Contracts exist to protect parties when things go wrong, as well as to regulate relationships when things go right. However, when entering into a new relationship the tendency is to focus on successful outcomes rather than disasters that could, but with any luck will not, happen.
In the pre-RDR world, the FSA defines trail commission as commission received by advisers “over a period of years after the original sale of the product to the client”. For historic reasons, trail is not always connected with an ongoing service but is more like a form of deferred payment.
So who does trail commission belong to? It is paid under the terms of a contract between the provider and the adviser, if the adviser complies with the terms of the contract it is entitled to be paid. Consumers have no contractual entitlement to trail commission so if the adviser ceases to trade, the consumer has no right to a rebate. Some providers allow trail commission to be transferred on a change of adviser (re-registration) and some do not.
In the network situation the ownership of trail commission depends on both the contract with the provider and the contract between the network and its members. It is common for commission to be paid by the provider to the network and the network to pay the member its share, effectively as an introduction fee. In this situation, the commission is likely to belong to the network and thus on the network’s insolvency the member would become just another creditor in respect of unpaid commission – but this is not necessarily the case.
Honister comprised four advice arms with a variety of contractual relationships. Because contracts are usually drawn up the by the network, they tend to set out what is to happen in the event of the insolvency or administration of the member but, despite high-profile network failures, contracts often do not cover the insolvency of the network.
When Honister was placed into administration, some providers will have been able to terminate their contracts with it. It is likely that Aviva and Standard Life terminated their contacts on this basis, leaving them with no obligation to pay future trail commission to Honister and able to accept bulk transfers of clients from Honister without the consent of the administrator.
Some contracts may have survived the administration and trail commission may continue to be paid. In this situation, the administrator, who is obliged to maximise returns to creditors, may treat them as assets and may sell on the right to future commission. But where consumers can demand re-registration it is not clear if these are valuable assets, so the sale price may not have been high.
In the latter situation, former Honister members who join new networks or become directly authorised face a choice between applying for re-registration of individual contracts or, it seems, paying to bulk novate contracts. Whether re-registration is commercially viable will depend on the number of clients whose contracts can be re-registered, how much work would be involved in re-registration and the percentage success rate, as against the cost of a bulk transfer.
Given the apparent fragility of the network model, the treatment of trail commission in the event of insolvency is clearly an area that members should pay close attention to when negotiating contracts with networks.
Harriet Quiney is a partner at Fishburns