IFA  

How to avoid issues with client novation

This article is part of
Guide to buying and selling a firm in 2017

Although a buyer can be comforted knowing that liabilities are not automatically assumed on an assets and business sale, they may find difficulty gaining traction with any clients or contractors to whom sums are owed, even if not legally responsible for those per se.

Quality and volume

For James Dingwall, the "quality and volume" of the client data is a big issue when it comes to novation. He explains: "Our due diligence process requests a list of all active clients, active being a client whom the selling firm has recently or is currently providing a service to.

"We can then differentiate who we need to contact to arrange new terms and ongoing fees. The problem with bulk novation of clients is that they all move across, which means buyers have to carry out a large segmentation process to determine what service we can provide."

Financial crime and data security

One of the main considerations when novating clients is whether the firm has the right to process the client's data.

According to Mr Dingwall, the buying firm must be certain the client has given consent to the previous adviser and therefore the firm must establish the status of all clients which have been novated across, quickly segment them and obtain an agreement and consent.

He adds: "We need to be sure the client bank does not pose a money laundering or politically excluded persons threat, and therefore we always verify the client using e-verification before we do any new business with them.

"Issues around who we are, who holds their money, data security and our right to have access to their data are all common concerns that should be addressed in the letter informing the client about the acquisition."

Talking to the clients

Keeping the client at the heart of the process is vital, and this involves good communication from both the seller and the buyer.

In fact, there’s a regulatory obligation on making sure the client has a proper agreement put in place to provide ongoing services.

Henry Blunt, managing director of Retiring IFA, outlines the rules: “If a firm carries on designated investment business the firm must enter into a written basic agreement, with the client, setting out the essential rights and obligations of the firm and the client.

“Where a business is acquired by way of an asset purchase, the rights and obligations (client agreement) stay with the selling company.

“The acquiring firm must be able to show that there is an agreement in place between it and its client to provide those ongoing services.”