FSA urged to force firms to 'novate' clients they can not service

Firms unable to show they can provide an ongoing service to the clients of an exiting adviser should be forced to let the adviser leave with them, 2plan Wealth Management CEO Chris Smallwood says.

Smallwood is demanding organisations facilitate ‘novation’ – the agreed en masse transfer of all client details from one company to another – when an adviser leaves the business.

While some firms and networks permit novation, others insist on contractual agreements at the outset stating clients belong to the company, not the adviser.

Elsewhere, some businesses only allow individual ‘change of agency’ agreements, which advisers argue are often used as a means of pressing clients to stay with the firm.

Fresh arguments over who ‘owns’ customers flared this week after wealth manager Towry Law was granted an interim injunction against six former Edward Jones advisers accused of soliciting its clients. Towry acquired the company in November last year.

But Smallwood says while vagaries exist in the case of employed advisers, the wider issue of novation is clearer for self-employed practitioners.

“If firms can’t service clients they should be forced to novate them,” he says.

“If a firm is receiving income streams from clients of past advisers, what are they doing to justify that? Shouldn’t clients simply receive the fees back if they cancel the service agreement with the firm?”

He says the “obscure” practice of firms preventing bulk client transfers will become a regulatory issue after 2012 when businesses must agree ongoing service fees with customers if they want to keep them.

However, the FSA says it does not intervene in cases of what it considers a “commercial” arrangement between two parties.

AIFA director general Chris Cummings says nobody ‘owns’ a client, but warns advisers to check their contracts as he sees a trend emerging in which organisations seek to tie-in their client base.

“They [firms] are realising it is in the client base that the company’s real value lies,” he says. “I have no doubt this will become a heated area of debate over the coming years.”

Informed Choice managing director Martin Bamford says he can not understand why firms stand in the way of advisers seeking to take their client contacts with them.

“The effort involved would be better spent fostering a stronger relationship with their advisers, rather than using litigation to protect assets they perceive as owning,” he says.

Network giant Sesame Bankhall says the business “positively encourages” novation.

“If a firm leaves and there is clawback liability on the agency, we retain a small amount of commission for a couple of months until that liability is settled,” chief operating officer Stephen Young says.