Federal Court of Justice upholds waiver clause for bank to keep distribution fees
Federal Court of Justice, judgment dated 14 January 2014, file No XI ZR 355/12
The Federal Court of Justice (Bundesgerichtshof, BGH) upheld a waiver clause in a bank's framework securities transactions agreement which allowed the bank to keep distribution fees it received from issuers. The BGH found the clause valid as it sufficiently informed clients about the type and amount of expected distribution fees, thus enabling clients to assess the economic value of the fees. The BGH did not, however, decide whether a bank is normally obliged to pay such fees to its clients.
A consumer protection association sought an injunction to stop the bank using a clause in its framework agreement for securities transactions with private clients. In Germany, certain organisations may take legal action if they believe a business's standard terms do not comply with the law on general contract terms. The agreement governed the types of distribution fees a bank normally receives from issuers of investments. The usual ranges of percentages of these fees were set out for various types of investment. The next paragraph contained the following waiver:
"The client agrees that the bank retains the distribution fees paid to it by the issuers, provided that the bank is entitled to accept the distribution fees under the provisions of the Securities Trading Act (in particular section 31d Securities Trading Act).
Insofar as the client and the bank reach an agreement deviating from the statutory rules on the law of agency (sections 675, 667 Civil Code, section 384 Commercial Code), a right to claim by the client against the bank for surrender of the distribution fees does not arise. Without this agreement the bank, assuming the application of the law of agency to all securities transactions entered into between the bank and the client, would have to surrender the distribution fees to the client."
Whether a bank would indeed have to pay out such distribution fees to clients is not clear as a matter of German law. The statutory rules mentioned in the clause provide that an agent is obliged to return to the client everything he obtains from carrying out the transaction. It has long been debated whether this applies to distribution fees which banks receive from issuers. The BGH expressly left this question open, stating that it was not relevant for deciding on the validity of the waiver clause. The BGH found the clause acceptable even if the client could claim the distribution fees from the bank under German law. The BGH stated that the relevant provisions of the Civil Code and Commercial Code can generally be deviated from by contract, and the clause complied with the law on general contract terms.
Transparency
The BGH found the clause transparent; it did not need to explain the circumstances in which a bank may accept distribution fees. According to the BGH, the reference to section 31d Securities Trading Act in the clause was sufficient as the clause's content was clear without recourse to the statute. Under section 31d, a bank may accept such fees if:
(1) they are designed to enhance the quality of the service to the client and do not impair the proper provision of the service in the interest of the client, and
(2) the existence, nature and scope of the inducement or, where the scope cannot be ascertained, the method of calculating that scope, are clearly disclosed to the client in a manner that is comprehensive, accurate and understandable, prior to the provision of the investment service. The essential terms of the arrangements may be disclosed in summary form if the bank offers to disclose further details to the client and provides them upon request.
The framework agreement set out the types and usual ranges of amounts of distribution fees. The BGH stated that this allowed the client to assess the value of its waiver and knowingly agree to it. The BGH explained that merely mentioning generally that the bank receives distribution fees would have been insufficient for a valid advance waiver. The BGH did not find it necessary, however, to set out the exact amount of each fee in advance. The agreement also obliged the bank to disclose details on distribution fees for a particular investment to the client upon request or, in the case of investment advice, even in the absence of a request. This, according to the BGH, meant that each client could therefore decide whether to enter into a transaction according to the exact amount of the fee.
No inappropriate disadvantage
The BGH held that the clause did not inappropriately disadvantage the clients as banks have a justified interest in rationalising mass transactions by requesting general advance waivers. The BGH further found that the clause maintained clients' freedom of decision. In addition to the bank's offer to disclose particular fees, the waiver clause was conditional upon the bank's entitlement to retain the fee under section 31d Securities Trading Act (see above). The court held that, if a particular fee is outside the general range mentioned in the framework agreement, it does not constitute "further details" which can be summarised under this provision; rather, the bank must disclose the actual amount without a client request. The BGH pointed out that, consequently, the client's waiver under the clause is binding only if the bank discloses the amount of such a fee, and in that case the client may make a fully informed decision on the securities transaction.
Comment
German courts and statutes in recent years have continually extended banks' disclosure obligations on distribution fees received from issuers. Whether banks must also pay out such fees to their clients has been in dispute. The BGH's decision does not answer this question but limits its relevance in practice. Banks now know they may request advance waivers from their clients. The court also explained the test which such a waiver has to meet to be valid. In particular, banks must set out the typical range of such fees in the waiver agreement. Subsequent to the transaction they have to disclose details of the actual fees for particular securities, however this is normally only on the client's request. If a bank gives investment advice or if the fee is outside the typical range set out in the waiver agreement, the bank must always specify the actual amount of the distribution fee (ie regardless of whether the client requests it).
