Regulated professionals in financial services, particularly those who provide financial planning advice to individuals, are likely to build deep relationships with their clients.
Through regular touch points, exhaustive due diligence and data capture about their client’s finances, personal circumstances, plans, hopes and dreams for the future, a financial adviser often becomes a trusted and enduring professional relationship over many years of a client’s life.
The adviser will bear witness to all of their client’s milestones and big life events; births, deaths, marriages and divorces, new jobs, redundancies and retirement.
When a trusted adviser informs their clients that they are moving firms it is perhaps, then, inevitable that many clients will want to move their business with their adviser. Shouldn’t clients be free to choose?
A financial services firm will argue that they have a legitimate interest in protecting their client base. That is, after all, what produces their income.
Relationships between individual clients and their advisers will have been nurtured under the auspices of the firm’s commercial operations and at business expense, not least in the form of remuneration paid to the financial adviser.
The influence that an individual adviser will have over a client’s decision as to where to take their business will also have been shored up with the acquisition of confidential data about the client, which the authorised firm has a duty to protect and preserve.
Consequently, post-termination restraint of trade in employment contracts are commonplace in the financial services sector.
How is it enforced?
Such restraints are at first sight unenforceable and anti-competitive, but they are legally enforceable through the courts if they exist to protect a legitimate business interest and go no further than is reasonable to do so.
A typical set of restraints would include a restraint against actively soliciting the business of a client for a limited period (often six or 12 months) after employment ends.
The restriction should not extend to all of the employer’s clients, only those with whom the adviser has had personal dealings within a period of time (again often 6 or 12 months) before employment terminates. If a restriction does not make these distinctions, it may be unenforceable.
In the 2020 case of Quilter Private Client Advisers Ltd v Falconer the High Court ruled that a restriction relating to clients with whom the financial adviser had had contact in the 18 months prior to termination of employment was too long and unenforceable.
While a firm will could feel that it should respect a client’s freedom of choice of adviser, non-dealing restrictions can be and have been enforced through the courts.
They found that this would catch former clients who had long since moved their business elsewhere, as well as clients that the adviser had inherited from her predecessor.
Given that the firm’s clients would have a review with their adviser every six months, the court suggested that a six or maybe 12-month backstop would have been sufficient to protect the firm’s legitimate business interest.
Non-solicitation restrictions feel, in principle, reasonable and common sense. It arguably cannot be fair for a departing employee to leverage their professional relationships to actively entice clients away from their previous employer.
A more problematic restriction, which is again very commonplace, is a ‘non-dealing’ restriction. This restriction will seek to put a financial adviser in breach of contract if they accept an unsolicited client instruction.
Again, the restriction should be reasonably time-limited to be enforceable, but the scenario of a client seeking out their financial adviser in their new firm and asking to stay with them is a fact of life.
What can and should that adviser and their new firm do in this scenario, and what could the consequences be of accepting that client?
First, it should be borne in mind that it will usually not be possible to circumvent these restrictions by allocating the new client to a different financial adviser in the new firm.
The wording of these restrictions are all different and the relevant contract wording needs very careful attention, but very often they restrict the outgoing adviser from having dealings with relevant clients ‘directly or indirectly’.
The inference will be that the adviser has indirectly had dealings with the client through the intermediary of their firm or a colleague.
Second, and while a firm will could feel that it should respect a client’s freedom of choice of adviser, non-dealing restrictions can be and have been enforced through the courts.
Non-solicitation restrictions feel, in principle, reasonable and common sense.
They are enforced by way of an award of damages in favour of the previous employer to compensate for business already lost.
Alternatively, if a lot of damage has yet to be done but could be, an employer can seek injunctive relief. Injunctions are draconian and costly applications that, if successful, result in a court order restraining the adviser from further breaches of their non-solicitation/dealing provisions, and potentially restraining their new firm from inducing such further breaches.
As an injunction application is very expensive, and some of those costs can be recovered from the losing party, employers will often want to join the new employer as a defendant to the legal proceedings, so they can have recourse to their business, as well as the individual adviser, for recovery of those costs and any subsequent damages.
As the long arm of the regulator extends, most recently reaching its tentacles into matters of non-financial misconduct such as sexual harassment, employers of the outgoing adviser will also be considering their regulatory obligations in respect of references and reporting.
Where an outgoing adviser is suspected of a serious breach of their covenants or duties of client/commercial confidentiality, this could call into question the integrity they are required to demonstrate under rule one of the Financial Conduct Authority’s code of conduct.
Authorised firms will consider whether to include information pertaining to individual fitness and propriety in regulatory references to prospective employers, and even whether there is a conduct breach that is immediately reportable to the regulator.
In view of the potentially serious consequences of observing these restrictions in their breach and the complexity of this area of law, with case law constantly moving the dial, specialist legal advice will invariably be valuable.
This article was written by Louise Attrup, an employment partner. For more information about his subject contact la@debenhamsottaway.co.uk or call 01727 735663
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.
