The lid on the idea of timelimited liability was lifted by the Glaister Green-wood case. Quite simply, the trigger point for limitation has been greatly wid-ened. In effect, it is not triggered until the client realises there is a problem.
Due to the long-term nature of many financial services contracts, the potential for claims way into the future is greater.
Latent liability is very difficult to measure. The ability to acquire a financial services black hole has greatly reduced the worth of financial services practices. The key to mitigating your position is twofold – to ensure that clients are fully aware of the investment risks they take and to protect your own position by business planning and structuring of your exit into retirement.
Without any documentation, consider yourself to be a sitting duck for a claim. A professional person will be expected to have kept detailed records. A client, on the other hand, will be forgiven by a court for having scant information.
The pension review showed how easily it is to fall into the trap of guilty until proven innocent.
Clients must be made aware of the extent of your advice. I have seen very many standard terms of business. Quite simply, they are inadequate due to their flimsy nature.
Specifically exclude certain activities. IFAs undertaking wills and trusts always send shivers down my spine. For the very same reason, the market is moving toward specialism. The general practitioner is a thing of the past as society becomes more litigious and aggressive.
Succession planning is key to the ability to ensure that when you finally retire from financial services, you do not take all the advice liabilities with you.
A purchaser may be prepared to acquire all your prior advice liabilities as part of a succession planning deal. The difficulty for the purchaser is how to quantify and undertake sufficient due diligence to ensure that what is acq-uired is clean enough to be worthwhile.
If you cannot achieve this, then the only option you have open to you is to purchase run-off cover for life. Professional ind-emnity insurers expect a massive upturn in this business and, inevitably, with such a captive market, prices will soar.
General indemnity clauses
All appointed-representative contracts have a general blanket indemnity without limit of time or amount. If you can negotiate this clause away, then you will have extinguished the liability you have under the contract. The clauses were put in network contracts as a cover all. They have remained pretty dormant until Glaister reared its head.
The mixture of the two is explosive. The ability to go back to an appointed representative at any time under the indemnity mixed with the extended ambit of latent liability truly creates “lifetime liability”.
Only one network contract limits its general ind-emnity by time. The rest are open-ended. One ext-ends beyond life to the executors. A truly frightening thought.
These clauses are unlikely to be amended on a wholesale basis. To limit the scope of the ability to transfer on liability is something that I cannot see networks doing. What is the solution?
In my mind, the solution lies around the very fundamental nature of the appointed representative contract.
Apart from giving the appointed representative the ability to transact inv-estment business, it is also an agreement to provide services within a very tightly controlled framework. From compliance to training and competence, the network holds the controlling position.
It cannot be said that the agreement is one of equals. In many ways, the contract is one of quasi-employment due to the restrictive and controlled nature of the agreement.
It is because of this that in my mind the appointed representative could argue against any pass on of liability by using an argument based around contributory negligence.
I have seen examples where PI excesses have been passed on to network members via the general indemnity.
These have been vastly reduced and in some case extinguished when it can be shown that the network controlled the method in which the appointed representative worked.
After all, in a principal and agent relationship, the principal is responsible for the acts of the agent unless the agent goes off on a frolic of their own.
You need to look at this issue now. It is little use planning at the last minute. Glaister is highly unlikely to be limited significantly. You have been warned.
Gareth Fatchett is principal at ProAct Legal