/holder of the funds discretionary powers to improve and protect the beneficiary’s interest in the funds transferred.1 There was no doubt that Alice intended for Beatrice to protect and advance the funds she transferred to Beatrice. Alice was uncertain about how to manage her inheritance and made a conscious decision to hire Beatrice, who was her friend, but was also a financial advisor to specifically build a financial portfolio. Alice then deposited the funds with Beatrice’s firm and did not give the funds to Beatrice. Thus Alice clearly intended to rely on Beatrice’s expertise as a financial advisor. In a typical case, where a fiduciary relationship is created such as the one between Alice and Beatrice, the fiduciary’s (Beatrice) discretion to manage the funds is limited by contract.2 The terms of the contract are not revealed by the facts of the case for discussion. The only know term is stated in broad terms: to build an investment portfolio. Regardless, fiduciary duties are typically provided for in standard contract forms. These duties usually include the no conflict rule, a duty of loyalty, the rule against personal profits and confidentiality rules.3 Despite the fact that the fiduciary duties are typically detailed in the standard form of contract, the fiduciary remains bound by the principle fiduciary duty of good faith.4 Frase advises however, that financial institutions such as banks are not typically regarded as fiduciaries in the ordinary course of their duties. In such a case, the relationship between the banker and the client is regulated by contract, leaving the client limited to remedies for negligence or breach of contract.5 However, financial advisors like all other members of the banking and investment market can be held to a fiduciary duty which operates outside of the contract with the client. According to Frase, in this regard, the fiduciary duty is “fact-based”.6 In other words, whether or not Beatrice, as a financial advisor is a fiduciary will turn on the particular facts of the case. As Lord Upjohn stated, it is necessary to evaluate all of the “facts and circumstances” to ascertain whether or not the agent in question is a fiduciary.7 Lord Upjohn went on to state that: The relationship must then be examined to see what duties are thereby imposed on the agent to see what is the scope and ambit of the duties.8 Lord Wilberforce also stated that the exact nature of the fiduciary’s duties “must be moulded according to the nature of the relationship”.9 Frase explains that where a bank provides the ordinary services of receiving deposits or extending loans, it would not typically have a fiduciary relationship with its clients. However, the moment the bank goes beyond those contracted services, a fiduciary relationship will most often arise. For example in the event the bank or one of its agents, uses confidential information for its own use, a fiduciary duty arises.10 A fiduciary duty will also arise where the bank has a conflict of interest.11 It can be argued that Beatrice made personal use of confidential information connected to Alice’s account. Beatrice knew the details of Alice’s account and while she did not pass their information on to others, she used that information to access Alice’s account. Moreover, there is no doubt that a conflict of interest arose since Beatrice was concerned about her own financial difficulties and desires and put those ahead of her client’s interest: to build an investment portfolio. The definition of a fiduciary as provided by Asquith LJ clearly captures the essence of Beatrice’s relationship with Alice. As Asquith LJ stated, a fiduciary duty arises when a party puts his or her trust in another with respect to property and depends on that party to treat and deal with the property transferred for the donor’s benefit or for specific purposes and for no other purpose or for the performance of a particular job, trusting that the party will ensure the best returns possible.12 On the facts of the case for discussion, Beatrice has a fact-based fiduciary duty to Alice since, Alice relied on Beatrice to build her financial portfolio and for no other purpose when she deposited her money with Beatrice’s firm and appointed Beatrice as her financial advisor. The fact that Beatrice was her friend is only relevant in the sense that Alice trusted Beatrice to deal with and treat her funds for Alice’s benefit and that Beatrice would undertake to ensure that Alice received the best possible returns on her funds. Moreover, Southin J. stated in Giradet v Crease & Co. that: ...an allegation of breach of fiduciary duty carries with it the stench of dishonesty – if not of deceit then of constructive fraud.13 Regardless, Frase explains that a financial advisor is usually held to have a fiduciary duty to his or her client on the basis that the financial advisor is an expert to his or her client who relies on the expert advice of the financial advisor.14 It appears however, that Beatrice is much more than a financial advisor and might be best described as an investment manager. According to Frase, an investment manager is one who the client trusts with the client’s property and holds the legal title to the property either personally or via a delegate and the client is the beneficiary of that property.15 Alice deposited the funds with Beatrice’s firm and while it is not known whether or not, she held the legal title to the property, there is evidence that the firm and Beatrice had legal and actual custody of Alice’s funds. The evidence arises out of the fact that the firm held the deposit and Beatrice had full access and control of the deposit. Moreover, since Beatrice was appointed to build Alice’s investment portfolio, it can be assumed that Beatrice had legal title to the funds and direct access to the funds. Frase notes that, that holder of the account has a “simple form of fiduciary relationship”.16As the “custodian” of property belonging to another, the custodian “is a trustee of that property”.17 Another feature of the investment manager that is consistent with Beatrice’s relationship with Alice is the fact that an investment manager has “unilateral power” with respect to the investment manager’s power to “control and take decisions which affect the client’s assets”.18 In this regard the investment manager is required to act in the interests of his or her client. 19 It therefore follows that both the no conflict and no profit rules are relevant to Alice’s claim against Beatrice for breach of fiduciary duties since Beatrice’s behavior was arguably not in Alice’s interest nor was Beatrice’s behavior beneficial to Alice. The purpose of the no conflict rule is to ensure that fiduciaries do not allow conflicts tween their duties and their interests’ to coincide.20 The no profit rule operates to safeguard against the fiduciary misusing the property entrusted to him or her.21 In fact, the no conflict rule and the no profit rule often overlap. For example it was ruled in Bray v Ford that: It is an inflexible rule of a Court of Equity that a person in a fiduciary position...is not unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict.22 Beatrice clearly put herself in a position where her interest and duty conflicted. However, a strict definition of the no profit rule leaves open the possibility that Beatrice did not breach her fiduciary duty. Oliver LJ ruled in Swain v Law Society that the no profit rule is guided by the principle that making a profit in the absence of authorization constitutes a breach of fiduciary duties since the profit made is for all intents and purposes the profit of another.23 It is not altogether clear whether or not Beatrice did not make a profit in some of her transactions with Alice’s money. Obviously the payment of 1000 pounds to a charity was not for the purpose of receiving a profit as Beatrice cannot realistically expect a return on that investment. Paying off credit card outstanding balances and paying mortgage are not for the purpose of making a profit, but merely to satisfy outstanding financial obligations. It is less clear whether or not the transfer of 5, 000 pounds to Cedric’s bank in Bermuda is a contravention of the no profit rule. Beatrice admitted that she wanted to 5,000 pounds to sit in Cedric’s bank as a means of attracting higher interests on the funds. It is not known (based on the facts of the case for discussion) whether Beatrice intended to earn the interest on those funds for Alice’s benefit. If this is the case, Beatrice did not commit a breach of her fiduciary duties with respect to the 5,000 pounds. However, informed by Beatrice’s behaviour with respect to the use of the 20,000 pounds, it can be assumed that she was using the 5,000 pounds for her own personal interests. Likewise, it is not altogether clear whether or not Beatrice purchased the share for her own personal gain or for Alice’s sake. Since this was a part of the 20,000 pounds that Beatrice misused it can also be assumed that the shares were purchased for Beatrice’s benefit and not for Alice’s benefit. The payment of the previous 20 premiums for an endowment policy which will pay Beatrice 50,000 pounds upon maturity is arguably a profit. In order for Beatrice to escape liability for a breach of fiduciary duty on the basis of the no profit rule, she will have to prove to the satisfaction of the court, that the investment for profit were authorized by either the contractual terms with Alice and/or that she had authorization to do so.24 However, no such authorization was requested nor given. In fact, Alice did not even know that the funds had been withdrawn and used the way that Beatrice used the funds. Alice cannot authorize something that she does not know took place. According to the court’s decision in Sargeant v National Westminister Bank Plc., in the event fiduciary makes a profit in contravention of the no profit rule, he or she is accountable for the profit made.25It therefore follows that in the event the court finds that the funds invested in the shares or the deposit made to Cedric’s offshore bank account or the purchase of premiums were invested for Beatrice’s own gain or profit, the court will make an order demanding Beatrice pay these profits to Alice. Whether or not Beatrice acted fraudulently or under the misguided presumption that Alice would not object to Beatrice making a personal profit with Alice’s money, will not make a difference to Alice’s claim that Beatrice breached her fiduciary duties. It was ruled in Boardman v Phipps, that when fiduciaries make profits the must account for the profits whether or not fraud was involved. Moreover, it does not matter that Beatrice might have been acting bona fides, since making a profit demonstrates a conflict of interest.26 As stated in Aberdeen Railway v Blaikie: ...it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.27 Subsequent rulings suggest that the no conflict rule may no longer be strictly applied. For example in Murad v Al-Saraj it was held that liability for a contravention of the no conflict rule should only be established in cases where there was some measure of fault on the part of the fiduciary.28 The court ruled in a similar way in a subsequent case.29 Therefore given the close relationship between the no conflict rule and the no profit rule it is clear that liability for the misuse of the funds on the basis that such misuse was a breach of fiduciary duties because it contravened the no conflict and no profit rules will only be established if Alice can prove that there was some fault on Beatrice’s fault. It is submitted that Alice will have no difficulty proving Beatrice’s fault since she did not authorize Beatrice using the funds to pay off bills, mortgages and premiums for her own personal gain. Nor did Alice authorize Beatrice to donate her money to charity. It is certainly unlikely that Alice authorized Beatrice to deposit 5000 pounds to Cedric’s offshore bank account. In fact, Alice had no prior knowledge of the use of funds by Beatrice. The guiding principle is clearly expressed in Regal (Hastings) v Gulliver and Ors. In this case, the court ruled that whenever an individual is deemed to be a fiduciary, and takes advantage of his or her fiduciary position to make a profit. In such a case, the fiduciary must account of any profits made.30 Therefore collectively, the no profit rule and the no conflict rule are standards established to prevent a fiduciary taking advantage of his or her position or making a profit from the assets that he or she are contracted to manage and administer.31 It therefore follows that as either a financial advisor or an investment manager, Beatrice committed a breach of her fiduciary duty when she withdrew 20,000 pounds from Alice’s account of the account held by Beatrice’s firm on Alice’s behalf. The fiduciary duty was breached under the no conflict and no profit rules. Alice is therefore advised to file a petition requesting an account of profits and for damages. A claim for damages can be proved by arguing that the removal of the 20,000 pounds prevented Alice benefitting from a profit if the 20,000 pounds were invested pursuant to her plans to build an investment portfolio. In other words, Alice can seek both compensatory damages and losses together with an account of profits for Beatrice’s breach of her fiduciary duties. Bibliography Aberdeen Railway v Blaikie [1854] 1 Macq 461. Armitage v Nurse [1998] Ch. 241. Attorney-General for Hong Kong v Reid [1994] 1 AC 324. Bray v Ford [1896] AC 44, 51. Broadman v Phipps [1966] 3 All ER 721. Day, M. (2009). “Fiduciary Duties.” Trusts & Trustees, Vol. 15(6): 447-457. Foster v Bryant [2007] Bus LR 1656. Frase, D. (2012). “Specific Issues in the UK’s Financial Service Industry.” In Helm, R. (Ed.). Practitioner’s Guide to Conflicts of Interest in the Financial Services Industry. London, UK: Sweet and Maxwell, Chapter 2. Giradet v Crease & Co.[1987] 11 BCL 361. Helm, R. (2012). Practitioner’s Guide to Conflicts of Interest in the Financial Services Industry. London, UK: Sweet and Maxwell. Keech v Sandford [1726] Sel Cas Ch. 61. Murad v Al-Saraj [2005] EWCA Civ 959. New Zealand Netherlands Society v Kuys [1972] 1 WLR 1126. Reading v A-G. [1949] 2 KB 232. Regal (Hastings) v Gulliver and Ors [1967] 2 AC 134. Sargeant v National Westminister Bank Plc. [1990] 61 P&CR 518 Swain v Law Society [1982] 1 WLR 17. Thornton, P. and Flemming, D. (2011). Good Governance for Pension Schemes. Cambridge, UK: Cambridge University Press. Tito v Waddell (no. 2) [1977] Ch. 106. Read More