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Categories:Advisers,Regulation

Adviser contracts to be scrutinised

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Legal experts say Towry’s defeat in the case it brought against Raymond James and seven former Edward Jones advisers raises questions about client ownership and will bring adviser contracts under heavy scrutiny.

Last week, High Court judge Mrs Justice Cox dismissed all claims brought by Towry against Raymond James and the seven advisers and awarded total legal costs of £1.2m.

Towry alleged the defendants, who did not join Towry when it bought Edward Jones and moved instead to Raymond James, had breached non-solicitation clauses in their contracts which prevented them from contacting clients for 12 months.

Towry brought the case in April 2010 after 388 clients with assets totalling £33m transferred to Raymond James. The judge ruled there was no evidence to support Towry’s claims.

Law firm Faegre Baker Daniels, which represented Raymond James and the seven advisers, believes the judgment is testament to the strength of the relationship between clients and advisers.

Litigation partner Robert Campbell says: “Towry said itself it was taken aback by the tidal wave of transfer requests that followed the acquisition. Firms cannot assume that just because they buy a client book that the clients are going to want to stay with them.”

Compliance consultant Adam Samuel says: “The impression given is that this was a botched takeover which resulted in a loss of business much greater than Towry expected, so it sued advisers claiming that the loss of business was due to a breach of the non-solicitation provisions. It had no evidence to support this.”

The case clearly highlights the difference between a non-solicitation clause, which prevents advisers who are moving firms from approaching clients, and a non-dealing clause, where advisers cannot continue to work with clients at all.

Foot Anstey financial and commercial disputes associate Jonathan Kitchin says some contracts go even further than non-dealing clauses by imposing “non-compete” clauses, which prevent advisers from working for an advice firm within a 20-mile radius of their former employers. He says the industry still needs to address the wide variation in contract clauses, particularly as an increasing number of firms are looking to consolidate and grow their assets ahead of the RDR.

Kitchin welcomes the work of the Tax Incentivised Savings Association, which is trying to develop an industry consensus on how restrictive covenants should apply in the financial services industry.

Campbell says adviser firms may look to impose tougher non-dealing clauses in the wake of the Towry case as the non-solicitation clause did not prevent the significant transfer of assets.

But Kitchin believes this would be a step too far. He says: “Non-dealing clauses would be extremely contentious in this industry. It cuts across everything to do with treating customers fairly. If advisers are changing firms and have not solicited clients who want to come with them but are contractually not allowed to service them, that is going to end in litigation. It strikes me as an area where the FSA is likely to intervene and make sure those particular clauses are not enforceable within the financial advice sector.”

Kitchin says firms will be keen to protect their business interests but he adds: “While legally potentially enforceable, from a public relations perspective, it is an unattractive prospect if it gets out in the press that a firm is trying to limit what its clients can do.”

Campbell says: “Anybody who is drafting a contract of this nature in light of this judgment is going to be in no doubt that they will have to be very clear about what they want to achieve. It is a bit of a wake-up call to the industry as a whole.”

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