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Principal principles

Some things in life are enshrined and taken for granted. The same could be said in law. For example, you cannot benefit from a crime. The principles of modern land law and trusts have been fairly static since 1925.

With such certainty in life, things should be relatively straightforward. Financial services wants to be different. No wonder the average IFA is confused. Who wouldn&#39t be?

Principal and agent

The simple rule in English law is that a principal is responsible for the acts of its agent. The rule is caveated only by circumstances in which the agent acts outside its given authority. In law, we call this “going on a frolic of their own”. The control element of the relationship gives credence to this rule.

The principal controls the way in which the agent works then there is a prima facie case to implement the accepted principle of English law. This means that, in simple theory, any person who is an agent for somebody else will have the protection of their principal.

Financial services

Based on the way that financial services works, on the face of it, this rule is entirely different. Let me paint the picture. The point of representative acts under the authority of their principal. Overlay the regulatory responsibilities and the principle of the principal and you create the perfect example of a principal and agent relationship in English law.

This is, however, where financial services steps in and inverts everything. The standard contract between principal and agent provides for (a) support services, (b) compliance order (c) training and competence training.

Without analysing things too closely the relationship not only describes a method of conduct but also trains the agent in their duties.

The basis of the standard relationship is that the agent indemnifies a principal against loss and damage caused by their negligence. This is unusual in that a control relationship is both contractual and regulatory.

The practical example of this could be where a network passes on a professional ind-emnity excess of a negligence claim from one of its members. This pass-on is effected by the general indemnity clause. On the basis of the strict legal analysis, the principal could argue that the agent went on “a frolic of its own”. My view is that this would he unsustainable due to the control elements that are put in place.

The whole issue in financial services relates to control. Control is immense. The principal has the power to suspend. The principal has the power to terminate the relationship. The principal has the power to withhold monies. The principal has the power to conduct the way in which business occurs. The principal has a way of dictating how training and competence be assessed.

The quasi-senior principal (that is, the regulator) can insist that the principal within the relationship do certain things. This is passed on to the agent who has to carry this out without question. There is very little leeway and therefore the control element is totally consuming in these circumstances.

The basis under which this operates is so tight that the argument that a general indemnity clause should operate to recover full loses on behalf of the principal needs further analysis.

Liability pass-on

It is my contention that where a pension review liability excess or any other damage is passed on due to negligent advice, then there could be an argument by the agent that this should be apportioned.

The apportionment will reflect the fact that liability was created not only by the agent but by the principal in its conduct and control of the agent. This argument has been tested in the past and is sustainable.

Therefore, my whole view of financial services is that although the principal and agent relationship on paper is subverted, this can be challenged in court.

No full-scale challenge has occurred as yet due to the fact of the devastating way in which this would affect the way that appointed representatives work. It would in one fell swoop swing the pendulum back in the agent&#39s favour.

In these interesting times when liability is everything and control of that liability is an important factor, it needs to be tested for future clarity.

An agent at present is probably in the most vulnerable of positions due to the fact all liabilities can be passed based upon current contract terms. There is only one network which offers a restrictive indemnity based upon period of time.

The other extreme is the network that implies liability on to the personal representatives of the deceased IFA.

It is worthwhile thinking about the fact that English law has been static and consistent for so long. In many ways, this consistency is the IFA&#39s best protection.


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