Agency Contracts – Agents And Representatives Beware

Agency Contracts – Agents And Representatives Beware

The first time I had a look at an agency contract, I was shocked that it was dated 1985 and not 1685.

Although not legally trained, I had done the subject of law of contract in university, and it struck me that the agency contract I was holding in my hand, was a classic case of a one-sided contract that screamed out “unfair”, “unfair”.

The Principal (or Master in some contract wording) had the right to terminate the contract at any time without having to give any reason, and the agent (or servant in some contract wording), would then forfeit rights to commissions and other payments, whether he terminates the contract or the contract is terminated by the Principal.

I knew immediately that I would be out of my mind to sign such a contract. But so many thousands of agents had done so. “What to do?” All of them said: I need to make a living and what is the alternative?

The tied agency contract went one step further and bound the agent to sell only the firm’s products and not any other company’s products, whether the firm was a competitor or in a totally different company. I was rather taken aback that this kind of contract was still around in spite of all the talk about “clients’ interest first” and consumers’ rights, because by tying the agent down, you also limit the clients’ choices.

I was pleasantly surprised to read later that some states in the USA had by then already decided that agents must be given the freedom to represent other companies as well. They were called General Agents (different from General Insurance agents). However, the more modern and client-friendly concept is the Independent Broker who legally represents the interests of the client and not the insurance companies. The rise of the independent broker in the USA and UK and Australia lent some encouragement to my starting a brokerage.

When I looked at the legal status of the agent and the broker, I knew that I had no choice of which business model to use if I had my clients’ interest at heart.

But it was not without cost. Forming a brokerage is a costly affair. Since a broker does not represent the insurance companies, it has to finance its own operations – rental, staff, marketing and sales expenses, training, compliance, etc.

But counterbalancing the cost is the advantage of ownership – the brokerage owns the business and will not be subject to unpleasant surprises sprung by the Principal. Of course, there are terms to observe and these are only fair.

The question which naturally followed was what about the individual brokers and Representatives who bring in the clients? Will they have a right to enjoy the business even when they terminate the contract or have their contract terminated?

Any agent or Representative who had to leave a company would know how painful it was to forfeit future commissions and fees and in some cases, be legally prohibited to take the clients out of the firm for a period of one to two years or permanently.

Natural justice and fairness soon led to the granting of ‘vesting’ rights for the broker or Representative. It started with conditional vesting i.e. vesting may depend on the number of years a broker has been with the firm, or on achieving certain production targets, or other criteria. Moreover, the vesting may be of varying percentages of the normal compensation.

However, the most significant question is whether vesting could be granted immediately and without any other condition – so-called unconditional vesting.

This means that even if the broker or Representative terminates the contract, he will be entitled to take out his clients even if he joins a competitor. This is a noble and extremely fair and “generous” policy because most firms would have provided training and benefitted the Broker or Representative.

Having implemented this unconditional vesting scheme, I am pleasantly surprised by how well-received and appreciated it is.

The only retention “power” now lies only with what the Principal can offer to the Broker or Representative and not using the threat of financial penalty or loss of clients.

It is my prediction, that it is only a matter of time before even all agency contracts will have this fair term of vesting. How soon it will take place depends only on the Agents themselves.

There are enough FA firms who offer immediate and unconditional vesting to Representatives to give choice to new entrants and also existing Agents who now realize how restrictive and one-sided the Agency contract is.

But a warning note. A firm that offers immediate and unconditional vesting and which for some reason, starts losing Representatives, may be tempted to hold back their Representatives by other means.

One way is to find grounds, whether reasonable or not may be questioned, to take action against the Representatives, leading to disciplinary action like suspension.

The motive may be to scare the Representatives so that they remain, as it may be difficult for the Representative to apply for license (if he has not been licensed before).

It is also a temptation for unprincipled firms to find grounds to terminate the Representatives and forfeit the payment of all commissions and fees which would otherwise vest with the Representative.

The point is that a Representative must still recognize the importance of joining a firm that can be trusted to do what is right and fair and not change terms (as is their right contractually), or takes unfair action to disqualify Representatives from enjoying their compensation.

When clients are treated unfairly, they have FIDREC and ultimately the MAS, to get justice done, while retaining their legal rights under the contract or common laws.

When Agents of Representatives are treated unfairly, they cannot seek help from MAS, MOM, or FIDREC because their rights are considered under the specific contract terms. Breach of contract has to be pursued in a court of law. This is onerous and it is not easy at all to gain a favourable judgment because the powers and rights of the Principal are general and wide-ranging, especially on the right to terminate a contract.

We all know CAVEAT EMPTOR. Buyers Beware. It’s good to know too: Agents Beware.