Study On Fiduciary Duty Of Financial Institutions

In the context of increasing complexity and diversification of financial goods and services, and frequent occurrence of misconduct of financial institutions, how can law effectively protect the interests of financial consumers? This issue has aroused wide concern in the academic and practical circles. A feasible path is to set constraints on the fiduciary duty of financial institutions so as to prevent their misconduct and balance the interests between the parties concerned. In order to prove this point of view, this paper analyzes the basis and premise of the existence of financial institutions' fiduciary duty, discusses the necessity of the existence of their fiduciary duty, and summarizes the main content of their fiduciary duty rules. On this basis, this paper reflects on the legislation and current judicial application of business codes of conduct of Chinese financial institutions and provide ideas for improving their fiduciary duty rules.The existence of fiduciary duty of financial institutions is based on the legal relationship about financial consumption between financial consumers and financial institutions. In this relationship, financial consumers often rely on the professional ability of financial institutions for financial consumption due to their lack of sufficient professional knowledge and information ability, which puts them at a vulnerable position. The applicable law of China recognizes the legal relationship about financial consumption as an arm's length relationship, to which the general rules of civil law apply. In the context of increasing diversification of financial institutions' business and the increasingly serious problem of information asymmetry between parties concerned with financial consumption, the rights and obligations between consumers and financial institutions are in a state of imbalance. The general rules of civil law fail to play the role of correcting the unbalanced legal relationship and are difficult to provide effective protection for consumers in a position of vulnerability.Financial institutions bearing fiduciary duty is based on the premise that law can recognize the nature of the legal relationship about financial consumption as a fiduciary relationship instead of the traditional equal transaction relationship. A fiduciary relationship is a legal relationship in which one party(principal) trusts the ability and experience of the other party(fiduciary) and entrusts his/her rights to such party. A fiduciary relationship has four basic characteristics: a) The fiduciary handles matters for the interests of the client; b) The client has a relatively high degree of reasonable trust in the fiduciary; c) The client gives authorization to the fiduciary; and d) The client undertakes risks due to the granting of authorization. The legal rules of a fiduciary relationship have been widely applied in the field of financial consumption. The applicable scope of fiduciary relationship and duty rules is expanding in the legislation of the United States Securities Law, etc. The basic characteristics of a financial consumption relationship are basically in line with those of a fiduciary relationship. As financial consumers give authorization to financial institutions due to trust in their expertise and honesty, a fiduciary relationship is established between them. China's legislation should recognize a legal relationship about financial consumption as a fiduciary relationship and set constraints on the fiduciary duty of financial institutions.The existence of fiduciary duty of financial institutions is necessary. In a fiduciary relationship established based on trust and authorization between the parties concerned, financial institutions may act for pursuit of profit by deviating from the interests of the client and cause damage to the interests of financial consumers, hence the so-called “principal–agent problem”, or “agency problem” for short. The traditional countermeasures against the agency problem include restriction or cancellation of the decision-making power of financial institutions, active supervision, compensation and incentives, etc. However, these traditional paths are not ideal for solving the agency problem. As a reinforcement or replacement of the traditional paths, fiduciary duty rules can complement and improve the incomplete contract between the parties concerned. In other words, fiduciary duty rules are incorporated in the contract as “default clauses” to deter misconduct of financial institutions and alleviate the agency problem arising from the incomplete contract. The fiduciary duty path has advantages such as pertinence, adaptability, flexibility and coerciveness in solving the agency problem in the field of financial consumption. Fiduciary duty can be used in collaboration with contract law rules, market competition, information disclosure, administrative supervision and other preventive mechanisms to strongly curb the misconduct of financial institutions.The core requirements of fiduciary duty for financial institutions are to faithfully and diligently provide services for financial consumers. Fiduciary duty of financial institutions includes four kinds of obligations: a) Loyalty obligation, which means that financial institutions should be faithful to the interests of consumers, try to avoid conflicts of interests with consumers, and shall not seek illegitimate interests through breach of privilege; b) Diligence obligation, which means that financial institutions should be prudent and diligent in handling affairs for consumers, make full use of their professional ability, and not be negligent in the performance of their duties; c) Suitability obligation, which means that financial institutions should make reasonable investigation to gain a full understanding of the characteristics of financial products and consumer attributes before providing consumers with the goods and services suitable for their investment; and d) Explanation obligation, which means that financial institutions should give consumers a complete and accurate explanation of important matters regarding financial goods and services in a way that can be fully understood by them. In a transaction of financial products with a complex structure and high risks, financial institutions have further obligation to inform, remind, warn and suggest consumers.China's existing financial laws, administrative regulations, departmental rules and regulations, and self-disciplinary regulations have set up a series of business behavior rules for financial institutions. The existing standards about financial consumer protection have some shortcomings. First, the lack of cross-financial common behavior norms can easily cause the lack of supervision and legislation in the context of cross-industry business of the financial industry. Second, existing legal norms seldom incline towards the benefits of financial consumers in terms of system design, or set higher standards about the diligence and explanation obligations of financial institutions. Third, the codes of conduct in financial laws are fundamental and abstract, and lack operability, and relevant administrative regulatory norms and self-disciplinary disciplinary regulations cannot provide consumers with the legal basis for seeking civil relief. In judicial practice, the court mechanically uses the caveat emptor principle, which, in addition to the difficulty of obtaining proof, makes consumers struggle in litigation activities.In our future financial legislation, fiduciary duty rules should be positioned as a common code of conduct of financial institutions in order to achieve inclined protection of financial consumers and implement the principle of appropriate protection for consumers. China's legislation should formulate differentiated, multi-level fiduciary duty rules for financial institutions based on existing standards and in reference to foreign legislation experience. The legislation should make clear the suitability obligation of financial institutions, enhance the standard of their explanation obligation, strengthen their loyalty obligation, and define in detail the standards about their diligence obligation. China's legislation should define the civil liability for breach of fiduciary duty as tort liability, where the principle of liability for fault applies and the presumed-default liability principle can be implemented. The legislation should establish the rule of inversion of burden of proof to reduce consumers' responsibility regarding the causal relationship and amount of damage, and facilitate them with smooth access to civil relief.