Law Society claims Co-op panel cuts may be indirect discrimination

Who would want a sole practitioner doing remortgages?

Whatsoever a man soweth, that shall he also reap. [Galatians VI]

The Gazette reported last week that the Co-operative Financial Services which has recently merged with Britannia Building Society is to axe 3,600 sole practitioners from its conveyancing panel.

Whilst the Law Society has requested an urgent meeting with Bob Burlton, CFS chairman, and has written to the Society to express its concern about the impact the move will have on the solicitor firms concerned and on access to justice.

The report went on to quote a CFS spokesman saying: ‘Following the merger between Britannia and CFS, our insurers notified us that, unless we stopped instructing sole practitioners to act for Britannia or Platform Home Loans, mortgage fraud insurance cover for the entire business would be withdrawn…’.

But why all the fuss?

The present position is, and has been for the last 10 years (if not before) is that not only mortgage lenders but all clients are in an inferior position when instructing sole practitioners (‘SPs’) than when instructing larger firms.

The reason in simple and has been understood, and indeed caused by the Law Society (now SRA): it concerns the protection of the client in cases of solicitor illegality.

If a dishonest partner misappropriates client money, the honest partner will be indemnified by the firms professional indemnity (‘PI’) insurers for the loss. The damages payable and interest will be on the usual principles, and the innocent partner will be indemnified by their PI insurers, thus broadly speaking, clients will have their losses met.

If however a SP misappropriates client money the position is quite different, as a claim will have to be made on the Compensation Fund. One may think that the Fund would treat claimants the same, and pay proven losses and interest on the usual indemnity basis, but not at all.
The Compensation Fund, now administered by the SRA, states on its website as the first piece of advice under ‘Important factors’ for eligibility is “You are not automatically entitled to a grant out of the fund.”

Despite the SRA saying that “The object of the Fund is to replace client money which a defaulting practitioner or a defaulting practitioner's employee or manager has misappropriated or otherwise failed to account for. The applicant need not necessarily be or have been the defaulting practitioner's client,” it is clear that the making of a grant is discretionary.
Reg 3 (1) of the Solicitors' Compensation Fund Rules 2009 makes it clear that “A grant out of the Fund is made wholly at the discretion of the SRA. No person has a right to a grant enforceable at law”.

Why? Why should clients have no legal right for compensation, and more importantly, why is it only a discretionally grant?

As to interest, it may be thought that again interest follows as per the normal basis. Again not at all. Reg 15(1) provides that the SRA “may consider an application for a supplementary grant by way of a sum in lieu of lost interest on a principal grant. Such interest will be calculated in accordance with the rates prescribed from time to time by the SRA.” And what is that rate?

All of the above was considered in R v The Law Society, Ex Parte Mortgage Express Ltd. where lenders had suffered losses as a result of loans being made and the solicitors acting for them had been dishonest.

The Court of Appeal held that the Law Society accepted that the solicitor's dishonesty was a cause of the lenders loss and the Society had made it clear that the Compensation Fund was the source from which to replace money taken by dishonest solicitors for their own benefit.
But the lenders had failed to show that the Society acted unlawfully in adopting a policy which disallowed claims where the loss was derived not from the failure to obtain security but from the inadequacy of the security, as it perceived it. The Society were entitled, in the exercise of their discretion, to assess the sum reasonably allowable for legal costs. Bingham CJ found that wronged clients “do not have a right to compensation which they are entitled to enforce. All they have is a right to seek a favourable exercise of discretion,” from the Fund.

However as the Society accepted that “in principle they were liable to pay compensation to the Building Society in respect of the legal fees and the cost of Land Registry searches incurred in perfecting title. On the information available there appears to be no rational basis for distinguishing between those items and the other expenditure incurred in perfecting title to the charges.” The court found that the Society “misdirected themselves in making their decisions on the costs and disbursements for which the Building Society should be compensated in relation to these two transactions and these decisions must be quashed”.

Conclusion

1 Clients receive more protection if their dishonest solicitor misappropriates funds from the firms honest partners from whom they can claim, and such claim is covered by the firms PI cover.

2 The client has a legal right to claim this, which may be enforced in the courts by bringing an action for damages, costs and interest, all of which will be assessed in the usual way.

3 If a SP is instructed and he dishonestly misappropriates funds, any action taken against him is almost certainly going to be pyrrhic. The only steps to obtain recompense will be to make a claim on the Compensation Fund, where payment will be:

 Discretionary
 Where there is no legal right to receive the same
 Subject to the policy of the SRA
 With interest and costs payable as determined by them, at rates determined by them.

4 The inescapable conclusion is that in extremis, clients whether they are mortgage lenders or others should be are advised to only instruct larger firms where they can rely on the honest partner’s PI cover, rather than SPs where they will be forced to rely on the Compensation Fund.

5 The President should move to regularise this position immediately, and should cease writing letters to lender until he has.

As a postscript, one notes that the President’s letter to CFS refers to the impact on the access to justice by the removal from the panel of SPs. If the Society creates a two tier compensation system, what does he expect?

Tom Inhouser
(a pseudonym for the author who is a practising former SP now working in-house)

Well said Tom! And how does a sole practitioner become an ABS?

The decision of Coop/Britannia may or may not have a disproportionate impact on BME firms but as rightly pointed out by an earlier commentator, this is not new. It is the action of Abbey/Santander, which has far more impact on not only practitioners but also consumer choice. In all likelihood very few of BSN’s members are affected by Britannia's decision although of course we share the concerns of all sole practitioners affected and will work with the Law Society in addressing the issue.

However of greater concern to BSN is that where discrimination has been found, here I refer to the disproportionate regulation of BME solicitors, the powers that be are unable to appoint a Board whose composition addresses the issue raised by Lord Ouseley in his report.

Until we see more BME representation on that Board of the SRA and it’s policy and decision making, BME solicitors cannot be assured that the issue of discrimination in every day practice is being taken seriously.

Cordella Bart-Stewart
Chair Black Solicitors Network