Initiator monitoring and controlling: sales companies and training managers in personal liability for incorrect training of financial intermediaries and financial advisors

The difference between the right word and the almost right word is the same as between a flash of lightning and a firefly

(Mark Twain, US storyteller and satirist, 1835 – 1910).

 

Since many training courses of product providers and/or distributors are based on legal statements whose contents were not checked in advance, the courts have been increasingly holding distributors liable for years.

Those intermediaries who trust in the legal and fiscal sales statements are at first sight unprotected. This is because, especially when they rely on legal and tax sales statements, there is often no VSH protection in their own intermediary VSH for this area.

Only intermediaries who belong to a strong community and have been properly advised legally can also pass on the damage to the distributor who caused it.
The case: X-Vertriebs-AG Germany. The renowned distributor had trained mainly British life insurers, with all the trimmings leverage models, calculation software, powerpoint, handouts. Other distributors reported that a “sales executive” was also on the invitation for the “exclusive training”:

It’s a great service. There was only one catch to the model: this customer later went bankrupt.

 

Now the “X-Vertriebs-AG Germany” was sentenced by the regional court Augsburg (Az. 10 O 1933/05) with judgement of 29.06.2006 up-to-date to the complete compensation. The reasons for judgement remind of numerous parallel cases, mean investor lawyer Bisping (www.bisping-becker.de). As soon as legal protection or litigation financiers have agreed, more lawsuits go to court.

This is not an isolated incident. Also other distributors get into this liability for faulty training, as for example the judgement of the OLG Karlsruhe of 24.03.2005 (Az. 11 U 31/04) shows. Again, the intermediary’s training had been inadequate.

Finally the BGH (Az. II ZR 13/03) made clear by its judgement of 28.02.2005 that wrong statements can lead with training courses to a folder adhesion, with a requirement of the damaged one from “deliberate immoral damage”, § 826 BGB.

 

Financial service provider and customer strike back together do the distributors have a proper punching vest (VSH) for this?

In the case of “X-Vertriebs-AG Deutschland”, the customer turned to his intermediary. Intermediaries often do not realize where the training deficiencies were until they engage an actuary or legal counsel.

The intermediary and the customer agreed to take joint action against the distributor neither the “instructions and training” nor the “software” had been usable. In court, the customer won; the agent as a witness showed the court his training material and other documents from his archive?

Vicarious liability of insurers and distributors: The law firm Bisping is preparing further lawsuits against distributors and insurers: The basis for this is primarily the case law as found in the textbooks of various renowned German law professors.

For the lawyer it’s child’s play if the mediator opens his archives and there is something delicate to be found there. Not infrequently, intermediaries and sales are jointly liable (cf. OLG Hamm, Az. 4 U 183/04, judgement of 10.03.2005).

According to case law, it is sufficient for the intermediary to use the “logo” of the distributor in order to take the distributor into the liability boat: The frightening thing is that even the use of a business card with the company logo of the distributor or product provider can be sufficient for this; the lawyer then often speaks of prima facie liability.

In practice, this can be taken to extremes to the extent that the distributor is also liable for products of the independent agents that were not brokered/sourced through his company. In view of these risks, quite a few distributors have not taken precautions either through VSH controlling or through contract quality management. Diligent autodidacts among the concept providers like to mix up §§ 84 and 93 HGB in their distribution contracts, with fatal liability consequences.

Credit-financed plants are no age precaution: Also the Th?ringer OLG (Az. 5 U 960/04) made clear in the resolution of 23.03.2006 that with (completely) outside-financed plants, the total loss risk is separately to be cleared up-obligatory, because an age precaution stands completely against it:

Some brokers don’t even know the difference between “retirement” and “pension”. Even the fact that the investor is a fully qualified merchant or GGF does not change these duties of disclosure at all.

 

Meanings of documentation:

Documentation by the intermediary has multiple meanings. The OLG Hamm (Az. 4 U 183/04, judgement of 10.03.2005) brings it on the point: The mediator has to explain concretely where and how the required clearing-up was made and/or arranged; by the way this lies for decades on the line of the BGH. Unfortunately, this point is often left out of so-called reference books on advisor liability.

It goes without saying for those familiar with the subject matter that “advisory protocol sample forms” are in practice not worth the money for the paper they are written on. Unfortunately, the “concrete where and how” can hardly be captured with a form; only rarely is software suitably designed for this purpose.

Only who can prove, how was advised, can lean back calmly, because with proper consultation the customer carries the risk really alone (BGH judgement of 21.03.2006, Az. XI ZR 63/05).

The OLG Hamm (file no. 8 U 170/02) requires in its judgement of 26.03.2003 that the broker has to prove that the prospectus was handed over. As one point among many, in a protocol, even if the customer signs it, this will regularly hardly stand up in court:

There a separate explanation and/or receipt will be necessary; Has that your software today, after all 3 years later – this point already considered?

The documentation is already required by VSH insurers, according to the current conditions. If the broker or distributor realises that he needs “subsidiary retroactive cover”, the insurer will currently only increase the amount of liability for the past if VSH cover was already in place beforehand, explains VSH specialist broker Ralf W. Barth (www.rwb-finanz.de). He goes on to point out that in this case, however, it is not the old set of conditions that applies, but only the newer one – which means that more restrictive conditions apply. Apparently thousands of times agents insure themselves backwards without realizing that due to lack of documentation from the past the premium is simply “thrown out the window”.

 

Conclusion for intermediaries:

Check the negligent false training!

If a safe legal or tax arrangement is trained for you, or other things seem unclear, get it in writing; preferably with a guarantee.
The intermediary should inquire about the creditworthiness of the distributor, then he can better estimate the value. Here, too, Basel II sends its regards. If a case of damage appears, active damage management is announced together with legal counsel and/or VSH broker: Then the “mill game” can succeed, the mediator is skipped, and immediately the “nearly correctly” training selling is sued.

 

 

Conclusion for distributors and product providers:

Transparency and external controlling!

It is not uncommon for insurers to reject a risk, and then refer to it as a cluster risk. Especially in risk and quality management, gaps may become apparent that an external controller would have recognised – the insurer will then politely wave them off, because it is not its task to set up the sales department in a sufficiently safety-oriented way, let alone to design the sales contracts in an appropriately liability-oriented way.

The “almost correct” specialist information, sales-oriented from the pen of the in-house counsel in the house of product providers, is also particularly prone to liability. Outside counsel occasionally relegates legal opinions to the realm of fairy tales and wishful thinking. The solution for distributors and product providers is quite simple: find a combination between external lawyer and VSH controller.

 

Liability trap since 01.01.2002:

Advertising liability according to BGB. Little attention is paid to the fact that liability for material defects and defects of title has been particularly comprehensive since 01.01.2002. The quality also includes the characteristics which the buyer can expect according to the public statements of the seller, the manufacturer or his assistant, in particular in advertising or labelling about certain characteristics. While the “3-litre car” abruptly disappeared from motor vehicle advertising on 01.01.2002, the financial sector occasionally allows itself to disseminate “almost correct” specialist information as sales support.

According to the new law of obligations, the customer can fall back on statements in advertising, because liability is assumed for these in the same way as for assurances; in particular for “supplementary performance” and/or compensation for damages. An interesting question, who is then liable for what and even more interesting the question, where are the gaps in the VSH protection?

 

Just sales(?) managers and their occupational hazard:

One of the tingling questions for the insurance broker is the extent of the insurance cover of a D&O policy, as currently publicly discussed in the “Hartz case”. For more details, please refer to the book of the same name “Manager und ihr Berufsrisiko” (Managers and their occupational risk) published by Gerling Akademie Verlag. In terms of content, the chapter on “(personal) liability of the board of directors vis-à-vis company creditors” can easily cover the need for horror films for affected business managers for the rest of their lives.

 

 

Our tip for agents:

Time and again, employees of product providers and distributors confidentially admit that they are well aware of the “risks of their models and methods” for the intermediary. Have you also heard of distributors who say in a liability case that only the intermediary is “criminal” and turn against him:

This changes immediately if the intermediary can prove that there was incomplete training and instruction.

The intermediary can only protect himself effectively by archiving all training and presentation documents (powerpoints, pdf-files, videos, CD-ROMs, handouts, screen shots or mobile phone cam recordings, if applicable), in all (different) versions. A data backup can be existential – as well as good contacts to colleagues who also maintain personal archives. The old pros in the market, no matter at what level in sales structures, have been cultivating this for decades, and then call it “pure self-defense”!

Furthermore, the intermediary can compare his data with the expert network DVD in order to try to really get hold of all the documents.

As the saying goes, “The wise businessman has his files ready for trial at every stage of the business relationship.”

 

 

by Johannes Fiala, Lawyer (Munich), MBA Financial Services (Univ.Wales), MM (Univ.), Certified Financial and Investment Advisor (A.F.A.), Banker (www.fiala.de)

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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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