Essentials of common Services Agreements in Financial Service
Service agreements are common agreements in many industries, not just in the financial services industry. A service agreement is a contract made between two parties that sets out the specific tasks or services that are to be provided by one party, the service provider, to the other party and other terms that govern their relationship.
Common service agreements specific to financial services firms include Corporate Authorised Representative (CAR) agreements, Authorised Representative (AR) agreements and Responsible Manager (RM) agreements. Financial services companies also commonly have an arrangement with another related business that provides administrative and support services. Even if services are to be provided by a related entity, a services agreement should still be entered into, to set out each party’s rights and obligations. Outsourcing agreements are another common type of service agreement.
Although there are a diverse range of situations in which a services agreement is appropriate, services agreements typically include a range of common features.
Typically, the nature of the relationship the service provider has with the other party is that of a contractor. This has the effect that an employee/employer relationship, partnership or joint venture are avoided. This relationship is established by a range of factors, including, for example, that the agreement is for limited or discrete services to be provided and the service provider is conducting their own business and only receives fees for the services provided.
Rather than instructing a lawyer to draft a services agreement, you may have considered purchasing a service agreement template online. Before making a decision as to which option to choose, consider the complexity of the services to be provided and the materiality of the arrangement, for example, the financial and operational impact of a failure of the arrangement, the cost of the arrangement and the availability of alternative service providers. These considerations are also relevant in determining the amount of detail required in the agreement. The agreement must be sufficient to manage and control the risks of the relationship.
The agreement should set out clearly and in detail, the nature of services to be provided. This is to ensure that both parties have the same expectations and to make the agreement enforceable. This may include, for example, particular tasks to be provided, service levels to be met and technical specifications. Depending on the deliverable, there may be an approval process and if so, a process to be followed should the approval not be granted. It should also consider whether any further services may be provided and if so, the process.
Generally, the service provider will be paid a fee that is linked to the services provided. If the services aren’t provided, typically the service provider won’t be paid. If relevant to the services, the agreement may set out the terms of payment or formulas for calculating amounts if the services provided don’t meet particular service levels, the company isn’t satisfied with the service delivery or only a proportion of the service is performed. The service provider may also be reimbursed for set expenses and there may be additional terms for payment of further services, if relevant. In addition to the provider’s payment entitlements, the terms of payment should also be set out, including any processes that must be followed.
The termination provisions in Service contracts are important. If the services are being provided poorly, you will need the ability to terminate the contract and engage another provider. This is particularly the case where the Service providers breach may cause you to breach the law or your licence conditions. For example, you rely on the IT services provider in order to have sufficient IT resources to comply with your regulatory obligations. Thought needs to be given to the key performance indicators and the defaults that will entitle you to terminate the service contract. Ideally, you will also be able to terminate for no reason, given a reasonable period of notice.
The agreement should set out the term of the agreement, whether the contract is for a one-off service for the set fee, continuing services for a set length of time or on an ongoing basis for a fee. Depending on the arrangement, you may consider entering into a master services agreement with a separate scope of work for each discrete project. Also important are the terms of termination, such as by giving of a notice period or on the occurrence of a specified event(s).
A service agreement may be prescriptive as to each party’s rights, responsibilities and obligations of the parties or could provide flexibility. Again, this will depend on the relationship between the parties and the particular services to be provided. Examples include, who will own intellectual property rights, whether subcontracting is allowed, confidentiality and privacy obligations and insurance requirements.
As you can see from the above examples, there are a range of factors that need to be carefully considered and included within a services agreement. Although template agreements may be available, you should carefully consider whether relying on these is appropriate. Engaging lawyers, such as Holley Nethercote Lawyers, in this process will assist you in ensuring that your agreement is enforceable, clear, sufficient in detail and controls the risks relevant to your particular business and the services to be provided.
Author: Alexa Bowditch (Lawyer)