If advisers are prepared to accept their own unearned income liability and agree to the novation of client agencies, the need to create a reserve or holding account is unnecessary, Keith Richards, distribution and devolopment director at Tenet told FTAdviser.
As reported in FTAadviser’s sister paper Financial Adviser, Positive Solutions recently came under fire for clawing back 3 per cent of advisers’ commission earned on indemnity business. The network said this is put into a reserve account which exists to protect advisers from “unforeseen chargebacks”.
While commentators have agreed that reserve accounts are not necessary if novation agreements are in place, Positive Solutions has confirmed that it does not operate these agreements due to its contracts to advisers.
A novation agreement is a triparty agreement between the network, the IFA and the product provider where the IFA agrees to take on all liability for that agency and therefore the network can release the commission knowing that any potential clawback will be there for the adviser and not for the network itself.
Mr Richards highlighted that the level of clawback liability risk can vary between individual firms and it is not unreasonable to agree an amount which can be set aside as a contingency to protect all parties.
He said: “However, where advisers are prepared to accept their own unearned income liability and agree to the novation of client agencies, the need to create such a holding account is not necessary.
“When an AR leaves a network, the preference would be for them to novate clients. By doing so they control the repayment of any future clawback payment, as the liability sits with them.”
Matt Timmins, joint managing director at SimplyBiz, ageed, adding that although it is “common practice” for networks to hold on to commission to cover any potential clawbacks for when members leave that network, this is in tandam with a novation agreement.
Mr Timmins said: “If that novation agreement is done correctly, I don’t understand why a network would want take a fee upfront to cover any potential liability given that there is already an appropriate structure in place to do that.
“The novation agreement transfers everything to do with that agency back to the firm, including ongoing trail commission and the liability, so there would be no reason for the network to take any money upfront because there is already a structure in place to do that so I don’t understand why a network would.”
Steve Young, commercial director at Sense Network, warned advisers that this is something they need to be aware of when they join a network like Positive Solutions.
He said: “Effectively, IFAs are giving up their clients, they will be owned by the network. In our business and other networks that is not the case.”
A spokesperson for PosSol said: “Once the indemnity period has ended and we are satisfied that there is no outstanding liability, then the adviser will have the sum reserved retuned to them. We do this purely to protect the business and our partners from having to fund liabilities left behind by advisers who choose to leave.
“Currently Positive Solutions does not operate a novation agreement. It is our policy not to novate out as our contract states that on termination of the agreement client ownership shall only be transferred back to the registered individual at the express written instruction of the client concerned.”
