Sustainable Financial Services, Innovative Finance and Fiduciary Duties: Reconciling Profitability with Responsible Conduct

Abstract

The world of financial services has been in a process of constant flux for over three decades. Changes have been rapid, often beyond the capacity of regulators to timely understand them, and they have been accompanied by very drastic shifts in the way financial institutions interact among themselves and conduct their business vis-a-vis their customers. Developments in financial services partly froze in the aftermath of the great crash of 2008, when the most innovative manifestations of their evolution, revolving around opaque transactions and speculative derivatives, were directly associated with the very causes of the global crisis. It was then suggested that new transactions and products had not contributed to real economic growth or to social goals. This narrative suggested instead that much of that wave of innovation had only fuelled the appetite for speculation, greed and excessive risk-taking through leverage. With the near-collapse of global financial markets in 2008, new channels of finance have started to emerge, such as for instance P2P lending and financial crowdfunding. This is mainly due to the fundamental need to direct finance where it is most needed, to fund valuable social projects and more generally to enable development. For these channels to be successful in accomplishing their overarching entrepreneurial and social goals, it is necessary that the legal relationships between the parties involved in the transaction are adequately regulated, namely: that those who invest in or buy financial services/products are protected by the law, and that those who provide those services/products abide by specific rules of conduct. Traditionally, these legal relationships in the UK are encapsulated in the fiduciary relationship that ties banks to their customers. This particular configuration has however been of problematic application in the context of contemporary financial services. More innovative legal relationships emerging from new financing channels do not seem to simplify the picture. This essay critically reflects on the challenges traditionally associated with the application of fiduciary duties in finance law and specifically on the question of holding providers of financial services to account under a fiduciary duty to their customers.