The pandemic brought socialising and ‘normal’ working life to an abrupt halt, yet there has been relative stability in the financial markets.
The current state of relative economic calm is a product of the unprecedented government support packages. However, as we edge closer to the autumn of 2021, with government support about to be turned off, there is a prospect of financial uncertainty.
Not only is it likely that businesses will go into liquidation, but trustees and financial advisers are also likely to find themselves under increased scrutiny from those whose funds they hold within their grasp.
An impending storm
Financial volatility in the markets, in particular the market crash at the very beginning of the pandemic in March 2020, has had varying impacts on investment portfolios.
Although equities have recovered, sizeable cash injections to the markets in the form of furlough and corporate support packages have left debt markets and interest rates tottering towards the dangerous territory of negative interest rates.
This has made a sluggish bond market even less attractive, while equities and housing markets have continued to soar.
Despite the initial panic at the onset of the pandemic in March 2020, the aforementioned government support packages have, at least for the time being, staved off an onslaught of insolvencies.
That is not to say there have been no victims in this crisis – the troubled airline FlyBe and retail giant Arcadia Group come to mind – however, it is fair to say that financial markets have stabilised in light of government support and steadying demand following vaccine roll-outs. This means we have not, as yet, seen a full-fledged financial crisis with a series of corporate failures.
In fact, a World Bank study found that formal insolvencies dropped in the second and third quarters of 2020, likely as a result of government support, payment holidays and suspension of insolvency procedures in various jurisdictions.
Pundits posit, however, that the situation is likely to change following the end of the government support, which is slated to be in autumn 2021 in various countries including the UK, Germany and the US, among others.
Unravelling the past
As a company or business is wound up and liquidated, creditors, appointed liquidators and auditors are tasked with combing through the relevant entities’ business and finances. This tends to be fertile ground for the discovery of potential financial mismanagement and irregularities.
The recent case of the construction behemoth Carillion typifies such a scenario. The government liquidator of Carillion has announced that it expects to make a claim in the region of £250m against KPMG, the auditors of the company, for having failed to uncover the financial woes of the company and review the accounts properly.
Moreover, financial mismanagement is often discovered long after the fact, and more usually, it is discovered when the effects are manifested in the form of lost capital, falling share prices or insolvency.
As in every crisis, there are bound to be trustees and financial managers who have served their clients well and those who have borne the brunt of market volatility. If businesses, in particular large listed entities or sizeable companies with private-equity funding, go into liquidation that is likely to result in greater scrutiny from investors and shareholders alike.
For professional asset managers and trustees, the key concern from their clients and beneficiaries of trusts are whether or not any investments that fail or fail to provide adequate returns were reasonable and in keeping with the mandate of the relevant fiduciary.
Key concerns for fiduciaries
Although vast amounts of private wealth is entombed in complex trust arrangements, the sheer amount of wealth held by either private or public pension funds far eclipses the former. That is not to say that trustees of private trusts have it easier, it is simply that the levels of formal regulation and scrutiny vary.
With pension funds, not only are they subject to regulation and internal corporate governance but they also tend to delegate the asset management function to professionals.
This often means that if investment decisions have resulted in losses, pension funds will have to consider pursuing the relevant assets managers. For example, the Swedish Pensions Agency is currently suing a UBS entity for allegedly having mismanaged funds.
Pursuing an adviser is well and good, but for smaller trusts/funds where the trustees or the trust company performs the investment function, there may not be somewhere or someone to pass the buck.
In such situations, it will be interesting to see whether beneficiaries have the appetite to pursue trustees for financial mismanagement and investment decisions. Often it is a case of the volume of sums involved, but that is not to say that losses necessarily translate to successful claims against trustees.
If investment decisions are adequately considered and compliant with the mandate in the trust documents, they are less likely to be impugned. That said, trustees may well find themselves in hot water if they cannot find documentary evidence to support earlier decisions.
As always, the cruel gaze of hindsight can often cast doubt over the reasonableness of decisions made years before, highlighting the importance of standardised processes for the protection of decision-makers.
It remains to be seen whether the end of fiscal support will open the floodgates to insolvencies and the claims for financial mismanagement that tend to follow in their wake. What is clear is that fiduciaries who proactively manage their own risk are likely to fare better than those who do not.
Shamilee Arora is associate at Cooke, Young & Keidan LLP
