Keeping the keys to your client information

Client data is the lifeblood of an adviser’s business and any loss can be catastrophic in the long term.

As advisers have embraced the paperless office and the ability to transact almost every investment and risk transaction online, a new form of risk has entered into their world.

With data stored outside the adviser’s office, there is a growing risk of data being withheld in the event of a dispute and the adviser having no records to hand.

In practical terms, it is not too dissimilar to when whitegoods manufacturer Kleenmaid went into administration earlier this month.

The manufacturer had delivered washing machines and refrigerators to a warehouse. 

The goods had been paid for by customers, but because there was a dispute between the warehouse company and Kleenmaid over payments, it would not release the paid-for white goods until settlement of the outstanding bills.

This example has parallels to the risks an adviser faces putting their clients’ data on a platform that will warehouse the information for them.

Moreover, the financial services industry is not immune from companies going into administration either, as Storm advisers discovered earlier this year.

On the day Storm ceased trading, so did the access advisers had to their client data.

Bartier Perry executive lawyer Matthew Crouch said this situation highlights the need for advisers to have a dispute procedure in place if things go wrong.

“If an external company is now managing or hosting an adviser’s client database, the adviser should consider adding provisions in a written contract that clearly states, even in a dispute, they cannot be ‘locked out’ of their own business information,” he said.

“This may make an external provider think twice before damaging an adviser’s business. 

“Also, if a database is being developed specially for the adviser by an independent provider, try to negotiate for ownership of the database structure as well as the data.”

However, a written agreement can contain various clauses to let the platform provider ‘off the hook’ in a dispute, even if they breach the agreement.

“Beware of onerous liability exclusion clauses. 

“It is common for contracts to exclude liability for loss of profit, but that is exactly what the adviser will lose if the provider deliberately locks them out,” Crouch warned.

These clauses can be added to adviser agreements with dealer groups, Holly Nethercote financial lawyer Ian McDermott said.

“However, an adviser may have to create a separate agreement to cover what information is theirs,” he said.

“Our firm has never experienced any difficulties in getting these access clauses put into the authorised representative agreement.” 

While agreements can be put in place for an operating company, if the data warehouse goes into insolvency, Deacons senior associate Michael Park admitted the adviser faces many difficulties.

As part of the move to the paperless office, many advisers have destroyed all paper records and rely just on what is stored on the platform’s systems.

While the adviser technically is seen to own the client and their information, if this data has been modified by the platform, there could be disputes over ownership of this information.

Park said ownership of any data will depend on who has created it.

“The client’s name and address is not affected by claims of ownership, but it subsequently depends on who has created additional information,” he said.

“The question of ownership depends on what has been done to the data by a third party.”

Couch said finding out who owned the data was critical.

“Sometimes, unfortunately, ‘might is right’,” he said.

“While there are many benefits to outsourcing, giving an external provider actual control of the adviser’s data is fraught with danger.”

Crouch said advisers who have outsourced data storage should request that the company storing client data provide back-up copies on a regular basis that can be stored on the practice’s own computer systems.

“This can be the adviser’s saviour,” he said. 

“If the copies are electronic, make sure they are in a format that is easily ‘readable’ by common software programs.

“I have had one case where the data was kept on discs in my client’s possession, but required special access software from the provider to view it.”

If an adviser is in dispute with a data storage company and it won’t allow access, Crouch said the last resort was legal action, but that is not without risk.

“Being right doesn’t always mean that the adviser gets the outcome they deserve,” he said.

“Litigation can be expensive, uncertain and a big and stressful distraction. 

“And even if the adviser wins, they are unlikely to recover all of their costs.”

An alternative is arbitration and mediation, Couch said.

“The adviser should think about these issues in advance and put clear provisions in their contracts for data management, including website development and hosting,” he said.

“That will hopefully nip such problems in the bud.”