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Chris Davies: Why we need a protocol on restrictive covenants

Tisa’s commendable recent conference on restrictive covenants seemed to generate a general consensus on the need for a pan-industry protocol to alleviate a potentially litigious nightmare of aggressive and defensive behaviour when advisers decide to up sticks and leave a firm with clients willing to follow them.

The very fact that Tisa facilitated an environment for both Towry and Raymond James to air their relevant views was a great achievement and only good for an industry which views the playing field as a battleground.

The key issues discussed and debated focused on the legitimate business interests which centre on stability of the workforce and client relationships and the adviser contracts and terminology, particularly where confidentiality, non-solicitation and non-dealing are concerned.

Without pointing fingers, what is clear is any restriction in a contract needs to be reasonable, clear and understood by all relevant parties. The drafting of these contracts needs to be tailored to company and employee needs and be reasonable in outcomes and duration. As we have seen from this particular case, non-dealing clauses are far easier to enforce than non-solicitation while non-compete clauses are the most onerous.

The lawyers who addressed delegates quite rightly and honourably pointed out the fact that it is highly undesirable for the courts to get involved in covenant disputes and thus engagement of the employer and employees in the formation and signing of these contracts is a solution to avoid redress.

Yet the elephant in the room was the fact that industry behaviour needs to be moved from a “what is in it for me” mentality to a “what is in it for us” culture. This is where a protocol will help.

Mike Alford, senior vicepresident for Raymond James Financial, presented succinctly the US position before and after such a covenant’s implementation. It was clear that three of the major US financial industry protagonists had had enough of slugging it out in courtrooms, where dysfunctional conduct only led to exorbitant legal fees and costs, loss of productivity and client confusion and frustration.

A broker recruitment protocol was drafted in August 2004. The protocol principle of good faith, where mutual co-operation is required, means that clients’ wishes are the primary consideration and any limitations such as loans and training costs are adhered to. The result? A level playing field was born which meant client choice, firms compete on merit and legal spend was reduced by some 70 per cent.

A protocol would begin to move the industry in the right direction, however disperse our interests are. A move from financial capital to relationship capital, where the clients’ custom is not bought but earned, client satisfaction is enhanced and firms compete on a value added basis, means happy clients, advisers and stronger and more competitive firms.

Where would you rather be spending your money – on your business or in the courthouse?

Chris Davies is director of Engage Partnership


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