His comments come as the UK regulator is taking action against advisers on overseas pension transfers, which has raised concerns that life companies are not being equally held to account.
“In many international markets, the relationship between client, adviser and life company is based on the Law of Agency, a largely common law concept which recognises that the adviser can be the agent of the client without being the agent of the life company,” Willoughby told International Adviser.
“At the same time, advisory firms can have ‘arm’s length’ contractual relationships with life companies in the form of terms of business agreements”, where they introduce potential clients that the life company “is not obliged to accept”.
The agency model generally works well, Willoughby said, but, “if a mis-sale occurs, regardless of the circumstances, the adviser will generally take the brunt of the blame as they provided the point of sale advice”.
“In this scenario, it’s not unknown for the life company to ‘hide’ behind the Law of Agency and say that the mis-sale is nothing to do with them, despite having a terms of business relationship with the adviser, who is promoting their products, sales of which will almost certainly have involved some form of payment from the life company for introducing the client.”
As the life company ultimately has control over which advice firms they offer terms of business to, they should not be able to shield themselves behind the Law of Agency, Willoughby said.
“If life companies give terms of business to ‘bad’ advisory firms, they deserve to cop some of the flak for a mis-sale.”
Works both ways
However, for life companies operating in civil law countries where the Law of Agency may not be recognised, the legal system assumes the client is the agent of the life company, despite the policy being sold by a third party.
“Any ‘arm’s length agreement’ is pretty useless,” said Willoughby, adding that this scenario goes against the life company rather than the adviser.
“Not forgetting the poor client caught in the middle.”
The Law of Agency is still a good model for providing independent financial advice, Willoughby believes, “if life companies vet and control whom they give terms of business to, and advisory firms seek to do right by their clients”.
For Bryan Low, director of international distribution business Provisca, advisers share responsibility with life companies as they are usually the only person who has had direct contact with the client.
“For me, mis-selling falls into two main camps; suitability, so is this the right product for the client; and the second is to do with the risk level and expected net performance of the investment choice within the product.
“Ultimately the financial adviser must take responsibility for recommending a suitable product that will meet the client’s needs. They are the only person that meets the client, they carry out the fact-find and recommend the product,” Low said.
He does believe, however, that the lack of transparency within life companies’ products in most international markets allows advisers to disguise their remuneration structure.
“The products can help advisers be opaque on charging at both the product and fund levels. Life company illustrations may highlight the effects of initial and ongoing commission and product charges, but often not in a way that a client would call commission disclosure.
“It is also unlikely to reflect the mix of initial commission, high ongoing management charges and performance fees that can apply to investments recommended by the adviser. The common use of back-end loaded funds can also have a major impact on net investment returns.
“Despite their protestations to the contrary, most life companies continue to allow advisers to ‘double-dip’ on product and fund charges, and to invest in assets such as back end load funds when there is clearly a great choice of standard funds from first class asset managers available.
“The clock is ticking on this business model however, despite life companies lobbying to delay the introduction of transparent commission and fee disclosure in home markets like the Isle of Man and host markets such as the UAE. Many adviser firms have already recognised this and started their journey down a different road,” Low said.
Attendees at IA’s International Portfolio Bond Forum in Bristol said that product providers and trust companies must take more care to ensure that unregulated funds don’t end up inside recognised overseas pension schemes (Rops) and life company wrappers.
Simon Gould, founder and director of Gould Financial Planning said: “It [the financial services industry] is taking a fee and we are facilitating investment, we ought to have a responsiblity to find out about the investment.
“This includes the product provider and trust companies.”
Markas Gilmartin, founder of Epoch Wealth Management, agreed: “There needs to be shared culpability on all levels, it can’t just be down to the introducer [of the scams].”