Are network contracts “unfair”? The vast bulk of network-related work that we see stems from the fundamental issue over contracts signed when the brave new world of the FSA was not even thought of.
The issue over whether a contract is fair or not is one which really does not have a basis for a legal discussion. Simply, all contracts are valid unless they are illegal or void for uncertainty.
The bulk of contractual disputes we see relate to the following topics.
Use of the price amendment clause.
Use of the suspension/termination provisions.
Use of the general indemnity to re-charge “losses” to a member firm.
It is very clear that the vast bulk of network IFAs do not practise what they preach.
We all tell clients to read contracts carefully but do not do so ourselves.
You cannot fault a network for writing a very one-sided contract if people are prepared to sign it.
What is more worrying is that the bulk of network members are “sold” on the idea of membership before even seeing a contract.
The irony is that “hard-sell” sales tactics are used to garner membership. You would have thought that battle-hardened IFAs would see through these tactics.
Are unfair contracts invalid?
The simple answer is no. They may in part or in whole become irrelevant or indeed have no application under the new FSA/post-CP121 regime. This will mean that all network members will have to re-negotiate their contracts if CP121 goes ahead.
Can a network decide its polarisation option under CP121 without consultation?
This is a very interesting point. The contract provides that the member will be app-ointed to the network for the provision of independent financial advice.
This contract will surely be broken if a network dec-ides to become a distributor or a multi-tied operation.
In my opinion, the chan-ces of a injunction to prevent such a unilateral choice being made are high.
The network has the power to terminate members if they do not like the options being put forward. I would add that in my opinion an injunction would also be available to prevent termination if the member would suffer loss and damage while waiting to be authorised elsewhere.
Blaming compliance breaches as a reason for a suspension is usually a smokescreen for other matters. The network, after all, is responsible for proper regulation of the members' compliance/training and competence systems.
The use of a suspension power should be in good faith. Even though many of the network contracts do not have a power of appeal, courts will imply one in order to achieve equity.
The simple parallel is the new FSA tribunal which has statutory guidelines under which procedures have to occur.
It is my opinion that drawing a parallel would be well received by a judge.
You have to bear in mind that courts do not encourage actions which threaten livelihood without good reason.
The amount of suspensions which take place without a member being infor-med why are frightening. The usual way of behaving is for the member to be asked to admit what they have done wrong.
This is completely out of order and constitutes a fundamental breach of human rights. To have to admit you have done something wrong without being afforded due process is highly questionable and is likely to be frowned on in court.
All network contracts have termination clauses. Ideally, reauthorisation should take the same amount of time (or less) than the notice per-iod. You have to look at it from the practitioner's perspective. They face:
Their client bank being written to, informing the clients of a “termination”.
Not being able to get re-authorised during the not-ice period.
Having their income frozen.
All this adds up to a most unsatisfactory arrangement and needs detailed thought as the haggle starts after CP121.
The regulator could play a much more active part in preventing disputes by refusing a network request to terminate until it has been ascertained what the member firm is going to do next.
To terminate on the grounds of “compliance bre-aches” suggests problems.
A good example would be non-compliance with the pension review. The review has many areas which are difficult to administrate. The network wants to wash its hands and deal with the review with the member as a “departed firm”. By simply reciting compliance breaches and the pension review, a firm becomes “dirty” and in an imposs-ible position.
Member firms very rarely test the termination clause in court but there will come a time when clarification is necessary to deal with a most unsatisfactory state of affairs.
Passing losses to member firms
God bless the lawyer who put the general indemnity clause into network contracts. This clause has been stretched to fit all sizes by networks in a very unfair way.
It is testimony to the contract and the lawyers representing networks that only a few members have sought to claw back losses passed on to them.
This fundamental problem of contractual equality is so stark with this clause.
The simple and logical argument is that you should not have to pay losses and damages where the fountain of the problem is the inadequate service from the network to its members.
The “we're all in it together” spin which you hear again and again, rings very hollow as it is very clear that networks are only too happy to pass on losses when it suits them.
I started out by saying that IFAs are notoriously bad for not reading their own contracts. When you are joining a network you are being sold the idea of a partnership. What you sign is usually a contractual straitjacket. Be aware, read the small print and do not be afraid to ask for amendments.
Gareth Fatchett is a partner in ProAct Legal Solicitors