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Playing devil’s advocate

06 April 2016 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

Clients are the most important asset in the financial services industry. They are fiercely guarded by insurers and brokers alike as they are vital to economic activity. This is an issue that has always been a central theme in the industry, whether the economy is booming or is in trouble. Companies and brokers will therefore be relentless in the defence of their clients.

But what happens when a tied broker leaves an insurer to go independent or to work for another insurer? Who do clients belong to? Do they belong to brokers or insurers? These were issues that were discussed at a recent regulatory workshop hosted by Moonstone where a legal perspective on restraint of trade was given by Dhevarsha Ramjettan, a Partner at Webber Wentzel.

The golden questions

Naturally, this is a sensitive issue and one that cannot be taken lightly. When assessing cases such as this – which will lead to a possible restraint of trade being imposed on the broker – Ramjettan says that four questions need to be looked at:

-  Does one party have an interest that deserves protection after the termination of employment?

-  If so, is that interest threatened by another party?

-  In the case of the second question, does such interest weigh qualitatively (quality or character of something) and quantitatively (based on the amount or number of something) against the interest of the other party enough to be economically inactive or unproductive? Simply put, if the one party takes the clients away from a another party, will the second party be affected to the point where they can no longer function from an economic perspective? And;

-   Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected? Simply…if the clients don’t have anything to do with the relationship between the two parties from an economic standpoint, does it matter who the clients belong to? 

Points of order 

Parties will argue that their clients need to be protected against two principles. 

The first is confidential information. When looking at this, Ramjettan points out that there is a simple test one can apply. The information must be useful (ie capable of application in trade or industry), the information must not be public knowledge, the information must have economic value to the person seeking to protect it and the information must be something unique and particular to the employer. Some examples of confidential information include client lists, discounting structures, pricing information and information received by the employee (broker) about the business opportunities available to the employer (insurer). 

The second principle is that of the customer connection. Insurers will argue that brokers have a massive influence on clients and have the ability to move clients from one insurer to another because of this influence. Brokers will argue that the relationship with their clients are their bread and butter and have built up over many years without the help of the employer that they brought customers to.

The lynchpin 

One can sit for hours and put forward strong debates from both sides and still reach a stalemate. Both insurers and brokers have valid arguments to claim sole ownership over clients. 

The key determining factor in this debate is what is best for the customer. The Financial Services Board (FSB) has been on a crusade to embed the principle and objectives of Treating Customers Fairly in the market and the courts will no doubt use this as a guide when making their ruling. 

Yes there is a personal relationship between brokers and clients; but there is no evidence that brokers force clients to move with them when they are working for a specific insurer. Clients operate on the basis of free will and will often willingly move with a broker because they feel that the broker has their best interests at heart. There is no gun to the head approach here. If there is, the FSB needs to know about it.  If there is no gun to the head approach, can an insurer honestly say that they are acting in the client’s best interest by not wanting them to follow a broker? 

There is an element of devil’s advocate here. If one client wants to move with their broker when they change employers, there will be no insurer in the world that won’t let one client go - unless the client is a high net worth individual. But when a whole book of business wants to follow a broker, we can possibly see the motivation behind the insurer’s reluctance.

Editor’s Thoughts:
At the end of the day the integrity of the broker and the insurer has to be kept intact and this can only be achieved by following TCF principles. Do you feel that at times this is easier said than done? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Tim Jones, 06 Apr 2016
If Insurers honored their contracts with advisors and ensured that the advisors continued to receive the ongoing commissions for ongoing service, then churning would be less of an issue. However, they have their own. agendas which certainly do not take the clients. Interests into account!
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Added by Anton Schutte, 06 Apr 2016
The question is who has the relationship with the client? People don't do business with businesses, they do business with people that they know, like and trust. Most FSP's argue that the client "belongs" to them. But who has the relationship with the client? The advisor. The FSP's concern is an advisor who resigns, joins another FSP and then churns the book. Where is the concern for what really is in the client's interest? My experience shows that, where companies retain the clients when an advisor leaves, the service levels and advice suffer. The clients are the "victims" of an advisor's career move. How does one pass on a relationship? Our company contractually states that an advisor may take his / her clients with should they join another FSP. To address the concern of churn, close scrutiny of replacements is the solution and not the FSP disallowing the advisor to retain the clients.
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Added by Kenny, 06 Apr 2016
Whooo now who is opening a hornets nest?
Actually there is a further layer. The client has a relationship with the broker not the insurer or... the broker house. How many brokers have moved elsewhere and have had to leave their clients at the broker house they were at? Most times a broker house will also insist that those are their clients and refuse to transfer with broker (and ethical brokers will not just change the insurance company- but may want to move houses).Which means that the client is further inconvenienced as the broker will now have to go and sign individual notes to transfer each client. So, broker houses are often guilty of wanting to build big numbers of brokers as they know they will retain clients (or some , as there is attrition when leaving), simply to retain comms for those clients. This is all very real in the industry and its not only the clients that get Unless you are viewing the broker as a client of the broker house.
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Added by Edsaid, 06 Apr 2016
Last time I checked, no one owns the client. The client owns themselves. For the... bank, or the dealership or the insurer or their agent to assume that they own me as a client is ludicrous
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Added by Bertie, 06 Apr 2016
Note that if the client cannot/may not/do not want to move with the broker/planner what needs to happen then? According to FAIS - they need to be, individually contacted (and proof need to be recorded) as to what would be happening with them! Am I correct? Question is - what is happening in practice (and what is happening with the fees/commissions)?
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