William Cash hopes the legal regulator is not as toothless as its former financial counterpart the FSA
The Solicitors Regulation Authority, based in Birmingham, is expected to make a closely watched ruling next week in a private client legal dispute concerning funds in a property transaction that were released by a law firm when the funds were ‘held to order’ by another law firm. The funds were released before permission had been granted to release the funds.
I am not going to name the Wolverhampton-based law firm under investigation until the SRA ruling is made. If the firm is found to have been in breach of the SRA’s own legal code, the findings of the SRA report will be published on the SRA website.
The Solicitors Regulation Authority regulates 125,000 solicitors at over 11,000 firms, as well as in-house lawyers at private and public sector organisations.The SRA was formed in 2007 by the Legal Services Act to function as an independent regulatory arm of the legal profession. Previously the Law Society regulated the legal profession however, following a report by Sir David Clementi it was recommended the SRA be established as an independent regulatory arm of the Law Society which remained the ‘representative body’ for UK solicitors.
This SRA ruling will be closely watched by the private client legal industry (and by me as the case relates to a conveyancing dispute involving a commercial property that I am a shareholder of) as the holding of ‘funds to order’ is one of the fundamental pillars upon which the entire private client legal system is based. The convention allows law firms to send over large sums of money to other law firms with a guarantee client safeguard that the funds are not to released until both parties are in agreement on all contractual points.
As my lawyer Steve Foden originally wrote to the SRA when we launched the complaint, the obligation to hold the funds to order arose in relation to the discharge of monies due to Barclays Bank which the seller (represented by the Wolverhampton law firm) was ‘obligated to discharge’ as part of the agreement between all parties.
On 24 December, in an email timed at 10.11am, the Parkinson Wright law firm wrote to the Wolverhampton law firm again, clearly stating: ‘We are sending you the required funds but now please hold these funds to order pending satisfactory answer to the Barclays bank unilateral undertaking listed in the title.’
On 9 January 2015, a follow-up fax was sent to the Wolverhampton law firm by Parkinson Wright stating again what the instructions were: ‘Further to our email correspondence of 24th December, we dispatched completion funds to you to be held to our order and assume that you are holding them as such and we await to hear from you…’
It doesn’t get much clearer than that you would have thought. Yet by 9 January, the funds had already been released by the Wolverhampton law firm to their client – around a week earlier (as the law firm had negligently misread the dates on the contract) than the agreed 12 January completion date.
Top London litigation solicitor David Archer of Pitmans says the SRA ruling will be closely watched as it is a subject that has almost no case law as holding funds ‘to order’ is such a fundamental principle of the UK legal system.
‘Holding funds to order’ is the number one client safeguard of the entire legal system,’ says Archer. ‘It has the same effect as a formal solicitor undertaking – especially in conveyancing when large amounts of money are involved. Holding money to another person’s order is how solicitors are able to complete property or company deals by telephone.
‘There is very little relevant case law on the subject because it is so well established. Client confidence in solicitors would be seriously undermined if lawyers think they can simply release funds at will, despite clear instructions to hold money to “order”.’
Top private client law firm Mishcon de Reya also say that their property department is ‘not aware of any recent case law’, partly because it is such an accepted client safeguard that the entire legal system would collapse if law firms were simply able to release funds the moment the funds reached their client accounts. Those in the HNW firm’s property litigation department who have seen the relevant emails agree that it was ‘clearly stated that the funds were to be held to order’ and Mishcon concluded that that the ‘funds were improperly released’.
But what does a private client then do to redress the problem? The first move I was told to make by my lawyer Steve Foden – founder of the West Midlands property litigation specialist firm Foden’s – was to make a formal complaint to the SRA. On the litigation front, there are three possible causes of action for my solicitor to take against the firm that is being accused of acting improperly by releasing the funds when ‘held to order’.
1. Breach of contract – the funds were sent on terms that they would not be released without my lawyer’s consent;
2. Breach of an implied undertaking – since they did not contradict my lawyer’s e-mail, therefore they must be said to have undertaken to ‘hold the funds to order’; or
3. Breach of a constructive trust – the funds were held under a constructive trust and released in breach of that trust.
The SRA is the body which regulates and ‘protects’ the consumer side of the private client legal industry. As with the former Financial Services Authority (which was abolished due to its ineffectiveness at regulating the financial services sector), the SRA is meant to regulate and rule on any violations of good legal practise, in particular the code of practice as set out in the Solicitors Regulation Authority’s Competence Statement, which defines the standards required for a solicitor to practise.
The latest updated SRA Handbook (13th edition) was published on 1 April. In the most extreme instances of professional negligence, the SRA has the authority to make an ‘intervention’ to close a legal practice down.
This is very rare. Usually the SRA investigates a case and then makes a ruling on the SRA website that enables a client to recover lost funds or ensure that correct good legal practise – according to the SRA code – is enforced. ‘Those we regulate are bound to comply with the Principles of the Solicitors Code of Conduct, which set out the professional standards we expect of all firms and individuals. We work with firms and individuals to eradicate any risk they may pose to the public by helping them comply with these Principles,’ says the SRA.
‘If we feel there has indeed been a breach, then you as a consumer need to feel assured that the SRA takes action where the solicitor or firm are found not to meet the standards expected of them,’ adds the SRA of its complaint procedure. ‘We will take enforcement action if there is serious non-compliance with the SRA Principles. Enforcement action can include controlling the way firms work, preventing them from providing certain legal services.’
With the email and fax written instructions to hold the funds to order being so clear, this would appear to be an open and shut case of ‘non-compliance’ and professional negligence. What part of ‘please hold these funds to order’ is not clear?
As my lawyer stated to the SRA: ‘This is the manner in which solicitors conduct their business and when solicitors send monies to be held to their order it is not then open to the recipient solicitor to do with it as they wish but in accordance with the authority of the sending solicitor. These terms are widely recognised between solicitors and I refer you to paragraph ten of the Law Society’s code for completion by post.’
In addition to releasing the funds ‘held to order’, without the authority of Parkinson Wright, the Wolverhampton-based law firm also has failed to provide my law firm throughout the entire conveyancing – beginning in August 2014 – with almost all the documents required in the original signed contract.
These include formal redemption statements of all loans, mortgages, company, accounts, consents, permissions, as well as the director’s resignation letter of the former owner of the property, with me being appointed as a director in his place.
As a result of this failure to provide my lawyer with any Companies House paperwork, I have been unable to communicate with the bank that holds the mortgage on the property and have been unable to move forward with any development. Some six months after wiring over the funds to purchase the property, I am still unable to communicate with the bank that holds the mortgage. They still refuse to speak with me.
As my lawyer has written to the SRA: ‘This failing to produce documents upon exchange completion including the sale agreement signed by their client is a matter that is of concern to the SRA as it relates to the failure by that practice to honour the undertaking given upon exchange to commit the documents by first class post or DX.’
Six months after signing the contract, still no documents have been provided, and my funds were released without my lawyer’s consent. I am sincerely hoping that the SRA is not as toothless as the FSA in matters of self-regulation.