Claudine Siou is senior technical services manager at IOOF. Claudine has over 20 years’ experi-ence in the superannuation and financial services industry, including over 15 years’ in technical roles at ING and ANZ.
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You may have heard of fiduciary duty in various contexts and know that it arises in a relationship between people, typically when one person owes a ‘fiduciary duty’ to the other.
Fiduciary duty is a general law principle which has developed through case law. In contrast with laws enacted by legislation, legal principles developed through cases are often not easily understood. This means recognising the nature of a fiduciary relationship is not always immediately clear and obvious.
In this article, we explain what fiduciary duty is and how conflicts should be avoided or if they can’t be avoided, how they should be managed. We also explain what a power of attorney is and how it differs from an enduring power of attorney, and how fiduciary duty interacts with a power of attorney or an enduring power of attorney.
What is a fiduciary duty?
The word ‘fiduciary’ derives from the Latin word ‘fiducia’, which means confidence. The fiduciary is the person with whom confidence is placed and who owes a fiduciary duty to the person who is a beneficiary or principal. A fiduciary duty is imposed on the fiduciary to prevent them possibly abusing the confidence or trust of the beneficiary or principal.
A fiduciary undertakes to act in the interests of the principal or beneficiary. A fiduciary has a duty of undivided loyalty to the beneficiary or principal. The core obligation of a fiduciary is not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict.
Conflicts of duty and interest
The application of fiduciary duty arises in situations where there is a conflict between the fiduciary’s duty to the beneficiary or principal and their own interests. A fiduciary has an interest if they could possibly benefit financially from a decision they take or from a transaction which they make that is within the scope of the fiduciary’s duty.
Undivided loyalty requires that in situations of conflict of duty and interest, a fiduciary’s duty is not to act in a way that is not in the interests of the beneficiary or principal.
The reason for the rule against conflicts is a moral one. Given what we know of human nature, there is a danger of a person who holds a fiduciary position being swayed by self-interest rather than duty, harming the beneficiary or principal they are duty bound to protect. In situations of conflict between duty and self-interest, duty must always prevail.
Fiduciary duties prohibit a fiduciary from taking a benefit where:
there is a conflict (or a significant possibility thereof) of personal interest and duty; or
a benefit arises by use of the fiduciary position (or of an opportunity or knowledge resulting from it).
An example of a conflict of personal interest and duty could be an attorney appointed under an enduring power of attorney who makes a gift of the principal’s property to themselves or their loved ones.
An example of a benefit arising from the use of the fiduciary position could be a company director diverting a business opportunity of the company to his or her personal advantage.
Avoiding conflicts of duty
A fiduciary has a duty to avoid conflicts of competing duties. Typically, a conflict of duty arises in situations where the fiduciary is acting simultaneously for two competing beneficiaries or principals. Examples of where a conflict of duty may arise are:
a lawyer may be acting for two clients – a wife and husband who have separated – in a family law settlement;
a real estate agent may be acting as an agent for both the buyer and seller; or
an employee may be employed by two employers with potentially conflicting interests.
A fiduciary is not liable for breach of fiduciary duty if the act was done with the fully informed consent of the beneficiary or principal. Informed consent requires full and frank disclosure of all material facts.
Nature of fiduciary duty
Fiduciary duties are traditionally viewed as proscriptive, that is negative, rather than prescriptive, or positive, duties. A fiduciary duty does not impose positive duties to ‘act’ in the interests of the beneficiary or principal, rather a fiduciary cannot act in a way that is not in the interests of the beneficiary or principal. In effect, fiduciary duties tell the fiduciary what not to do, not what they have to do.
The scope of a fiduciary duty is determined by the nature of the relationship between the fiduciary and beneficiary or principal and the facts. The scope of a specific fiduciary duty requires an understanding of what the fiduciary undertakes to do in the interests of the beneficiary or principal.
Fiduciary duties are strict, which is often not commonly recognised. In this case, strict means if they are breached, liability results irrespective of intent to defraud or whether any loss is suffered by the principal. Strict liability has a preventative effect by reducing the temptation to act in ways other than in the interests of the beneficiary or principal.
Nature of fiduciary relationships
A fiduciary relationship is often called a relationship of trust and confidence. There is no single test for determining whether a fiduciary relationship exists, however, generally the signs of a fiduciary relationship existing include:
relationship of trust and confidence;
inequality of bargaining power;
undertaking by one party to perform a task or fulfil a duty in the interests of another party;
the scope for one party to unilaterally exercise a discretion or power that may affect the rights or interests of another; and
dependency or vulnerability on the part of one party that causes that party to rely on another party.
According to case law, the critical feature of fiduciary relationships is: “…that the fiduciary undertakes or agrees to act for or 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.”1
Relationships that are generally accepted as fiduciary include:
Trustee and beneficiary (the classic fiduciary relationship);
Business partners (owe fiduciary duties to each other);
Principal and agent (for example, real estate agents and powers of attorney);
Director and company;
Employee and employer (generally, employees in a managerial capacity);
Solicitor and client; and
Guardian and ward.
It can be misleading to talk about fiduciary relationships, because not all aspects of these relationships are fiduciary in nature. If a contract or legal instrument exists between the parties, then fiduciary duties will only arise in aspects of the relationship that are not covered by the contract or legal instrument. It is the contract or instrument that regulates the rights and obligations of the parties and a fiduciary relationship must mould itself to the terms of the contract or instrument.
When does a financial planner have a fiduciary relationship with a client?
A fiduciary relationship arises between a financial planner and a client when the planner holds him or herself out as an expert on financial matters and undertakes to perform a financial advisory role for the client.
The statutory fiduciary obligation for financial planners to act in the best interests of their client or give priority to the client’s interests if their interests conflict, is outside the scope of this article.
However, it is worth noting that Standard 3 of the Financial Adviser Standards and Ethics Authority’s (FASEA) Code of Ethics prohibits a financial planner from acting where the planner has a conflict of interest or duty. Disclosure of interests and obtaining the client’s consent will not relieve financial planners from the duty to comply with Standard 3. General law, on the other hand, negates a breach of fiduciary duty where the client has given their fully informed consent.
Given the heavy burden of full disclosure at general law on a financial planner who offers the client an investment in which the planner has a financial interest, FASEA’s approach is a practical one.
Powers of attorney
Powers of attorney have been used for hundreds of years. A power of attorney gives power to a person (the attorney) to make financial and legal decisions on behalf of the donor or principal. The attorney acts in a representative character in the exercise of their responsibility.
A power of attorney is an ‘agent and principal’ relationship, which is an accepted fiduciary relationship. A general power of attorney ceases when the principal loses capacity. During the term of the appointment, the principal has capacity and can supervise decision-making by the attorney.
Enduring powers of attorney
Enduring powers of attorney are a form of agent and principal relationship, so it does create a fiduciary relationship. Fiduciary duties protect the principal, who is often elderly and vulnerable to financial abuse due to their loss of capacity, by preventing the attorney from placing themselves in a position of conflict or from obtaining a benefit from the position.
In response to a need for people to be able to appoint someone to manage their financial affairs after they lose capacity, the states and territories enacted legislation in the 1980s that enabled a principal to make an enduring power of attorney, so the power of attorney continues or ‘endures’ after the principal loses capacity.
A principal who loses capacity can no longer supervise decision-making by the attorney and the attorney can make decisions without reference to the principal. Safeguards to protect a vulnerable principal are therefore necessary.
Statutory fiduciary obligations
Some state and territories have statutory fiduciary obligations in their power of attorney legislation, which generally don’t affect the attorney’s fiduciary duty under general law. Statutory fiduciary obligations prohibit the attorney from entering into unauthorised conflict transactions, making unreasonable gifts or acting in a way that results in benefits being conferred on the attorney or third party, which are not expressly authorised in the instrument.
Fiduciary duty and enduring power of attorney
General law principles of fiduciary duty are a common safeguard in all states and territories, to protect a vulnerable and incapacitated principal from financial abuse by the attorney.
The relationship between an attorney and principal is ‘agent and principal’, an established fiduciary relationship, which is clearly fiduciary in nature. The relationship is one of trust and confidence. The principal is in a position of disadvantage or vulnerability, which causes them to rely on the attorney and requires the protection of the attorney. The attorney must not place their self in a position of conflict, or obtain a benefit from the position, without first obtaining fully informed consent. Where a principal who lacks capacity can no longer give fully informed consent, authorisation may be obtained via an order of the court or the state or territory tribunal.
Scope of fiduciary duty
Fiduciary duties regulate how the attorney may exercise powers given by the principal. However, the terms of the instrument creating the enduring power of attorney will affect the scope and extent of the fiduciary duty and not the other way around.
The scope of the fiduciary duty requires consideration of what the attorney undertakes to do in the interests of the principal. The undertaking is generally set out in express terms, warnings and notices of responsibilities in the instrument. Generally, an attorney cannot, in the absence of a clear power to do so, make presents to him or herself or to others of the principal’s property.
However, the undertaking upon appointment might clearly provide that the attorney can act in a manner that confers benefits on the attorney, or enter transactions in which the attorney’s duty and interest conflict or permit the attorney to make gifts.
In New South Wales, an instrument which expressly authorises the attorney to act in a way which could confer a benefit on the attorney, authorises the attorney to act ‘other’ than in the interests of the principal (that is, in the interests of the attorney). This is an example of how the scope of fiduciary duty of an attorney may be governed by the terms of the power of attorney.
Breach of fiduciary duty generally occurs where the attorney takes a benefit for him or herself from the exercise of power, not expressly authorised by the instrument creating it. Fiduciary duty may also be breached when the attorney uses the principal’s assets to make gifts to third parties on behalf of the principal when those gifts are not authorised by the power.
The role of the financial planner
Financial planners must understand how fiduciary duty operates and the impact it can have on their clients. Fiduciary duties play an important role in preventing principals suffering financial harm. A fiduciary duty will arise in situations of conflict, between the fiduciary’s interests and the principal’s interests, or between competing duties.
For a financial planner in these situations, the best course of action is to be guided by the duty of undivided loyalty to the principal and to accordingly always act in the principal’s interests.
1. What are indications that a fiduciary relationship exists?
a. Vulnerability that causes reliance, and ability to exercise power that affects legal or financial interests.
b. Inequality of power, exercise of discretion to affect legal or financial interests, and confidential information.
c. An undertaking by one party to act in the interests of another that is not governed by a contract.
d. A special opportunity to exercise power in a representative capacity, and the exercise of unlimited discretion.
2. Do all aspects of a fiduciary relationship involve fiduciary duties?
a. Yes, fiduciary duties cover all aspects of a fiduciary relationship.
b. No, fiduciary duties only cover aspects of the relationship that are not governed by a contract or instrument.
c. Yes, fiduciary duties only arise in established fiduciary relationships.
d. No, fiduciary duties only cover aspects of a fiduciary relationship where the principal is in a position of disadvantage in relation to the fiduciary.
3. Margaret is preparing recommendations for her client as part of the annual review process. However, her principal is suggesting recommendations that she doesn’t believe are in the best interests of her client. What are Margaret’s key fiduciary duties?
a. Not to be in a position of conflict, and not to act if the interests of the fiduciary and principal conflict.
b. To act in the best interests of the principal and to not receive a benefit under any circumstances.
c. Not to act in way that is not in the interests of the principal and not to receive a benefit from the position, unless the principal gives informed consent.
d. To act in the interests of the principal and only receive authorised remuneration.
4. What determines the scope of a fiduciary duty?
a. The terms of the contract or instrument determine the scope of the fiduciary duty and not the other way around.
b. The established fiduciary duties that apply to established fiduciary relationships.
c. The scope of the undertaking by the fiduciary to act in the interests of the principal.
d. The scope of a fiduciary duty is limited to not acting in a way that is not in the interests of the principal.
5, David has been a client of his planner, Wendy, for 20 years. However, Wendy has noticed a gradual loss of David’s mental capacity over the past seven years. At the age of 80, David is deemed to have lost his capacity.m In this instance, why are fiduciary duties an important safeguard for an elderly client, like David, who has appointed an enduring power of attorney and who subsequently loses capacity?
a. The client is vulnerable and relies on the attorney, who has the power to affect the client’s financial, personal and lifestyle matters.
b. Because the client lacks capacity, they cannot give fully informed consent.
c. The power of attorney gives the attorney the authority to do on behalf of the principal anything that the principal may legally do.
d. The attorney can exercise powers that affect the client’s financial interests without regard to the principal.
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