WHO OWNS THE CLIENT?

25/02/2009

Financial planners and other service sector business operators often talk about “owning clients”; but who actually owns who or what?

People who operate businesses such as financial planners, insurance brokers or mortgage originators, are very protective of their client base – and rightfully so. The client base is probably the most valuable asset of the business. Generally, the only way to increase the value of the business is to increase the number of clients that the business is servicing. Certainly, when it comes time to sell a financial services business the sales price will primarily be determined by the number of active clients that the business is servicing.

 

It is, therefore, no wonder that many business operators genuinely believe they have a proprietary interest in their clients.  We often hear a financial services licensee say to their authorised representatives that the licensee “owns the client”. Similarly, when we work for clients that are establishing joint ventures or referral agreements within the financial services sector, there will inevitably be discussion about who “owns the clients”.

 

The simple fact is no financial service provider “owns” their clients. Consumers of financial services are free to take their custom to whichever provider they like. The fact that a person may have an existing customer relationship with a particular service provider does not mean that customer cannot take their business elsewhere in the future.

 

In fact, the financial service provider does not even “own” the clients file. On the contrary, it is the client that owns their file, and they can demand that it be delivered to them at any time. While the service provider is allowed to, and in many circumstances is required to, keep a copy of the client’s file, they cannot refuse to hand over the file if the client requests it.

 

So, how can a business operator protect their client base if they do not have a proprietary interest to enforce? Generally, there are two types of persons from whom the business operator will need to protect their client base. Obviously, there are countless circumstances that could arise where a business operator’s client base could be jeopardized, but these are the two circumstances we see in practice most often.

 

The first type of person is the former employee. It is very common in many businesses, but particularly in the financial services industry, for former employees to try and take their former employer’s clients with them when they move to a new employer in the same industry. The most effective method for protecting your client base in this situation is to ensure that your employment contracts have professionally drafted restraint provisions and other protections. The restraint provisions will prohibit the former employee from contacting clients of the business during a legally enforceable restraint period.  Other protections include the return of all company property such as client lists, as well as the return and prohibition on use of all company confidential information.

 

The second type of person who often jeopardizes a business operator’s client base is that business operator’s former business associates such as contracted authorised representatives or referrers under a referral agreement.  Often when there is a contractual arrangement, where both parties have a financial interest in the client or the client base, when that arrangement comes to an end, one or both parties may take uncharacteristic actions to try and secure their interest in the client base.

 

Frequently, in the early days of the business relationship when the parties are filled with a spirit of co-operation and goodwill the parties will not have fully contemplated what will happen with the clients when the arrangement comes to an end.

 
The best way to protect your client base in these situations is to ensure that your contract adequately deals with issue of what happens to the client base when the contract is terminated or expires. Again, adequate restraint provisions and use of confidential information provisions may apply. However, in these situations it may be more beneficial to adequately document who has control of the client files and who can and cannot contact clients during and after the term of the contract. By addressing these issues fully at the beginning of the contractual relationship, there will be less likelihood of a bitter and potentially costly dispute at the end of the relationship.

If you would like more information, please contact Mark Dupuis at Townsends Business & Corporate Lawyers on (02) 8296 6222.