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FSC launches locum agreement guide for financial advisers

According to the adage, doctors make the worst patients. Mechanics have the crappiest cars. And, say some, financial advisers will often drag their feet when it comes to mitigating risk in their own businesses.

Wednesday, March 16th 2022, 7:25AM

by Jenni McManus

The Financial Services Council (FSC) is keen to change all that. It has just released a comprehensive, step-by-step guide on how financial advice providers (FAPs) can set up locum arrangements if, for some reason, a key player in their business is taken out of action by an accident, illness or for some other reason cannot work.

Locum Financial Advice Arrangements – A Guide for Financial Advice Providers is the result of a six- month collaborative effort, led by Mark Banicevich, co-chair of the FSC’s Professional Advice Committee and the head of industry engagement at Partners Life.

Banicevich urges FAPs to think carefully about who would service their clients and whether their businesses would even survive if a key person suddenly became unavailable. “How can you protect your business from this sort of unexpected risk?” he asks.

“Is there anyone in your business without whom the business would struggle? And if you have that key person, what is your mitigation strategy if [he or she] is suddenly not available?”

The situation is particularly challenging for businesses with a sole adviser who is also the sole director and sole shareholder. Or for a two-adviser business where, for example, one might be an insurance specialist and the other advises on mortgages, meaning their roles are not readily interchangeable.

“That’s essentially why this guide was established,” Banicevich says. “It’s about getting the legal arrangements right, as well as the practical arrangements.”

The other complication in a sole-adviser/director business is that the company and the adviser are two separate legal entities though to clients they might seem indistinguishable, says David Ireland, a partner at law firm Dentons Kensington Swan and a financial services expert who contributed significantly to the FSC’s locum guide.

“It can be quite challenging and somehow you have to deal with both of them.”

Tricky legal situations such as this can be dealt with in a locum agreement which, as both Ireland and Banicevich point out, needs to be in place long before disaster strikes. The risk might be small, Banicevich says, “but the best insurance policy is the one you ever have to claim on”.

The Financial Markets Authority (FMA) does not require a locum agreement as part of an FAP’s licensing application and larger businesses with multiple advisers may not need one. But standard condition 5 requires a licence-holder to have and maintain a business continuity plan.  So, no matter what their size, businesses must be able to provide an alternative service to clients if a financial adviser cannot work.

Trimming costs
On the question of cost, Ireland says the best thing FAPs can do is to work through the FSC’s guide and bundle all the relevant information together before asking their lawyer to draw up a locum agreement.

“Have a well-thought-out plan,” he says. “Think about all the issues that need to be covered in your locum agreement. These things should be tailored to your particular circumstances. The challenge is that most lawyers won’t have too much of an idea of all the issues, all the challenges and the dynamic of each individual financial advice provider.

“Your lawyer might have a few technical bits to add but if you’ve got the guts of it, you will save yourself a heap of cost and you’ll have more confidence the agreement will cover off what you need. Lawyers don’t know what they don’t know, and you need to fill those gaps for them.”

The FSC hasn’t provided a template for a locum agreement because every business will be different and trying to do so would be “incredibly dangerous”, Ireland says.

“The risk is that somebody will jump onto it and grab that agreement and won’t have a properly-considered legal input into tailoring that for the situation.

“This is not a job you should do on the cheap in terms of grabbing an off-the-shelf agreement. Everyone is different and will require different tailoring,” he says. “ It would probably be negligent to try to produce a standard form agreement as it would be setting people up to fail.”

More complexity
Ireland also points out that a sole adviser business does not necessarily need to apply for a class 2 licence if a locum needs to step in. It depends on how the agreement is structured.

“If the locum appointment is documented so the locum steps in only once you cease to be an adviser, it’s still a single-advice business,” he says. “You might need to update your FSP registration, depending on the terms on which you have engaged the locum.

“If the locum has been engaged to provide advice on behalf of your business, they will need to be linked to your FSP registration. However, your locum agreement might just say they’re not giving advice on behalf of [your business] but on their own behalf.

“There’s a whole raft of possibilities around the way you do it. The locum could be appointed as part of your business, so you have a two-adviser firm and need to apply for class 2 licence.”

Other important issues to be address include Privacy Act concerns (factor the locum agreement into your privacy statement disclosures), the need to advise professional indemnity insurers about the locum agreement and the challenges involved in finding the right locum.

Tags: FSC

« Kloogh investors lose most of their moneyAdvisers told full licencing will become more streamlined »

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Last updated: 16 May 2022 9:03am

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