Legal Eye: Unregulated advice

These and other financial advisory firms advertise themselves to the public, at one level or another, as providing one-stop shopping for a wide range of financial services, including mortgage lending, short term loans, insurance sales, and to a lesser degree stock brokerage services. Moreover, financial advisory firms provide an alternative to conventional banks, and in many cases are able to provide financing to a consumer who may not otherwise satisfy the lending requirements of a conventional lender. With the growing expansion of this industry one might think that traditional banks, insurance companies and brokerage houses would be opposed to these new upstarts - after all they are all competing for the same clients. Think again. Let's take a look at why.

Who sells what?
Financial advisory firms, for the most part, act as brokers for banks, insurance companies and stock brokerages. The products sold by a financial advisory firm are generally, although by no means exclusively, the same products provided by individual banks, insurance companies and stock brokerages. For instance, Open Finance may be able to recommend several different mortgages to a prospective client, each of which is underwritten and issued by an individual bank. The financial advisor simply acts as a broker for the bank and obtains a commission for selling a particular bank's financial product. Depending on the capital backing of a particular financial advisory firm, products sold may actually originate from within the firm. Not all financial advisory firms are free to offer different products from different banks. Xelion, for instance, will only sell financial products offered by Bank Pekao. So, with this in mind banks are motivated to cooperate with financial advisory firms (and in some cases to set up their own financial advisory firm) in order to reach more consumers. The same principal applies to the sale of insurance products.

Licensing Requirements
Financial advisors are not licensed. If I wanted to, I could advertise myself as a financial advisor. However, in order to actually sell a mortgage or insurance policy, a financial advisory firm will need to retain, in-house, a licensed professional qualified to sell such products, identical to the same requirements imposed upon individual insurance companies and financial institutions. The same applies to the sale of stocks, investment funds and other forms of equities.

Liability
Does a consumer have any recourse against a financial advisor for a financial loss due to poor advice? In theory the answer is yes. In practice the odds of obtaining any redress are slim. Pursuant to the Polish Civil Code, a consumer may generally seek redress for damages if such loss is due to the intentional or negligent misrepresentation by a seller of a product's (or service's) benefits, including financial products sold by a financial advisory firm. But be warned. Most likely, before a financial advisory firm will sell any product to a consumer, the consumer will be required to sign a disclaimer designed to give notice of possible risks to the consumer as a condition of sale. In order to prevail in any action for redress of damages, a consumer will need to establish that he or she relied on the representations of the financial advisor, and moreover, that the purchased financial service was in fact 'defective'. So when making use of a financial advisory's services, it's always better to operate by the principle of 'caveat emptor' - buyer beware.

Paul Fogo is a senior attorney with Miller, Canfield, W. Babicki & Partners