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Commentary. How to avoid being left to carry the can when third party ‘system errors’ cost your clients.

June 18, 2015 imaclegal 0 Comment

Macquarie’s recent refunding of $5.5M to clients holds important lessons for SMEs.

 You have probably read that Macquarie is in the news again for all the wrong reasons. ASIC’s media release of 17 June states that Macquarie Investment Management Limited is to refund $5.5M to clients of the Macquarie Wrap platform due to ‘system errors’.

 The system errors included failing to apply sufficient tax credits to the GST portion of client fees and charging fees in excess of the maximum disclosed in the product offering documents. Which raises questions for SMEs as to how you can avoid getting caught up in such things. There’s a few things you can do. As a financial services licensee you have obligations to have adequate compliance arrangements and risk management systems. And if you are APRA-regulated too, you need to meet stringent outsourcing requirements.

 But if you were looking at recommending the Macquarie Wrap would any amount of due diligence on the platform really have identified such system errors? You’d have to think not because had Macquarie known of the errors they would surely have been fixed. And what level of due diligence is a licensee expected to undertake in any case? Would you sit down with the systems and business analysts and ask them to step you through all the functionality of the system and test and re-test every element of it? In my experience, very few would. In any case, most would assume that the platform operator has already undertaken extensive due diligence and testing of their own.

 So, what is there for a licensee to do to avoid being left carrying the baby in situations like this? In Macquarie’s case (and in other cases which involve other big product operators of which I am aware), they are coming to the party and refunding all incorrect amounts. But what if the operator wasn’t so forthcoming or, worse, did not have the financial wherewithal to promptly address the issue? Of course, they’d have some serious questions to answer with ASIC but it leads to the first thing you can do to mitigate the risks of being indirectly responsible for refunding your clients.

Tip 1: only deal with operators who you know and can trust. Who is your contact with them? Do they give you the impression that they will be there to do the heavy lifting if things go wrong or will they run a million miles? Are they reputable? What sort of track record do they have? Do you know and trust their management? Do they have the financial strength to fix things should they go wrong (as an operator they will have onerous NTA requirements). Ask around your network. Make these inquiries before you enter a distribution or promoter agreement with them.

 Tip 2: don’t just accept the operator’s standard agreement. Some of them are very one-sided and afford little protection to you if things go wrong. Review it properly and seek to negotiate changes. In our experience many operators will accommodate reasonable changes.

 Tip 3: ensure the agreement contains warranties and other promises about the efficacy of the operator’s platform, systems, and procedures.

 Tip 4: ensure the operator agrees to indemnify you in case of any loss, expense, etc that you may suffer as a result of their negligence or fraud. Why would you want to deal with someone that isn’t prepared to back their own product?

 Tip 5: and ensure the agreement requires them to maintain adequate PI insurance.

 We hope that helps. Best of luck. And of course, imac legal is able to assist with any contract reviews, drafting and negotiation.


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