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.