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Case Study: Part 1
Mr. O’Connor is a multi-billionaire domiciled in Geneva.
Mr. Donald Jameson, his close friend, has an uncle Mr. Scrooge working as relationship manager at Credit Private Bank Geneva (“CPB”). Mr. Donald Jameson introduces Mr. O’Connor to Mr. Scrooge.
Mr. O’Connor finally concludes an agreement with the CPB for all sets of financial services (including deposit, management, etc).
At the same time, Mr. Donald Jameson concludes a commission agreement with the CPB, which provides for the payment of 50% of the fees received from the banking relationship with Mr. O’Connor to him, in consideration for the referral.
What is a Triangular Relationship when it comes to introducers and referral agents in the financial industry?
Triangular relationships may require financial institutions to adapt ways in which a business introducer is remunerated and look out for potential conflicts of interest.
Types of Contract as per the Swiss Code of Obligations of 30 March 1911 ("CO")
- Agency agreement (Article 418a ss CO).
- Brokerage agreement (Article 412 ss CO).
- In both cases, the general rules of the mandate agreement (art. 400ss CO) are applicable secondarily.
Can anyone be an Introducer?
In the past, anyone could be a business introducer. Even a taxi driver who picks up high net worth individuals from the airport could introduce them to a banker and sign an introducer agreement.
There are no legal requirements or licenses specific to introducers in the financial industry. However, due to the increased requirements on financial institutions (Code of Conduct, duties, etc. towards their clients), many compliance officers have set internal requirements whereby introducers should be licensed. This ensures the organization minimise its risk of on boarding clients that breach AML rules and regulations.
What should financial institutions consider when remunerating introducers?
- Remuneration principles are fixed by the parties in the agreement (no provision as per the law)
- Fixed finder fee?
- Percentage of the gain made by the financial institution, e.g. percentage of the bank fees paid by client (gross or net)
- Time limit of the remuneration? shall be fixed contractually
What are the duties involved?
- The business introducer generally has a duty of loyalty towards the client. Based on the pre-existing mandate he has with the client (oral or written) (art. 398 II CO).
- The business introducer is not disinterested about the referral remuneration(retrocession).
- Conflict between the interests of the client(duty of loyalty) and the remuneration of the business introducer (financial institution recommended in function of its own financial interest?)
Conflicts of Interest between parties
As per doctrine and jurisprudence, the business introducer has the obligation to avoid any conflict of interest – all conflict of interest shall be disclosed and authorised by the Client (Article 398 CO).
Financial service provider -Article 25 FinSA:
- “Financial service providers shall take appropriate organisational measures to prevent conflicts of interest that could arise through the provision of financial services or any disadvantages for clients as a result of conflicts of interest.
- If disadvantages for clients cannot be excluded, this possibility must be disclosed to them.
- The Federal Council shall regulate the details in this respect; in particular, it shall designate forms of conduct that are always impermissible on account of conflicts of interest”.
Specific issues regarding the retrocessions:
- As per civil law – reddition of account:
“The agent is obliged at the principal’s request, which may be made at any time, to give an account of his agency activities and to return anything received for whatever reason as a result of such activities” (Article 400 I CO).
- This includes the retrocessions /!\
- The Client shall be informed in advanced of the amounts of the retrocessions and waive his/her right to receive them.
Case Study: Part 2
What if Mr. Donald Jameson acts as independent wealth manager for Mr. O’Connor (bound by a management mandate)?
In the context of the retrocessions received by the independent wealth manager from the bank
- As per the Federal Court, the client shall be able to compare the direct remuneration of the independent wealth manager(calculated on the asset under management) with the indirect remuneration (the retrocessions received) (TF 4A_355/2019 of 13 May 2020).
- Communication of the retrocessions received on a regular basis to the client.
As per regulatory law (Article 26 FinSA):
- “Financial service providers may accept compensation from third parties in association with the provision of financial services only if they: (i) have expressly informed the clients of such compensation in advance and the latter relinquish such compensation; or (ii) pass the compensation on to the clients in full.
- The information for the clients must contain the type and scope of the compensation and must be given to them before provision of the financial service or conclusion of the contract. If the amount cannot be determined in advance, the financial service provider shall inform its clients of the calculation parameters and the ranges. If so requested, the financial service providers shall disclose the amounts effectively received.
- Compensation is defined as payments from third parties accruing to the financial service provider in association with the provision of a financial service, such as brokerage fees, commissions, discounts or other financial benefits.”
Case Study: Part 3
What if Mr. O’Connor expressly prohibits the CPB to pay his remuneration to Mr. Donald Jameson?
As a result, the CPB would be in breach of its agreement with M. Jameson.
Solution: Specific clause in the business referral agreement providing that the bank has the right to stop paying the remuneration of the business introducer upon instructions from the client.
What are the obligations of the financial institution in respect of the retrocessions paid to the business introducer?
- No obligations based on Article 400 I CO (TF 4A_436/2020 of 28 April 2022).
- Shall be mentioned in the documentation/agreement between the financial institution and the client.
- Communication of the retrocessions paid on a regular basis to the client.
Specific clauses to think about when drafting a business referral agreement
Exclusivity of the business introducer?
If the agent acts on an exclusive basis for the financial institution (in a certain area or with a certain clientele),the remuneration is due to the agent for each and every business concluded by the financial institution during the agreement, in the area or with the type of clientele, even without his/her intervention (Article 418g II CO).
The business introducer shall be considered as an independent contractor and in any case as an employee of the financial institution.
Any preliminary checks to be performed on the client before the introduction?
Client categorisation (Article 4 and 5 FInSA)? /!\ this will not release the financial institution to do its proper categorisation but precise the scope of the mandate
AML pre checks?
Any excluded client?
Confirmation that the financial institution has no obligation to conclude with the client, and that onboarding is subject to the financial institution’s own checks.
Does the business introducer has a right to conclude on behalf of the financial institution?
Remuneration of the business introducer shall due to the business introducer for the clients introduced (causality link) and (Article 418g CO) only upon execution of an agreement between the client and financial institution (depending on case, bank deposit, subscription agreement etc.) – limitation to the fees effectively received by the financial institution?
Regarding the remuneration: the agent as a mandatory right to consult the books and the other supporting documents that are relevant to calculate his/her fees. The agent may not waive this right in advance (Article 418k CO).
But the financial institution is bound by the banking secrecy.
Solution? Right given in the agreement to the auditor or the judge to consult the books and calculate the remuneration in case of dispute.
Right of the financial institution to stop paying the remuneration of the business introducer upon instructions from the client.
Time limit of the remuneration, calculation formulas.
Commitment by the business introducer to perform its obligations of disclosure toward the client: conflict of interest, full information on its remuneration and waiver of the retrocessions received.
lecocqassociate provides a full range of financial regulatory, corporate and commercial advice for financial institutions in Switzerland, Malta, the Dubai International Financial Centre and the Abu Dhabi Global Market.
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