UK – Trustees cannot be expected to take investment risk while the definition of 'fiduciary duty' – and to what extent the term allows or disallows trustees from investing in a long-term fashion – remains unclear, the head of the London School of Economics' Sustainable Finance Project has said.

Speaking with IPE after the UK's Law Commission announced a review of the term and whether it hinders long-term investing, Roger McCormick of the Department of Law warned that there would be no "magic solution" to the problems plaguing the financial industry if the duty was codified into law, rather than simply being interpreted through case law.

He noted that the current problem stemmed from confusion as to what fiduciary duties entailed.

"From time to time, you hear suggestions and ideas about fiduciary duty, which tend to point the law in different directions," he said.

"You have the ESG [environmental, social and governance] community wanting to have a more liberal interpretation of what the duties are.

"Then you have other people looking at investment banks selling dodgy-looking derivatives products to people that they call 'muppets', and maybe feel that a higher level of duty should be imposed in situations like that."

The academic and former arbitrator said it would not be possible to find a "magic solution" to such problems simply by applying fiduciary duty.

"You have to break the questions down in a more analytical fashion, almost forget the label 'fiduciary duty' and focus on what the substance of the duty should be," he said.

"You can't expect trustees to take risk in this area if the law isn't reasonably clear – they are not going to be interested in sticking their necks out."

He explained that the Law Commission's review would allow for a "considered, objective" analysis of what the current interpretation of the law entailed.

"With that as a background, we can have a more enlightened debate on the political aspects – and there are a lot of them," McCormick said.

"This is all about what you do with other people's money – you can't get more political than that."

However, he warned against introducing a definition of the duty onto the statute book, noting that there would need to be significant flexibility to any such law to allow it to develop as behaviour in the financial sector changed.

"It's very difficult to lay down a hard and fast rule that will work for decades to come," he said.

For more on the Law Commission's review of fiduciary duty, see the May issue of IPE.

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