Retrocessions under the mandate contract

Retrocessions in asset management: obligations of the agent and legal risks

It is common for a fiduciary, an asset manager or another intermediary to receive money from a bank for having introduced a client. This compensation is known as a retrocession (sometimes also called a Finder's Fee or Kickback). In substance, it is a payment made to the person who has enabled the conclusion of a contract, for example an asset management agreement, between the bank and the client.

The person performing this function is referred to as a client introducer or business procurer. The role may be fulfilled by a financial services professional as well as by any other natural or legal person.

When the mandate contract becomes relevant

Matters become more complex when a mandate contract within the meaning of Art. 394 et seq. CO exists between the introducer and the client. In this scenario, the introducer is not a mere intermediary: he is also the agent of the client whom he has directed to the bank. This gives rise to specific obligations.

An aspect that many underestimate: the mandate contract does not require written form to be valid. It may arise tacitly or through conclusive conduct. It suffices that a person undertakes to manage one or more matters on behalf of another in return for remuneration, or that he or she provides a simple paid consultancy. The contractual relationship exists more frequently than one might think.

The duty of accountability under Art. 400 CO

Where a mandate relationship exists, the agent is under a duty to act in the interest of his principal. Art. 400 para. 1 CO imposes two fundamental obligations:

• To inform the principal of the fact that, by introducing him to a third party, the agent receives a retrocession.
• To return to the principal everything obtained in the course of the mandate, on whatever legal basis.

Where the introducer is a legal entity (SA or Sagl), this duty of accountability falls directly upon the governing bodies of the company.

The underlying principle is clear: the agent must not enrich himself through the performance of the mandate, except through the fees agreed with the client.

Civil consequences: restitution and limitation

A principal who discovers the existence of undisclosed retrocessions may act on several fronts. He has the right to demand detailed information from the agent concerning every retrocession received. He may also claim the full restitution of the sums collected, together with any other economic advantage arising from the performance of the mandate.

The restitution claim is subject to a 10-year limitation period and becomes due from the moment the agent has received the retrocession or other benefit from third parties. This represents a significant exposure for those who fail to comply with their transparency obligations.

Criminal risks: criminal mismanagement and private bribery

Failure to comply with the duty of accountability does not only carry patrimonial consequences. Where certain conditions are met, the introducer may incur criminal liability. The principal offences are:

• Criminal mismanagement under Art. 158 SCC, which punishes anyone who, being under a duty to safeguard another's financial interests, causes damage to those interests.
• Private bribery under Art. 322octies SCC, an offence introduced into the Swiss Criminal Code in July 2016.

These are not theoretical hypotheses. Swiss case law in this area has consolidated in recent years, and the risks for those who operate without due care are real.

How to protect oneself: the principal's contractual waiver

The solution lies in preventive contractual regulation. Before carrying out any activity as an introducer, the mandate contract must expressly address the question of retrocessions.

One possibility is for the principal to waive, in favour of the agent, the retrocessions that the latter will receive from third parties. Such a waiver is, however, valid only if the client is informed in detail about the expected amount of the retrocessions, or at least about the parameters used to calculate them. It should also be noted that an agreement of this kind does not automatically exclude possible criminal law implications.

Specialist legal advice in Lugano

Retrocessions in asset management sit at the intersection of contract law, criminal law and financial regulation. A superficial assessment of one's obligations can lead to costly civil proceedings or criminal prosecution.

Hugo Haab, Attorney-at-Law, and Roberto Haab, Attorney-at-Law, of Studio Legale e Notarile Haab in Lugano regularly advise principals and agents on questions relating to retrocessions, duties of accountability and contractual liability. If you operate as an asset manager, fiduciary or financial intermediary, it is advisable to verify that your contractual arrangements comply with the requirements of Swiss law.

Contact us for a personal consultation at our offices at Via Ludovico Ariosto 5, 6900 Lugano.

For a personal consultation: info@haablegal.ch | +41 91 913 30 70