Formulation of the Guiding Opinions on Regulating Asset Management Businesses of Financial Institutions (new asset management regulations) was a hallmark event of the financial industry in 2018. A highlight of the new regulations is that implicit guarantee is prohibited and asset management should return to its basics.
In other words, asset management will be provided in the principle of due diligence of sellers and caveat emptor. This means that, in the event of losses on the asset management product, a dispute between the investor and asset manager will centre on how to determine causes to the losses and how to compensate for the losses.
At the level of legal relationship, investors and asset managers are in the trust legal relationship. The asset manager’s, or the trustee’s, statutory obligations of performance of duties and due diligence are specified in the Trust Law, the Contract Law, the Law on Securities Investment Funds, and applicable normative documents formulated by the financial regulator.
The trust relationship means a type of relationship in which “the trustee is entrusted to manage assets on behalf of its clients”. Asset managers should fulfil their duty of due diligence and assume responsibilities and liabilities for management, use, investment and disposal of trusted assets, while investors, with the help of the evaluation system of the asset managers, should buy asset management products that match their risk tolerance.
In judicial practice, for cases relating to fiduciary duty of the asset managers, most courts make decisions with the idea of “comprehensive assessment with priority of agreements”. The court will decide on the fiduciary duty first, based on the terms of the asset manager’s rights and obligations in asset management as agreed in the entrustment agreements on asset management. This idea reflects the party autonomy and contractual autonomy.
Under the circumstances of ambiguous agreements, or absence of agreements, on the obligations and duties of the trustee, the positions and roles of the parties concerned in a transaction will be comprehensively assessed with consideration to the specific contents of the transaction and actual performance of the entrusted matters. On this basis, the court will further identify the subject of risk taking for the entire asset management programme, and clarify the right and obligation relationship of the parties concerned.
This standpoint is explicitly stated in a decision made by the Supreme People’s Court in March 2018. The court pointed out that the fiduciary duty of the trustee in the asset management business was statutory, namely, “the statutory obligation of performance of duties and due diligence that the trustee to an entrustment contract or trust contract should assume is provided in the Contract Law, Trust Law, and applicable normative documents of the financial regulator, that is, even if the agreement on such obligation is absent from the contract concluded by the parties concerned, the trustee shall assume civil liabilities for any loss it causes to the client due to its breach of such statutory obligation; and due diligence, and the circumstances of its fault”.
This view clarifies the legality of the manager’s obligation of performance of duties and due diligence, and that the manager will not be exempted from such obligation by any special agreement (exemption of duties, waiver, etc.) between the parties concerned.
In previous practice, there were cases in which local courts decided that the asset manager breached its fiduciary duty and should be liable for compensating the client for breach of the agreement, based on the idea of “comprehensive assessment with priority of agreements”.
Take the decision made by the Intermediate People’s Court of Taizhou in August 2015, for example. The court held that trust referred to the client’s act of entrusting its properties to the trustee based on its trust on the trustee, which, following the will of its client, would manage or dispose of such properties in its own name for the interest of the beneficiary or specified purposes.
In this case, evidence suggested that the asset manager failed to fulfil its duty of due diligence and care in issuance, supervision and recovery of funds in breach of the Asset Management Entrustment Contract. It should be liable for breach of the agreement and compensate the investors for their losses as per the contract.
There are also cases in which local courts ruled that the asset manager should assume liability for infringement to the extent of its fault. Take the decision made by the Intermediate People’s Court of Qingdao in September 2018, for example. The court decided that although the investor had experience in investment in high-risk asset management products, the asset manager should be liable for losses incurred to the investor because the asset manager failed to fully disclose the risks to the investor, and the investor made decisions on investment out of its trust in the asset manager’s recommendations. The court ruled after comprehensive consideration that the asset manager would assume 30% of the liability, while the investor would assume 70% of the liability for the loss.
On the contrary, in the previous civil case dated March 2018, the Supreme People’s Court ruled not to support the investor’s claim for compensation for damages because the investor failed to produce evidence to prove its losses in detail, the fault of the asset manager, or the causal relation between such fault and the losses caused.
It should be noted that, in terms of proving the fault of the asset manger, any previous administrative punishment of the manager by the regulator because of breach of duty of compliance or care does not necessarily prove that the manager is at fault in management of the specific asset management products. There is no direct causal relation between such punishment and fault. This viewpoint is supported by related court judgments and arbitration awards.
In general, whether the asset manager should assume civil liability for losses of investors depends on the evidence to prove their losses. If an investor claims that its asset manager should assume default liabilities, it should produce evidence to prove which terms of entrustment contract the asset manager breaches in the process of management, or what faults it has in performance of the entrustment contract, as well as the causal relation between such fault and the investor’s losses. If the investor claims that the asset manager should be liable for infringement, it should produce evidence to prove that the specific fact of damages is the inevitable outcome of the act of the infringer.
Yao Xiaomin is a partner and Guo Xiaohan is an associate at Lantai Partners