"Unenforceable" consumer credit and loan agreements
Ensuring that the public are protected
This guidance was issued by the SRA in April 2009. The guidance is not part of the rules and is not mandatory, but the SRA may have regard to it when exercising its regulatory functions. Solicitors, and others subject to the rules, who do not follow the guidance may be required to explain how they have complied with the rules.
The risks posed
1. The SRA is concerned by reports that members of the public are
- being misled about their chances of writing off loans, credit balances etc; and
- being tricked into making payments for services which are never provided.
You need to be alert to the risks that some introducers may not be acting in the best interests of clients. You should, therefore, be particularly vigilant. You must act with integrity and in the best interests of each client, and comply with the Solicitors' Code of Conduct ("the Code").
Background
2. The Claims Management Regulator (CMR) at the Ministry of Justice and the Office of Fair Trading (OFT) have warned consumers to think carefully before responding to businesses claiming that they can arrange for outstanding balances under loan, credit card and other consumer credit agreements to be written off and secure compensation. Concerns have been raised that consumers are being misled into thinking that the chances of successfully writing off their debts are much higher than they actually are. There is also concern that some introducers charge large fees to clients up front which are unjustified and unnecessary.
3. Examples of the type of practices which cause concern are
- unsubstantiated claims that 80 per cent of all credit agreements are unenforceable or that debts can be written off within six weeks;
- publicity which misleads the public because it omits key facts;
- up-front fees for a claims management company to "check" credit agreements for clients when such costs do not need to be incurred;
- failure to highlight the potential risks in not making repayments, such as a poor credit rating, the withdrawl of an existing credit facility and a county court judgment.
Your responsibilities
Publicity
4. Rule 9.02(c) of the Code requires firms to be satisfied that clients referred by an introducer have not been acquired as a result of misleading or inaccurate publicity (or any other type of publicity which would not comply with rule 7 of the Code if conducted by a regulated person). If you accept referrals of "unenforceable" consumer credit agreement/loan work you must check the accuracy and clarity of that introducer's publicity.
The type of arrangements entered into with introducers
5. The CMR and the OFT have specifically advised consumers to seek independent advice before handing over hundreds of pounds for checking credit agreements. The fee for "checking" the credit agreements is a duplication of the work which will eventually be required by a solicitor and will not, it seems, be recoverable as part of the claim. In some cases the "checking" fee is paid to the introducer which then seeks its own legal advice and advises the claimant client direct.
6. Once the claimant client has been put in touch with a solicitor, the solicitor must advise his or her clients if the merits of making a claim really do justify the cost of pursuing it (rule 2.03(6)) and what course of action is in the client's best interests (rule 1.04). This includes advising the client not to proceed with a particular scheme or fee payment if such arrangements are not in the client's best interests, regardless of whether the arrangement has already been entered into by the client. Solicitors must not enter into referral arrangements with an introducer whose scheme is not in the best interests of the client. You should monitor and if necessary terminate agreements with introducers who act improperly.
7. If an arrangement involves the claimant client incurring fees before the solicitor is instructed, these may be irrecoverable. For this reason, the SRA's view is that such arrangements will not usually be in the best interests of the client and should be avoided.
8. In a recent case, Beresford and Smith 9666-2007 (PDF 44 pages, 215K), the Solicitors Disciplinary Tribunal noted that the attitude of a firm was that clients had entered into an agreement with introducers:
- "...before they instructed the firm and therefore [the firm] had not been concerned with it [the terms of the agreement]".
The Tribunal concluded that:
- "In the circumstances of the case, the Tribunal did not find this acceptable."
9. Solicitors must also ensure that their own interests in receiving referrals of work do not conflict with their duty to give clients proper advice. In the case referred to above, the Tribunal went on to find that the firm's interest:
- "...had been in obtaining and maintaining a flow of work from the... "
introducer and that the firm:
- "...had acted in circumstances of conflict between themselves and their clients and in conflict between their clients and the [introducer]".
10. Clearly, there will be some introducers of "unenforceable" consumer credit agreement work whose schemes will not be adverse to the clients' best interests and will be compliant with a solicitor's obligations. However, in light of the serious concerns raised, solicitors should consider their responsibilities carefully.
Is the introducer authorised?
11. Under the Compensation Act 2006, persons providing a regulated claims management service need to be authorised by the CMR. Regulation applies to claims made for compensation, including claims in respect of financial products and services. Whilst some introducers are exempt from regulation, you should check whether or not any potential introducer requires and has obtained authorisation. The CMR hold information on authorised introducers and provide a guidance booklet as to when authorisation is needed.
More information
Although the SRA is unable to "sign off" a particular scheme or arrangement as "compliant", our Professional Ethics team can help you with specific queries about how the rules of professional conduct apply.