Good advice can be expensive

What was well-intentioned as a tip can become a nasty liability trap for brokers or financial advisors. As a tipster, it is sufficient to adhere to a few principles in order to protect yourself.

Agents for insurance or building society contracts, advisors for financial investments such as investment funds or over-the-counter investments are experts in their field. They are, as it were, experts in financial matters. At least, that’s how they perceive their clients and customers. But they cannot know that not every one of these “money experts” has a licence to advise on every product. And so it happens every day that customers and clients ask their – let’s take the insurance agent – about other products. He’s a professional. He might have a good tip. In such a situation, no intermediary would put his client in front of his head, he would not be allowed to say anything about it. Or give himself the nerve to say he can’t say anything about it. And what’s more: as in the medical profession, financial service providers are usually well networked in their region. People know each other, recommend each other.

Liability risk unknown

Many people are not aware that the intermediary and financial service provider are on very fragile liability ground. If they mention other product areas in their discussions with customers, or even make specific recommendations, their statements automatically mutate them into tipsters. In doing so, customers trust their apparent “financial expert” based on their previous relationship and automatically transfer this to the recommended product or provider. If the tip or advice then leads to damage for the customer, however, the advisor has a major liability problem. Real-life example: An insurance broker is approached by a medium-sized company after its family business has just been sold. Does he know a good asset manager? The recommended asset manager manages to speculate away a good three million euros of savings within three years by making financial bets against the market trend down to half a million euros. The Federal Financial Supervisory Authority (BaFin) later filed for insolvency of the asset manager who had been sued several times. The broker as tipster is reproached that he should have been aware of the reports about a “series of losses” of the asset manager which had been known in the financial industry for years. In addition, he should have known that the money would be put into a fund of funds managed by the same people to whom he entrusted his private assets, so that a conflict of interest was inevitable. The insolvency administrator confirms an ongoing remuneration of the tipster.

Liability without remuneration

The consequence: The broker had no clause for this and thus no sufficient protection in his pecuniary damage liability and was liable with his private assets. And since he as a person had given the tip and was compensated, he could not hide behind his limited company. “Already the Reichsgericht (RGZ 52, 365) decided in 1902 that it is sufficient if someone with a recognisable need for reliable information turns to a lawyer, an information contract associated with liability comes about from socially typical behaviour. It does not depend on the intention of the parties to be liable (intention to be legally bound), but on the objective horizon of the recipient (RG JW 1928, 1134 f.). There does not even have to be a remuneration for the tipper. He may not even expect a reward for the facilitated conclusion of a contract at home or abroad. The decisive point is that whenever considerable responsibility is involved, it is no longer a matter of liability-free private courtesy. If, however, the alleged tipster has even “already prepared and processed the conclusion of a specific transaction so comprehensively that the customer only has to sign and send the order, or if the broker forwards the order receipts signed by the customer after providing investment advice”, then, according to the Federal Court of Justice (BGH) in its ruling of 05.12.2013 (Ref. III ZR 73/12), the tipster definitely requires permission. The intermediary sued in this case was doomed by the fact that he did not have a licence under section 32 of the German Banking Act (Kreditwesengesetz – KWG) for brokering financial instruments.

Secure tippership

For clarification: The activity as a tipster is exempt from licensing, especially in the insurance industry. No license is required if only the contact of a potential customer to an insurance intermediary or an insurer is established. Of course, the tipster may be paid any compensation for his efforts. If the financial service provider takes all these principles to heart, he has already gained a lot. However, in order to fully protect yourself, it is advisable to have sufficient property damage liability insurance (VSH). The activity as a tipper is not subject to insurance and is therefore only covered in some special VSH policies. However, for the vast majority of intermediaries and advisors, this misses the point. A VSH policy check quickly brings this gap and other disadvantageous clauses to light. For this reason, it is a good idea to have your VSH policy reviewed by an independent advisor even without the desire or thought of becoming a tip donor, also in order to identify and close other often unknown gaps in coverage. Since injured parties, also in order to lend emphasis to their claims, also add a criminal law component to their liability questions, advisors and intermediaries are additionally advised to take out a favourable criminal law protection insurance policy as a supplement to the VSH.

by Dr. Johannes Fiala and Ralf Werner Barth

published in

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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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