Network Openwork is locked in a legal battle with a former adviser after it sought to recover up to £250,000 in commission that had been clawed back when a client encashed a bond investment.
According to court documents filed with the High Court and seen by FTAdviser, Openwork has launched a claim for up to £250,000 against the adviser, who requested not to be named, for breach of contract.
Openwork says the amount covers clawed back commission it repaid to investment firm Sterling after a client fully encashed a £4m ‘no exit penalty’ investment bond in April 2013 that she had only invested in seven months earlier.
The adviser asserts in his defence that the client had only sought to partially exit the bond but that Sterling fully encashed the bond in error without notifying him first despite the fact he was the registered adviser.
He further disputes the network’s claim that he was aware of a potential clawback liability in the event of any partial withdrawl of funds due to it being contained in the 2012 Openwork ‘financial manual’, saying his contract was based on a previous 2005 manual.
The adviser, who left Openwork in December 2012, has also launched a counterclaim for damages, legal costs and ‘lost profits’ of £618,800 relating to the company’s alleged failure to provide adequate training or to transfer ‘capital units’ he says he is entitled to under an equity participation scheme.
Sterling, which is not a party to the action, declined an invitation to comment and said it would be inappropriate to do so while the legal case is ongoing. An Openwork spokesperson said it could not comment on cases that are progressing through the courts.
Openwork is 25 per cent owned by Allied Zurich Holdings, itself owned by Zurich Insurance Group which also owns Zurich Assurance. Sterling is a trading name of Zurich Assurance.
According to the statements of case, the adviser recommended the client invest in the bond in August 2012. She invested £3m in September 2012 and then another £1m eight days later.
In November 2012, the investor withdrew £350,000 from the bond. In April 2013 the remaining balance was encashed following a direct communication between the client and Sterling.
Openwork’s claim references appendix three in the 2012 financial manual, in which it specifically refers to commission clawbacks on no exit penalty bonds where “funds are withdrawn within three years of the most recent investments”.
The manual states a percentage of initial commission will be debited from an adviser’s commission account should funds be withdrawn. “The amount of initial commission clawed back relates to the amount invested, length of time invested and amount withdrawn,” it adds.
Openwork says due to the investment and the agreement between Sterling and Openwork, it received a total of £319,998 in commission and the adviser received a total of £271,511.
It claims the adviser needs to pay a total of £205,671 plus “interest pursuant to the manual” of 3 per cent above Lloyds Bank base rate, due to the adviser’s “breach of the franchise contract”. It is claiming a maximum of £250,000.
The adviser’s defence says that he notified Openwork several times in writing that he would not accept “unilateral material alterations to the contractual terms governing their relationship”.
His own counterclaim includes £618,800 in alleged lost profits due to a failure to provide adequate training.
He claims Openwork was obliged to provide “training” but only provided one course in 2009. If more had been offered he asserts he would have been able to market more effectively, recruit additional advisers and pass more exams which would have boosted annual profit by 85 per cent.
He also says he was a member of an equity participation scheme whereby he was allocated various units and a fee was allocated to each unit. According to the document by 1 October 2012 the adviser was entitled to 562 units.
The claim alleges Openwork breached the contract by not transferring the capital value of the units and he is seeking an investigation to assess their full value, which he is then claiming alongside damages and lost profits.
Openwork has said in its defence to the counterclaim that the entity involved in the legal action, Openwork Ltd, is not “contracting party” of the equity participation scheme, which is operated by Openwork Partnership LLP.
It also denies that it failed to provide adequate training with its defence listing a series of online tests the adviser had undertook, amongst other things such as attending courses and seminars. It has said the adviser has yet to prove its actions have resulted in any loss.
The litigation follows Openwork serving the adviser with a statutory demand which was rejected in a court ruling in November 2013 as the claim is “genuinely disputed on substantial grounds”. Openwork withdrew the petition and was ordered to pay legal costs of almost £8,000.
