Banks Blindsided by Loophole Enabling Client Poaching

Chris Gaetano
Published Date:
Oct 17, 2016
Tied Up

Financial institutions like Morgan Stanley and UBS are finding that an inter-bank protocol they signed aimed at reducing litigation between them has also created an environment where employees can leave to start their own firms and take valuable clients with them without worrying about a lawsuit, according to Bloomberg.

The protocol, called the Protocol for Broker Recruiting, was developed in 2004 by UBS, Merrill Lynch and Citigroup and was later signed by other banks as well. Under normal circumstances leaving your company and taking its most valuable clients with you would be grounds for a lawsuit, but the protocol opened a loophole protecting against this kind of litigation. Bloomberg said that people learned they can set up a shell company, have that company sign the protocol, and then take it over. Then the workers leave for their new company and get as many old clients as possible to sign up with them.

These departures can have big impacts: Bloomberg reported that Deutsche Bank and Bank of America, for example, both lost $3 billion over the past two years to defections performed under the auspices of this agreement. Despite this, the horse may have already left the barn, as Bloomberg notes that renegotiating the protocol would require a small number of big banks to deal with the more than 1,500 smaller players who benefited from the loophole and may not be so amenable to any change. 

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