AFC Christmas debate: Should intermediaries be fiduciaries?

Sponsored by

Summary

The Asset Finance Connect (AFC) webcast, in association with NETSOL Technologies, hosted a thought-provoking Christmas debate titled: “This house believes that nothing good will come out of the decision to make intermediaries into fiduciaries.” Chaired by Jason Hurwitz, Sales Director – Europe for NETSOL Technologies, the debate brought together two leading voices: John Rees, Head of Equipment Finance Community at AFC, arguing for the motion, and David Betteley, Head of Content at AFC, arguing against. The discussion considered the implications of the recent Court of Appeal motor finance judgment imposing fiduciary duties on intermediaries.

The debate was designed to help members consider the arguments for and against making intermediaries fiduciaries. The debaters were asked to argue a position rather than argue a view with which they necessarily agreed.

The event preceded the Judicial Review judgement.

Background to the debate

AFC CEO Edward Peck characterised the discussions to date on this topic using 3 Cs: complexity, consistency and collaboration. The industry faces complexity when considering whether the ruling applies to the wider industry including asset finance. There is a need for consistency in the industry’s approach. Collaboration is important in finding a route through this crisis – but the need to act collaboratively does not trump the need to debate and identify the best way forward. He stressed the importance of considering fiduciary duty, and not simply commission disclosure. Fiduciary duty obligates intermediaries to prioritise their clients’ best interests over personal or commercial gains.

Peck was concerned that some informed consent statements sought to remove the duty through a blanket disclosure which suggested that brokers were not acting in their customers interests. He suggested this was an extraordinary message to provide to a customer, and that it normalised bad behaviour rather than distinguishing between brokers who were acting in their customers’ best interests and those who were not.

He suggested that the industry might consider whether the informed consent was the right way forward.

The arguments: For and against the motion

For the motion: John Rees

John Rees argued that imposing fiduciary duties on intermediaries was a misunderstanding of the role of an intermediary. Brokers are sales enablers, whose value lies in them acting as an intermediary between customer and lender. By forcing them to represent one side or other they would not be able to provide this important role. He likened intermediaries to shopkeepers rather than doctors or lawyers. Shop keepers balance their own interests with those of their customers. This is unlike the role of a fiduciary – a doctor or a lawyer for example when the overwhelming need is to act solely in the interests of the customer. For example doctors and lawyers provide life-preserving advice, and freedom over prison.

He pointed out that intermediaries are paid for their sales enablement role. They are not paid to get a better deal for a customer. He asserted that their role was well understood by all participants.

Additional points from Rees:

1. Complexity and uncertainty: The ruling’s lack of clarity regarding “sophisticated and unsophisticated customers” increases regulatory and operational burdens. Lenders may struggle to categorise clients, leading to duplicative processes and rising costs.

2. Economic risks: He warned that increased compliance costs might deter intermediaries from the industry, reducing competition and customer choice.

3. Professional roles misaligned: Rees argued that intermediaries are connectors, not fiduciaries, and redefining their role could shift costs to customers. For example, brokers might charge advisory fees akin to lawyers, fundamentally altering the industry model.

4. Regulatory overreach: He cautioned against “regulatory creep” that could erode free market principles, urging the industry to challenge the ruling in the Supreme Court.

Against the motion: David Betteley

David Betteley embraced the fiduciary duty ruling as a catalyst for progress, arguing that it strengthens accountability, transparency, and trust in financial markets.

Key points from Betteley:

1. Enhanced market practices: He asserted that fiduciary standards would deter unethical practices like those seen in the PPI scandal, fostering a fairer and more ethical industry.

2. Customer-centric approach: Fiduciary obligations prioritise client welfare, improving trust and long-term relationships.

3. Operational improvements: While acknowledging transitional challenges, Betteley believed the ruling offers an opportunity to streamline the regulatory landscape and set clear, consistent rules.

4. Mitigating risks: He highlighted how fiduciary duties can prevent conflicts of interest and promote professionalism, making the UK an attractive market for investors.

Betteley also suggested leveraging digital tools, such as AI co-pilots, to ensure transparency and compliance, particularly in interactions with unsophisticated customers.

Audience interaction and insights

Audience questions brought additional perspectives. One delegate, drawing from their medical background, raised concerns that imposing fiduciary duties might give customers a false sense of security. Others questioned the industry’s readiness to handle fiduciary responsibilities, pointing to a lack of training and understanding. Suggestions like employing AI-driven solutions to document and guide customer interactions were also explored.

The verdict

Before the debate, the audience leaned slightly against the motion, with 54% disagreeing that nothing good would come from the fiduciary duty ruling. However, after hearing the arguments, a significant 19% swing led to a final result of 65% in favour of the motion, securing John Rees a bottle of champagne from sponsor NETSOL Technologies.

Conclusion

The debate underscored a critical juncture for the asset finance industry. While Rees successfully rallied support for caution and resistance against fiduciary duties, Betteley highlighted the potential for positive transformation. Ultimately, the webcast illustrated the complexities of balancing customer protection with market efficiency, leaving the industry with much to reflect on as it navigates this regulatory evolution.

Since the AFC Christmas debate webcast, the High Court dismissed Barclays judicial review.

This decision brings the imposition of fiduciary duty on intermediaries closer to reality. Despite the industry’s stance, as emphasised during the recent AFC webcast, to resist accepting fiduciary duty, it now appears highly likely that this battle may be unwinnable.

Watch the AFC Christmas 2024 debate here.