News & Views

Common mistakes in financial services agreements

Warren Buffett said you should never test the depth of the water with both feet – as the Vicar of Dibley found out. Likewise, you should never enter into a financial services agreement with your eyes closed - and yet many still do.

Agreements in the financial services sector tend to be very different from other commercial agreements. Due to the environment in which they operate, financial services agreements have a structure and language all of their own and lawyers earn a lot of money unravelling boilerplate commercial agreements with a few ‘compliance with laws’ clauses thrown in but which do not accurately reflect the regulatory status of the parties to the arrangement.

What do we mean by a ‘financial services agreement’?

The most common agreements we come across in the financial services sector are those relating to agents, appointed representatives, introducers, brokers, fund managers, designated professional bodies, wealth managers, insurers, reinsurers, insurance managers, and captive owners.

Commonly, these agreements govern terms of business, agency and distribution arrangements, appointed representative appointments, the provision of services, insurance & captive management, and insurance & reinsurance contracts.

So, how do you avoid common drafting mistakes?

Most drafting mistakes occur because not enough time and care is taken to understand the exact nature of the relationship between the contracting parties. Here are a few of them and how best to avoid them:

• Failing to map out the inter-connected relationships – Financial services agreements rarely stand alone, so it is worth creating a schematic showing all the connected parties and agreements in an arrangement and how they link together contractually.
• Using the wrong drafting template – Obvious as this may seem, getting the right starting point is essential. Not only does using the correct template ensure the basic regulatory clauses are built in, but it can also ensure consistency, efficiency, accuracy, and professionalism. Importantly, it should also ensure the parties have necessary rights and remedies that will help manage any risks and breaches in the ongoing relationship.
• Incorporating the wrong regulatory provisions - This is surprisingly easy to do, particularly if the two points above apply. Specialist financial services advisers have access to a library of regulatory provisions tailored to the exact circumstances pertaining to the contractual relationship concerned. For example, for a principal to satisfy the regulatory requirements of engaging an appointed representative, the agreement needs to be crystal clear as to what activities the appointed representative or introducer appointed representative is authorised to carry on and for there to be specific reporting obligations on the part of the appointee. The principal will also need audit and access rights to the appointee’s business to verify and, if necessary, enforce FCA compliance.
• Relying on a ‘compliance with laws’ provision - Whilst most agreements will include this general sweeper clause, it should only be a fallback provision. It is usually inadequate in dealing with the narrow regulatory provisions required by financial services agreements and lacks the audit and enforcement provisions needed to mandate compliance and remedy breaches.
• Not checking that the counterparty is appropriately authorised – This is a common oversight and can lead to contracts being unenforceable with consequential losses. Even if the parties are offering warranties that they are appropriately authorised, it is important to check this via the FCA register. Not only should this show the party is registered but also that it has the appropriate permissions to carry on the regulated activities it is purporting to do. It is also worth checking any restrictions or enforcement action it may be subject to.
• Not specifying what happens on termination – As financial services is largely about data, it is vital for the agreement to set out what rights and obligations each party has in relation to the data before, during and after the termination of the agreement. Always best doing this when both parties are enthusiastically looking forward to starting a business relationship rather than at the end.

Getting things wrong can have grave consequences

Falling foul of your regulatory provisions will not only jeopardise a contractual arrangement but can also lead to regulatory consequences, from warnings and enforcement notices to fines and potential imprisonment.

Using a commercial contracts lawyer who is familiar with financial services rules and regulations should help avoid these common mistakes and result in better commercial outcomes.