The SRA’s approach to regulatory settlement agreements places firms between a rock and a hard place, says Vanessa Shenton.
I am alarmed by a practice which the Solicitors Regulation Authority’s legal and enforcement unit appears to be adopting in relation to regulatory settlement agreements (RSAs).
I have acted for some 20 firms investigated by the SRA for implementing stamp duty land tax mitigation schemes on behalf of purchaser clients. Since 2010 this has evolved into an SRA enforcement theme, which many regard to be somewhat of a political witch-hunt.
Firms have faced numerous allegations, from breach of integrity and lack of independence, to accounts rules and management system failings. However, of importance is the July 2013 Solicitors Disciplinary Tribunal case of Grindrod (11030-2012). The vast majority of identical allegations were either withdrawn at the door of the hearing (including a failure to act with integrity) or were dismissed by the tribunal. I supported one of the respondents who was entirely exonerated.
In Grindrod, findings were made in relation to one scheme only, the unlimited company scheme. Because of the particular way that scheme worked, it should have been disclosed to lenders and the one culpable respondent had, therefore, acted in conflict. In terms of core duties, he had failed to act in the best interests of lender clients and had not offered a proper standard of service.
However, the tribunal agreed that there was no evidence that the lender’s interests were in fact prejudiced, so dismissed the allegation that he had failed to behave in a way that maintains the trust the public places in solicitors and in the provision of legal services. The tribunal dismissed all other allegations relevant to the implementation of the unlimited company scheme.
In relation to two other schemes, the husband and wife, and the nominee company schemes, every single allegation was dismissed, including those relating to lender disclosure, because these schemes operated on an entirely different basis.
The SRA has not appealed the Grindrod decision.
Since then, it is apparent that the SRA wishes to engage with solicitors to enter into publishable RSAs, thus avoiding the need for tribunal prosecutions. This might be a reasonable proposition, on the face of it, in appropriate cases.
However, it is also becoming increasingly apparent that the SRA’s legal and enforcement unit is insisting that solicitors admit, within a RSA, to allegations which the SRA itself withdrew and others which were dismissed in Grindrod. Even firms which only implemented the husband and wife and/or the nominee company schemes have been persuaded into a RSA, admitting to allegations including breach of integrity and public confidence, accounts rules and failures to act in the best interests of lender and purchaser clients, despite all such allegations being dismissed, and the reasoning fully explained, by the Grindrod tribunal.
Why would solicitors accept such RSAs?
The SRA’s public persona is to be a fair, open and transparent regulator. Surely the SRA, and any of its exclusive panel of prosecution solicitors instructed, would openly and fully disclose the findings in the defended Grindrod case. Surely it would take it into account when drafting RSAs or, in fact accept that some solicitors should not be subject to misconduct findings at all.
Surely, the SRA will not continue to rely on previous cases which went in its favour instead, including Dlay (10855-2011), an admitted case where the arguments were not therefore fully debated, and which must have fallen into disrepute following Grindrod.
On the hopeful assumption that the SRA and its panel representatives do fully and openly disclose the Grindrod decision, the answer as to why solicitors might, nonetheless, admit to Grindrod withdrawn or failed allegations might be the financial risks if they do not.
The cost rules in the tribunal almost invariably result in costs against a solicitor if the SRA succeeds only in part on the allegations that it raises. Even if a solicitor’s defence is successful and the tribunal does not order the solicitor to pay the SRA’s costs, the solicitor is extremely unlikely to obtain a cost order against the SRA in respect of their own costs. Costs include not only tribunal costs, but the ongoing costs of legal and enforcement unit representatives, charged at commercial rates, or panel solicitors, if the firm attempts to negotiate appropriate and fair terms in the RSA. Rarely will the SRA accept any substantial amendments to their draft RSA.
Firms are caught between a rock and a hard place. Do they admit to publishable and reputationally damaging allegations which they perceive to be unfair and suffer the risk that they might lose lender panel membership, Lexcel or Conveyancing Quality Scheme accreditations? Or do they risk additional legal and enforcement costs, and potentially tribunal costs, if they argue against what they see as unfairness.
The SRA’s argument on why solicitors are being required to admit to Grindrod withdrawn or dismissed allegations might be that each case must be decided on its own facts. However, RSAs do appear to be entered into by firms whose involvement with the mitigation schemes were significantly less than in Grindrod (where some 250 scheme cases had been implemented) including, as mentioned, firms which only ever implemented schemes where not one Grindrod allegation succeeded.
Below is one example to illustrate that perhaps the SRA attempts to exploit unfair leverage.
I am aware, via a Freedom of Information Code request, of a case which went to an SRA independent adjudicator in January 2014. The investigation was carried out in April 2011 more than a year after the solicitor had ceased implementing the schemes. The firm implemented only 27 cases (14 involving lenders) between February 2009 and January 2010.
All cases involved either the husband and wife or the nominee company schemes, in relation to which each and every SRA allegation was dismissed by the Grindrod tribunal. However, these allegations continued to be pursued against this solicitor including integrity, public confidence, accounts rules, and failure to disclose material information to lender and purchaser clients.
The SRA’s recommendation was for the adjudicator to make adverse finding and to issue a rebuke and/or a financial penalty.
The adjudicator made no findings of misconduct and directed that this four-year investigation be discontinued. The adjudicator referred to the firm’s submissions.
Submissions included reference to a tribunal case heard in July 2013. The adjudicator confirmed that she had not been provided with copies ‘despite [the representative’s] criticism of the supervisor for not drawing those cases to my attention’. She continued: ‘I have taken into account and attached due weight to [those] comments on the facts of the particular cases, the allegations that were pursued in the tribunal (and those that were not) and the level of sanction imposed.’
The adjudicator also referred to evidence of the SRA’s decisions in several other cases that were closed with no finding or sanction and queried why the SRA felt it appropriate to pursue this particular solicitor.
If these overt criticisms of the SRA are not enough, the adjudicator also referred to previous negotiations for an RSA where ‘pressure was put on him to admit all the allegations and to accept a reprimand on the basis that a decision had already been made to refer him to the Solicitors Disciplinary Tribunal when this was not the case’. The adjudicator stated that ‘the SRA has not commented’.
This is but one example I am aware of where the SRA appears to be exploiting an unfair advantage because of the impossible predicament that a requested RSA puts solicitors under. There are at least two RSAs published on the SRA’s website where the solicitors’ situations appear to be uncannily similar to those in the above adjudication. These involved schemes for which all allegations were dismissed in the Grindrod tribunal.
The above adjudication and reference to the previous unfair negotiations for an RSA is in the public domain following a Freedom of Information disclosure request. However, most will not be. RSAs are pursued via without-prejudice negotiations, but with the SRA stating that it considers these will not be disclosable, if a matter ultimately goes to the tribunal.
One must surely expect that the SRA would not, as a fair and transparent regulator, place solicitors under unfair pressure to admit unfair allegations. Surely the SRA would not also refer to RSAs obtained in this way, in a tribunal case or when it attempts to persuade the next solicitor to sign up to one, or would they?
Vanessa Shenton is a member of the Law Society’s professional standards and ethics and regulatory processes committees and, via her business, The Compliance Partner (Vanessa Shenton@thecompliancepartner.com), provides compliance advice and assistance to law firms