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Would industry standard on restrictive clauses work?
by Danielle Levy on Feb 29, 2012 at 00:01
Wealth managers who leave firms and take clients with them are a double-edged sword for the industry.
While recruitment can represent a source of growth through the acquisition of new clients, at the same time, the loss of successful rainmakers represents a perennial business risk.
Individual wealth managers and their employers are likely to have been closely watching the Towry versus Raymond James court case last week. The verdict was a resounding victory for the seven former Edward Jones advisers who moved to Raymond James. The judge, the Honourable Mrs Justice Cox DBE, ruled they had not solicited clients.
At the centre of the £6 million two-year case was the question of whether there is a difference between non-dealing and non-solicitation covenants in contracts.
The non-solicitation clause meant the advisers could not approach or contact clients for 12 months after leaving the company. But Towry contracts – which the advisers had not signed – have a stronger non-dealing clause which states that even if clients approach their old adviser, they cannot do business with them.
Towry’s head of risk and compliance Nicholas Anderson believed the two were all but the same in practice, but the judge refuted this.
An industry standard?
In the wake of the case, Raymond James chief executive Peter Moores is calling for the creation of an industry-agreed standard on restrictive covenants in contracts to avoid a repeat of the case. He hopes to win the backing of industry bodies and the FSA for a UK version of ‘Broker Protocol’, which outlines rules for advisers to follow when they leave companies and has become established in the US in recent years. He believes it is particularly notable that the initiative has received backing from 600 firms and the first signatories were Citigroup, UBS and Merrill Lynch.
‘It would have to be an industry standard. People would say that Raymond James will be a net beneficiary of these types of things and obviously we are interested in doing it, but I would be interested to see if the FSA and other industry bodies would look at it and say, “why can’t the client have a choice?”’
He added: ‘I understand the need to protect interests through non-solicitation covenants, but why can’t the customer choose? Towry’s perspective is non-solicitation is very hard to prove, but if it happened it isn’t hard to prove and we would have lost the case.’
Raymond James’ head of business development David Hazelton has started to put the wheels in motion by enlisting the support of the Tax Incentivised Saving Association (Tisa) and offering to chair a working party to achieve consensus on restrictive covenants.
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