Whose money is it? Trust account considerations

Despite what was considered common industry practice arrangements, the external administration of a financial services dealer group saw many authorised representatives lose their brokerage income when the company failed to properly set up their brokerage account to protect their interests.

Background

We were appointed voluntary administrators to a number of entities operating as a financial planning dealer group which provided licensing and dealer group services to its advisers. The companies were subsequently placed into liquidation.

One of the group’s functions was the receipt of fees and commission payments generated from the activity of its Authorised Representatives (financial advisers) into a ‘Brokerage account’ and the distribution of same to the respective advisers.

As a result of our appointment, an important question arose as to the relationship between the group and its advisers and the nature of the funds held in the bank account, specifically whether there was:

• A debtor/creditor relationship and whether funds in the account was considered assets of the group to be distributed in accordance with the priorities set out in the Corporations Act. That is, advisers would be considered unsecured creditors ranking behind priority (employee) and secured debt.
• A trustee/beneficiary relationship and whether funds in the account was considered to be held on trust for the benefit of advisers. That is, the administrators and other ordinary creditors of the company had no rights to the funds held.

The outcome

Ultimately, due to the complexity of the underlying agreements and arrangements, court directions were sought which determined that the funds were not held on trust for the advisers.

The key considerations for the judgement are summarised below:

• The account was not a designated trust account, nor did any agreements specify that the funds were to be held on trust.
• While the majority of funds held in the account related to commission payments, the account also held funds to which the authorised representatives had no entitlement.
• The agreements governing the relationship between the group and the advisers did not support the existence of a trust or a fiduciary relationship. Rather, a commercial relationship where the funds were to be firstly paid to the group which must, in turn, pay the advisers a share after the al location and payments of fees and other deductions. Any shortfall would constitute a debt owed by the adviser to the group.
• The group was entitled to any interest earned and also to any amounts which remained unallocated, which is inconsistent with advisers’ claim to having a beneficial ownership. Further, advances could be made to advisers who had no current entitlement to funds held.
• While there were indications that the board did not consider the funds available for the group’s operational matters, the taxation and accounting treatment of the funds was inconsistent with a trust account. In particular, the entire amount of funds held was treated as income of the company for tax purposes and the payments to the advisers was recognised as a company expense.
• The underlying fee and commission agreements existed between the company and the product issuer and there was no liability recognised by the product issuers to the advisers.

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Conclusion

The decision meant that the advisers collectively lost rights to brokerage income of over $2m. This was despite their belief that their position was protected, as the arrangements in place were common industry practice and the company’s intention to treat the funds in the account as belonging to the advisers.

Whilst the judgement was specific to the facts and agreements in place, it is important when establishing a trust account to ensure that appropriate documentation is in place and that the account is operated as such. Parties with an expectation that their funds are being held in trust, should ensure that they seek their own independent advice.

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How can Cor Cordis assist?

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