Countdown to Financial Services Reform

Question:We are a principal planning business that is part of a medium-sized Australia-wide dealer group scheduled for transition on January 1, 2004. We are looking to review our business structure in the post FSR environment and are keen to understand the FSR impact on who owns the client.

Answer:The real question is not who owns the clients but who enjoys control of the income generated and who therefore can claim an interest in the relationship. It is now also common to ask who controls the relationship with referrers.

Control is worked out through understanding the proper form of legal relationship between those who would claim the rights of the client. As a principal planner, we see the control issues reflected in your relationship with your dealer, with your contracted and employee financial planners, administration and support staff and those of your dealer.

The first question is — which of these relationships is most important in terms of controlling (or influencing) income? Where is the greatest fear of challenge of who owns the client?

The next question is — what is the basis of the legal relationship and what does it say about control of the income? Is the primary relationship one of employment or independent contractor? And is it in writing or not?

If there is no written agreement, no matter what the form of the relationship may be, the on behalf of nature of the FSR relationship will mean that the dealer owns the client. That is, the dealer controls the income flows — the Privacy Act principles will reinforce this.

Where there is no written agreement, the nature of the relationship (ie, employee or independent contractor) will determine if the dealer can exert rights against a former employee or contractor, or as in Halliday’s case, can claim a loss of profits for up to 12 months for clients that have been taken.

The issue of control becomes very problematic for a principal planner who has employed planners where the authorisation comes directly from the dealer. FSR says that the dealer has a direct relationship with clients but the employed planner has their major commercial relationship with the dealer! Just where the principal planner fits in is a matter of some challenge.

Where there is a written contract, the principles briefly mentioned above are not to be ignored, they may still have application. They are simply modified by the written terms of the agreement.

Many of these agreements are being rewritten as a consequence of FSR.

Look to the words of the contract — what does it say about the right to direct future income flows arising from client investments? This alone is not enough, especially from a taxation perspective. In fact, without the benefit of being able to link the income flows with a business of financial planning, payment for the re-direction of an income flow is likely to be argued by the Australian Taxation Office as fully income taxable, no capital gains tax concessions will apply.

This can be corrected where the relationship with the client can be clearly stated as being part of the business, where the person who re-directs the income can lawfully claim to ‘own the client’ and has sold ‘the rights to them’.

Let’s return to the question — in the post FSR environment, who owns the client?

FSR makes clear that a dealer must have a direct relationship with the client. Because your business acts on behalf of the dealer business, the dealer has the direct relationship. Your relationship is therefore dependent on what your contract, if you have one, says. If it is silent, or does not exist, the dealer owns the client. In the absence of any specific rules, the weight of FSR opinion is clearly in favour of the dealer. Don’t bemoan this since the weight of FSR opinion is that the liability burden also falls heavily on the dealer.

If your agreement is pre-FSR and attempts to oust the dealer, it has the potential to fail because it is contrary to law. However, if properly structured, the agreement can evidence a shared or mutual, but separate relationship with clients. Such an agreement will survive FSR.

But do not stop at the dealer/planner relationship. As a principal dealer, we assume that you are also interested in protecting your business, even if your dealer may not because it has a come-and-go relationship with planners.

Now the question is re-directed at your relationship with your staff and your contractors. You need to ask all the same questions, only now you do not have the benefit of the FSR presumption that you own the client, only your dealer has this. Mind you, the nature of your dealer’s authorisation of your planners may allow you to benefit from its presumptive ownership of the client.

Don’t try to work out what you might have, rather, with all of your relationships, sit down and clearly work out what it is you want. Then clearly set this out in writing and ensure that everybody agrees.

Send your FSR question to[email protected]. The noblest question will not only receive an answer but also a bottle of de Bortoli Noble One.