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As the last of the derivative mis-selling claims peter out (for the current cycle anyway) and the court processes come to an end, as with any ‘crisis’ there is reflection and altered behaviour. But just like in Arthur Miller’s Pullitzer Prize-winning play, it feels that there are still many people who don’t appreciate that even the best salesman can’t be all things to all people. For financial counterparties, the ever-tenuous connection between sales and advisory roles has now fallen away completely.
The documentation now provided by derivative counterparties clearly states the absence of any advisory responsibility on their part, with added emphasis that the client/customer should take independent advice before entering into a derivative contract. This disclaimer is also pre-recorded and regularly included on trade calls prior to derivatives being executed. A recent judgment in a derivative mis-selling case reinforced this point, with the presiding judge noting that to impose any wider ‘duty’ on the bank (derivative counterparty) would “…blur the lines between a salesman and an advisor”.
At JCRA we think the demarcation of these roles is extremely clear. But the reality is that, despite all the coverage of ‘mis-selling’ of interest rates and FX products, we are astonished by the number of clients who rely on product salespeople from banks and brokerage houses to guide/influence/dictate their decisions on risk management solutions. Even more surprising is that fact that some banks and brokers continue to routinely position themselves as ‘trusted advisors’ despite clear documentary evidence to the contrary (which they will rely on in court).
The post-financial crisis regulatory environment has reacted to the lack of transparency in the derivative market, and clients can take some comfort in this. The best outcome of the new regime is that, if asked, counterparties are obliged to reveal their ‘spread’ (revenue) from the products they are selling. But the question is the spread over what? And what if the whole hedging strategy/derivative product is unsuitable for the client? Some of the financial counterparties we work with (UK clearing banks in particular) have taken the view that the reputational and litigation risk is too high, and so are absolutely explicit in stating that their role is execution only.
The ability to determine and recommend a hedging strategy which is in the client’s best interests rather than the provider’s is where the real distinction between a salesperson and an independent advisor lies.
JCRA is committed to providing independent advice, ensuring transparency of pricing and the delivery of optimal hedging strategies to our clients.
Have you got a question about how you hedge your financial risks, or structure and arrange your debt?
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