The Solicitors Regulation Authority has made a new warning to solicitors about becoming involved in dubious investment schemes after reviewing recent cases leading to the closure of seven firms and other regulatory action.
An updated warning notice published today says that the regulator continues to receive reports about law firms’ involvement in questionable investment schemes. ’This is a key risk for consumers resulting in significant financial losses, which in some cases can be more than £1 million per scheme.’
A thematic review of 40 past cases found that in 63% of the cases, solicitors had failed to carry out proper due diligence on those who ran the schemes, with no checks carried out at all in 20% of cases. Investigations led to seven firms being intervened in to and 20 referrals to the Solicitors Disciplinary Tribunal.
The new notice highlights the risks posed by fractional property investments, where the buyer acquires a portion of an investment property such as a care home or hotel and investment schemes that are promoted as being secured by insurance bonds which have proved worthless.
Among other issues, it states, solicitors must watch out for:
- Dubious or risky schemes being presented as routine conveyancing or investment in ‘land’ when the reality is very different.
- Schemes labelled as for example mini-bonds, but which are in fact speculative investments promising a high return and the buyers’ money is not being used in the way the seller it says it will.
‘Red flags’ which law firms should watch out for when considering investment opportunities include sellers asking to namecheck firms in marketing material.
Paul Philip, the SRA’s chief executive, said: ’While most solicitors would never willingly participate in such schemes, those that do, whether knowingly or not, lend a veneer of credibility which sellers can exploit to help persuade people that their offer is legitimate. Not only does that harm those who buy into these schemes, it undermines confidence in the profession as a whole.’
He added that dubious scheme operators look at the warnings regulators issue and adapt accordingly. ’Solicitors must never be complacent – stay up to date, do your due diligence and if in any doubt, do not get involved,’ he said.
In the past five years, the SRA has taken 48 solicitors and two firms to the Solicitors Disciplinary Tribunal for involvement in investment schemes, resulting in 16 strike offs, eight suspensions and £870,000 worth of fines.
The Law Society said it supported the call for awareness. Simon Davis, president, said: 'Historically fraud is a crime that increases during recessions. As the economy slides and unemployment rises, all solicitors must therefore be alert to that risk, especially if a deal seems too good to be true.'
Davis noted that concerns about fraudulent investment schemes were a motivation behind the SRA's decision to reduce the maximum claim on the Compensation Fund from £2 million to £500,000. 'These activities pose a risk to the ongoing viability of the fund, and – because the Compensation Fund is paid for by a levy on SRA-regulated firms and individuals – place a considerable burden on the profession as a whole,' Davis said.
'Solicitors should also be aware that if, as a result of their unwitting involvement in a fraudulent investment scheme they receive multiple similar claims, there is an aggregation clause in the SRA’s minimum terms and conditions for professional indemnity insurance, which can place a cap of £2 million (or £3 million for incorporated firms) on an insurer's liability for "a series of related matters or transactions".
'If the aggregation clause is triggered, then the principals of the firm could find themselves personally liable for any claims in excess of that cap.'