Court of Appeal rules on Experienced Investor Fund Directors Duties

The appeal against the Supreme Court’s much discussed decision that Experienced Investor Fund (“EIF”) directors have a higher duty, as decided in Compson v Financial Services Commission and Weal v Financial Services Commission has been dismissed by the Court of Appeal. The Court of Appeal has upheld the decision of the Supreme Court to the effect that that EIF Directors have a higher objective standard of due skill, care and diligence when exercising his functions as a director of an EIF.

The Court of Appeal, dismissing the appeal, found:

“that [the director] was no ordinary director, but rather a licensed Experienced Investor Funds director subject to regulation by the FSC….given the nature of the enactment and its regulatory provisions aimed at the protection of investors, the plain reading of regulation 5 [of the Financial Services (Conduct of Fiduciary Services Business) Regulations 2006 (the “Regulations”) ] establishes an objective test. Although reliance upon authorities dealing with the common law test of a director’s duty can assist, the dual objective/subjective test does not have to be imported”.

Regulation 5 of the Regulations sets out that “licensees shall act with due skill, care and diligence in the conduct of its fiduciary services business” and the Court of Appeal’s judgment suggests that EIF directors (by virtue of their licence) will be held to higher standard of due skill, care and diligence. To that effect, the decision highlights that courts should deploy an objective test when deciding on issues relating to the fiduciary duties owed by EIF directors, meaning that one would only need to consider what the elusive “reasonable man” would do when faced with similar circumstances.

Whether this standard will extend to licensees across the board remains unclear, but the Court of Appeal’s judgment indicates that this may well be the case with regard to the fiduciary duties of licensees covered under the Regulations.

In light of the judgment, licensees should be especially careful in the exercise of their licensed functions in order to ensure they do not fall short of these high regulatory standards in the exercise of their duties.

The transcript of the judgment refers to the Financial Services (Investment and Fiduciary Services) Regulations 2006.