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Half-way House Fiduciary Duties: Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd

Document Cited in Related
Vincent
DOI10.3366/elr.2019.0574
Author
Pages388-395
Published date01 September 2019
Date01 September 2019
INTRODUCTION

In Medsted Associates Ltd v Canaccord Genuity Wealth (International) Ltd,1 the Court of Appeal considered, inter alia, two questions relating to the fiduciary duties of financial intermediaries: (i) in what circumstances an introducing broker owes fiduciary duties to its clients, and (ii) whether the broker's failure to disclose the exact quantum of its commission amounted to a breach of the no-conflict fiduciary rule. The Court of Appeal agreed with the trial judge that fiduciary duties arose in this case, but reversed his decision on the point of breach of fiduciary duty. It ruled that when a client knows or should have known that the broker is remunerated by the other party, the no-conflict rule does not require the broker to disclose to its client the full amount of the commission. In other words, when the fiduciary's benefit is only “half-secret”, the default requirements of full disclosure and informed consent are not triggered. This analysis will argue that the court's reasoning in finding a fiduciary relation and its treatment of this halfway-house case are problematic.

 THE FACTS

Medsted was an introducing broker in the field of contracts for difference (“CFDs”). Its role was to introduce investors to second-tier providers of CFDs, which in turn dealt with first-tier providers. Due to the nature of these derivative instruments, investors were not allowed to deal directly with first-tier providers. Medsted formed a business relationship with Collins Stewart (“CS”, subsequently acquired by Canaccord), a second-tier provider, whereby the former introduced clients to the latter, in exchange for a share of the commission and funding rebate that clients paid directly to CS. Representatives of both parties agreed orally that the clients should not be told of the split of the charges between Medsted, CS and the first-tier provider.2 In particular, Medsted was adamant that clients remain unaware of the division of charges,3 and refused to disclose this information to the clients when asked.4 Upon discovering (or suspecting)5 that Medsted received part of the commissions and fees, the investors expressed their dissatisfaction with the current arrangements.6 Eager to keep its clients, CS secretly bypassed Medsted and traded with the investors directly.7

Medsted sued CS to recover the share of the commissions it would have been entitled to, alleging that CS had breached the non-circumvention clause of their agreement.8 CS's defence was that, after discovering the quantum of Medsted's commission, the clients decided to cut out the broker and deal directly with CS.9

 THE COURT DECISIONS

At trial, the judge ruled in favour of Medsted.10 Teare J found that CS breached its contractual obligation to disclose regularly to Medsted all trading information of the introduced clients, so that Medsted could calculate the share of profits it was owed.11 Moreover, CS was in breach of contract by circumventing Medsted and doing business directly with the investors, which deprived Medsted of its right to commission and rebate on those trades.12 Nevertheless, the judge found that the “root of the damage”13 was Medsted's own breach of fiduciary duty to its clients.

In analysing the relationship between Medsted and its clients, Teare J began by observing that it was not the paradigm agency relation, where one party acts on behalf of the other and has the power to affect the latter's relations with third parties.14 Medsted was only an introducing broker, and the clients formed their contracts with CS directly.15 Nevertheless, Medsted could still be a fiduciary if the core characteristics of fiduciary relations were present. In deciding whether that was the case, the judge referred to Hurstanger Ltd v Wilson 16 and McWilliam v Norton Finance,17 where it was held that an introducing agent would be a fiduciary only if acting in a capacity which involved the repose of trust and confidence.18 In the case at hand, the clients reposed trust and confidence in Medsted,19 who impliedly represented to them that the terms offered by CS were competitive.20 The elements of reliance and vulnerability were also present. Since the investors could not deal directly with a first-tier provider, they relied on Medsted to introduce them to the...

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