Time and again, tax advisors and lawyers try their hand at “investment advice” – occasionally not only for a fee but also for commission if the investment is successful. Conversely, insurance companies (e.g. when setting up a company pension scheme) and banks (e.g. for financial advice and succession planning) are increasingly offering the customer a “one-stop solution” – including advice on or design of tax and/or legal arrangements. This raises the question of the legal framework.
The question of competence
Since financial service providers (for example, insurance intermediaries) generally have no training in legal and tax matters, they are prohibited from giving qualified advice (for example, on succession planning or inheritance law) – only “ancillary services”, i.e. the simplest questions, would be allowed to be advised. The Federal Court of Justice and the legislator thus want to protect customers “from unqualified advice”.
Violations of this are not insurable under any circumstances, because it is a tort. The borderline is to be seen where the financial service provider does not only fill in forms, for example for a pension commitment, similar to a secretary or typist, but starts to design individually. This includes, for example, wording(s) tailored to the individual case, however minor, or even suitably chosen.
As a broker, brokering a suitable reinsurance policy for an existing pension commitment is one of his tasks. On the other hand, it is just as absurd to want to supply the pension commitment with form assistance at the same time as if the broker thought that the preparation of purchase contracts for used cars belonged to the brokerage of the motor vehicle insurance to be concluded for it. Or it belongs to the insurance broker activity at all, which serves somehow the goal to mediate later an insurance contract for it.
Conversely, most tax advisors and lawyers have no training in banking and insurance products, as this requires special expertise. After all, no notary would think of not only wanting to record the property purchase contract, but also to plan the house conversion.
The activity of a client advisor as a “syndic” (as an employee of a bank or insurance company) leads – if the professional chamber finds out – to the withdrawal of the license. This applies not only to bank customer advisors, but also to independent insurance agents and real estate brokers. In the absence of qualifications in financial services, there is also the threat of personal liability – without insurance cover, of course.
There are said to be tax consultant offices that have brokered financial products such as junk real estate, closed participations or even insurance policies – often in return for kick-backs of which the client only learns in the event of liability. As far as this does not concern own contracts or those of family members, the trade tax liability of the own law firm is threatening. In addition, insurance brokerage today and financial investment brokerage in the future require a licence.
Even today, tax advisors are generally prohibited from engaging in any commercial activity – otherwise their licence may be withdrawn. However, financial service providers complain time and again that some tax advisors have held out their hand – for example, as tipsters. If something like this comes up as a result of a dispute or in the case of an investment loss, then there is the threat of preliminary proceedings for fraud or breach of trust.
Asset advice of the tax adviser has limits
Permissible and insured with the StB/RA is at most a “consultation” of the client. However, this means something quite different from what an advisory financial services provider does as an activity. This is because the advice given by an insurance intermediary is aimed at providing the customer with a specific product – in other words, the customer is persuaded to make a decision in favour of a specific product provider and/or a specific product.
This is not insured as “recommendation of economic transactions” neither with the StB nor with the RA, let alone compatible with the profession. The correct advice given to the client by the StB and the RA is in fact quite different: It is only permissible and insured “in close connection” with their professional activity. Just the “tip” to subscribe to a certain investment is no longer part of it. Permissible is a consultation in the sense of an appraisal of different product providers or products, according to the customer’s specifications.
This certainly includes conducting “beauty contests”, but not recommending a particular immediate annuity model, for example. It is also permissible if the StB offers controlling, i.e. the supervision of asset managers – but not the uninsured managing activity in a fiduciary position for the client. In the case of the so-called “family office”, the contractor will usually have some scope for interpretation, interpretation or discretion for the convenience of the client – thus the chamber professional regularly operates outside his VSH cover.
Wealth planning by and with the tax advisor?
The implementation, e.g. the selection of financial products for or with the customer, regularly requires a licence according to § 34 c, d GewO. Conversely, StB chambers have already successfully issued warnings to banks for preparing financial plans with tax content. A chamber of StBs in southern Germany has also obliged a major bank to issue a cease-and-desist declaration with a penalty clause.
It becomes even more precarious for the StB if he also takes over the asset management of the client’s bank account in his office – such orders are regularly null and void, because no StB has a small banking license according to § 32 KWG for “family office with portfolio management”. Every financial service provider can see this from the public asset manager list on the BaFin homepage. If a financial service provider discovers such tax advisors, a “report” to the Chamber of Industry and Commerce (IHK), the Chamber of Professions (Berufskammer), the Trade Licensing Office (Gewerbeamt) and the Federal Financial Supervisory Authority (BaFin) is sufficient – plus perhaps a note to the Bundesbank, which will then order “liquidation” after a local inspection. Incidentally, in case of doubt, the tax advisor must then also take responsibility for any investment losses or, in the case of insurance brokerage, compensate for any losses (of almost) all kinds – out of his own pocket, of course.
Cooperation or collaboration?
StB and RA should not adorn themselves with foreign feathers in the field of financial service providers, because they can in no way replace the analysis of an experienced insurance broker. The same applies to financial service providers – because, on the other hand, they are not responsible for legal. and tax consultancy – a good reason in this respect to refer specifically to a “chamber professional” with the confidence of the client or another suitable expert as soon as complex questions arise in the respective specialist field. The perennial problem with this, however, is that clients are reluctant to learn that good “advice” costs anything.
The financial service provider has an easier time of it here, because his remuneration is usually “calculated in”, i.e. not visible at first glance. Even more recent legal obligations to disclose kick-backs, for example, are still ignored by many a financial house or its advisors/brokers today – despite the often already calculated risk that the customer could therefore later demand reversal.
An all too lax reference to the fact that one could consult a lawyer, tax advisor or expert without a sufficiently clear and urgent recommendation can in turn bring the financial service provider into liability who knows about the necessity of advice by chamber professionals in the individual case. However, the attempt of an openly recognizable “cooperation” between a tax advisor and, for example, a financial service provider also has the “catch” that the tax advisor has insured a completely different profession and completely different activities in his VSH policy than, for example, an insurance broker.
Already an office partnership – and not only a cooperation – can thus inevitably lead to “averaging” in the VSH coverage – not only in the event of a claim. In the case of both cooperation partners, this can easily lead to false insurance or underinsurance, because in case of doubt, the professions and activities of all cooperation partners would have to be covered in the same amount (in each case in their own VSH policy).
For years, VSH insurers have failed to recognize the opportunity for financial sales through special VSH coverage for completely legal possible collaborations between financial service providers and chamber professionals. In doing so, both sides of such a cooperation put their own authorisation at risk and, in case of doubt, act without or without sufficient cover in such a cooperation.
“Cobbler stick to your last”
Even the vernacular warns against overestimating oneself. Those who exceed their authority run the risk of being convicted of “intentional immoral damage” and “fraud. These usual legal claims against “impostor services” should be heeded by tax advisors and financial service providers, because their own VSH insurer might even be pleased about this, to say the least, and probably won’t pay a cent in the event of a claim. The courts assume that already the entry into an activity that is no longer compatible with the professional profile, i.e. the simple provision of appropriate advice, can constitute fraudulent client deception – for the StB as well as for the financial services provider.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
by courtesy of
www.experten.de (published in Expert Report 12/2011, pages 12-13)
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About the author
PhD, 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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