*by Dr. Johannes Fiala, Lawyer (Munich), Mediator (Univ.), MBA Financial Services (Univ.Wales), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert (C.I.F.E.), Lecturer in Civil Law (Univ. of Cooperative Education), Banker (www.fiala.de)
Who does not know them, the so-called leverage models – an instrument to multiply the sales commission: The customer invests in an endowment policy not only his own capital, but also a multiple amount – financed by a loan. The loan is granted in particular on a DM/Euro, YEN or SFR basis. This is made palatable to the customer as an “instant annuity”, “private pension”, “savings annuity” or “credit-financed annuity”. Numerous broker bankruptcies also this year show that leverage transactions on the basis of German and/or British life insurance policies have not only left behind scorched earth. The fact that in this connection many credit institutes do not carry white vest, know the selling best – finally these banks supplied the mediator information about lever models free house, occasionally additionally its own computation software. The bank thus presented itself as a sales partner, went beyond its role as a pure financier and, according to settled case law, is also liable to the end customer – just like the sales department. The one or other case shows that with it the selling could save literally its skin, because after back completion by the bank opposite the customer the topic was eaten.
It is common for multi-level distributors to appear on the market in KLV structure distribution: Somewhere below the product provider, i.e. the insurance company, a leverage model is installed in most cases – with a friendly bank partner, of course. There waits then again a small commission for the supply of the credit customer. At this sales level, the training of the subordinate district or regional directors, up to the intermediary (agent or insurance broker), also begins immediately. Often, a vicarious agent (for example, bank employee, loan broker) is also involved in the training for the credit institution. Only: In many cases, the sales company has no idea of the liability it is risking – including the fact that, as a rule, there is no insurance whatsoever for financial losses and, for reasons of cost, a qualified check of the sales training documents with software is spared: On the other hand, one or the other sales agreement expressly contains a commission regulation for leverage transactions, and thus an indication of liability.
From the point of view of the intermediary, the approach is that even self-made(!) training and sales documents (from whichever stage of structural sales they may originate) can lead to prospectus liability. It is important to know that “brochures” are not only bound glossy printed matter, but can also be, for example, training documents, PowerPoint presentations, computer calculations and even handwritten sample calculations. This means that the intermediary can invoke liability arising from incomplete prospectus information against the “superordinate” sales company in individual cases. In addition to possible bank liability, liability of the distributor is also a possibility. In addition, the intermediary regularly has claims against the sales company arising from faulty training. This is because it is part of the core business and thus one of the cardinal obligations of the sales company to provide information about all risks that are economically, fiscally and legally associated with a capital investment model (BGH ruling, ref.: III ZR 62/99). Sufficient for this is, for example, the statement of a sales company “We have examined the investment or the investment model” (BGH judgement, Az: III ZR 268/96).
The intermediary can claim an “indemnity” on the basis of this responsibility of the distributor. In concrete terms, this means that the intermediary passes on his loss to the distribution company so that the latter pays compensation. As far as a customer of the intermediary has not yet made a claim, a security deposit would also be possible, because after all the intermediary is liable according to the “old” BGB (effective until 31 December 2004) for 30 years, and according to the “new” BGB for three or ten years in principle.
Often the intermediary accuses the sales company of having misled its customers into speculating on credit on the basis of the seminars or training courses. In particular, these are: the tax risk, the risk of a foreign currency loan due to changes in exchange rates, the risk of low or fluctuating earnings, the risk of financing not matching maturities, the risk of changes in credit terms and the risk of bank claims to increase collateral. Leverage transactions can also lead to a conviction under criminal law if a leverage transaction is conceived for the purpose of rescheduling or reducing the debt burden of, for example, unsuccessful tax savings models (LG München Az: 61 Js 7605/03), but the model fails in the end. British life insurance policies had often been taken out as repayment vehicles (also for customers’ old debts) on the basis of loan financing: The loan brokerage commission paid in advance by the customer together with the capital was lost in most cases.
It gets better. In accordance with the principles of vicarious liability and prospectus liability, the insurance company may also be liable. This is an aspect that has often not even been recognised by many insurers with sales operations. If the logo of the insurer is used on (also self-made) sales and/or training documents, then the insurance company must, in case of doubt, accept responsibility for the content.
In spite of yields in the lower single-digit percentage range, which are known today, British KLV sales organisations still advertise on t-online.de, among others, with currently rather unrealistic yields of 12.95 percent (over the last 30 years). It is astonishing that such potential liability risks are not taken as an opportunity by the insurance companies to strengthen the reputable sales partners and to cut off “diseased branches”.
Conclusion: According to the Saint Florians principle, intermediaries can be well advised if their affected customers inform themselves with regard to a bank liability and, if necessary, seek a reversal. The case law is just as customer-friendly in this context as it is in the case of bad investments in closed-end real estate investments on credit. Here it is worth taking a look at one’s own brokerage files in order to gauge what one’s own liability is under fire: This can provide sufficient reason to ask the sales company for a declaration of exemption backed by loan collateral.
(www.experten.de on 17.01.2007)
Courtesy ofwww.experten.de
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Dr. Johannes FialaPhD, MBA, MM
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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