Draft supervision and enforcement strategy for conveyancing
Published 19 April 2011
Last updated 29 November 2011
This paper sets out the SRA's draft Supervision and Enforcement Strategy for Conveyancing ("the Strategy"). The Strategy will be published in final form in
2012 (originally anticipated in late 2011) and will sit alongside our
overarching Enforcement Strategy published on 13 January 2011. The Strategy is intended to be a living document, informed by the results of our supervision of firms and individuals.
This Strategy sets out how we will engage with firms who undertake conveyancing work with a view to identifying and responding to evidence of practice that is inconsistent with our Principles, achievement of the Outcomes in the new SRA Code of Conduct and compliance with the Rules in the new Handbook.
The Strategy builds upon the effective regulatory work associated with conveyancing we have been doing over the past two years. In particular, our work in addressing the risks posed by firms engaged in property-related fraud and money laundering and our targeted and proportionate enforcement action to address these risks.
Although this is not a formal consultation, we welcome feedback on the Strategy.
Conveyancing and the SRA's approach to risk-based regulation
Conveyancing is an area of practice which accounts for a high proportion of claims on professional indemnity insurance and the Compensation Fund ("the Fund") and complaints; it is particularly susceptible to changes in the economic climate and has potential for considerable consumer detriment.
Conveyancing claims represent about 50 per cent of the value of professional indemnity claims arising against firms. There is also some indication that the value of payments made by the Fund is linked to the economic cycle and by virtue of that the property cycle. There has been a substantial increase in payments made by the Fund in the last few years from £9.23 million in 2008 to £21.2 million for 2010 which correlates with the downturn in the conveyancing market. These statistics highlight the need for us to continue to target our regulatory resources on conveyancing.
As a risk-based regulator, the SRA focus on the risks to consumers and the regulatory objectives1 posed by
- activities undertaken by firms and individuals,
- areas of law in which they practise,
- the business model of the firm.
Those regulatory objectives particularly at risk in relation to conveyancing are:
- the protection and promotion of the interests of consumers,
- the protection and promotion of the public interest,
- encouraging an independent, strong, diverse and effective legal profession, and
- the promotion and maintenance of adherence to the professional principles.
Constructive engagement on conveyancing
We are piloting our approach to supervision throughout 2011 and this Strategy will be informed by the work of the supervision pilot. These will in turn provide evidence for the wider way in which we regulate conveyancing and the holding of client money that we are undertaking in 20112. This will ensure a "joined-up" and evidence-based regulatory approach to the serious risks posed by improper conveyancing practice.
We also need to fully understand the equality and diversity impact of our Strategy. Full details are set out later in this document. As the Strategy is developed, we will engage with the profession and other stakeholders to ensure that we get our approach to the risks posed by conveyancing right. A full equality impact assessment will be published with the final Strategy in 2012.
Our intention is that the work we do on conveyancing will be highly collaborative, drawing on the information and experience available in the profession (through the Law Society), clients (including lenders) and insurers. We will take account of wider developments in this area such as the establishment of the Law Society's "Conveyancing Quality Scheme" and lenders' developing approach to the risk management of their conveyancing panels.
Should we or the firms and individuals themselves identify issues, our aim in the first instance will be to work with firms to put matters right themselves but we will use enforcement action where necessary.
As set out in the SRA's Enforcement Strategy published 13 January 2011 the decision to take enforcement action will be taken on a case by case basis in accordance with our published decision making criteria. A likely outcome of our pilot and the wider review of conveyancing is that the SRA will develop case selection criteria for enforcement in cases arising from conveyancing to address particular risks inherent in that work, within our overall outcomes-focused approach.
We will continue to regulate in a way that is fair and proportionate, but this may not always lead to the same outcomes for different firms. In particular, even where the original incidents are similar we are much less likely to pursue legal enforcement with a firm which recognises the risks and is prepared to improve its approach than we would be with a firm which is unwilling to accept or address the risks identified. We will need to be transparent and consistent in our approach and recognise that monitoring and ensuring equality under the new regime, where there is a much wider range of tools and outcomes for firms and individuals, is an important challenge for us to meet.
Identified issues
We have identified the following conveyancing related issues that pose a risk to our regulatory objectives. These are the focus of this draft Supervision and Enforcement Strategy. They are:
- conflicts of interests,
- referral arrangements,
- costs information (including publicity about fees),
- financial stability,
- property-related fraud and money laundering.
Conflict of interests
Any transaction involving the acquisition of rights over land is very likely to involve negotiations on behalf of a client/clients and therefore there is an inherent risk of conflicts of interest in this type of work. Our experience tells us that conveyancing is one of the key areas of work associated with improper management of conflicts of interests to the detriment of consumers.
Particular high risk areas are:
- acting for buyer and seller;
- acting for two buyers in a contract race;
- acting for buyer and lender where the lender asks a firm to go beyond standard instructions;
- the potential conflict between your duty of disclosure and your duty of confidentiality when acting for buyer and lender.
Firms providing these conveyancing services are expected to assess these and other conflict risks, and ensure appropriate systems are in place for the effective identification and mitigation of these risks.
Referral arrangements
Conveyancing is an area where it is common for firms to enter into referral arrangements with third parties for the introduction of business. For example with
- Estate agents, and
- Mortgage/Financial advisers.
Financially valuable referral arrangements could compromise a firm's integrity, professional judgement and/or independence.
Placing reliance on one third party for a significant proportion of a firm's conveyancing business could also impact upon their financial stability.
Firms will need to assess the risks to their business posed by any referral arrangements and/or fee sharing agreements and have appropriate systems in place to mitigate these risks so as to ensure compliance with the Principles and Outcomes in the new SRA Handbook.
Firms will also need to determine whether their financial stability is at risk because they are dependent upon one introducer/referrer for their conveyancing business.
Costs information
Conveyancing is a price-competitive and highly commoditised area of practice which can lead to firms advertising headline figures to consumers that do not represent the actual cost of the transaction.
There is potential for considerable consumer detriment if consumers are not able to make informed choices about the particular conveyancing services they need and how much they will cost. Integral to this is that publicity relating to costs in conveyancing transactions is clearly expressed, not pitched at an unrealistically low level and is not misleading. Transparency about costs and the avoidance of overly- complex layering of charges will help avoid such situations.
Firms will need to assess whether their approach to costs and publicity about fees complies with our Principles, achievement of the Outcomes in the new SRA Code of Conduct and compliance with the Rules in the new Handbook.
Financial stability
Conveyancing has traditionally been vital to a firm's cash flow and therefore closely linked to financial stability.
Firms who only do conveyancing, or place reliance upon conveyancing transactions for a significant proportion of their fee income, are particularly vulnerable in an economic downturn with the consequent impact upon consumers.
Firms will need to consider what systems and controls to put in place for monitoring their financial stability and economic viability. Firms will also need to determine if they are complying with the Principles and Outcomes by monitoring their financial stability.
Property-related fraud and money laundering
Conveyancing presents significant opportunities for property-related fraud and money laundering. The sums of money involved can be an incentive for criminals to use a property transaction to launder money through placement, layering and integration
Similarly, through property-related fraud criminals steal large amounts of money from institutional lenders causing massive losses and opening up firms to claims from those lenders.
Property-related fraud and money laundering can have a serious impact upon consumers, the profession, us as a regulator as well as the Fund. A significant proportion of the value of payments from the Fund represents payments related to fraud in connection with conveyancing activities.
Firms will need to evaluate the risk posed by property-related fraud and money laundering and determine what policies, procedures, systems and controls to put in place to minimise the possibility of being used, unwittingly, as a vehicle for criminal activity. Firms will need to consider monitoring and re-evaluating their systems and controls at appropriate times.
The above list is not exhaustive and our supervision and enforcement approach will be flexible in addressing any other conveyancing-related risks that we identify through our engagement with firms.
Identifying firms
We will identify the firms with whom we will engage on matters in the following ways:
Our response to information we receive, and how we engage with firms, will depend upon the nature of the information and the risks identified. Our responses will always be proportionate to the risk posed.
Identified risks and regulatory tools
We will use a variety of regulatory tools to address the conveyancing-related risks firms face. These tools may involve
- desk-based reviews,
- on-site visits, including interviews;
- use of formal investigative powers, including requests for documentation and attendance of individuals at formal interview;
- obtaining, in some cases, documents or information from third parties, including law enforcement agencies;
- mystery shopping, and
- thematic visits.
These tools will be used in a proportionate, consistent and targeted manner.
The following information details what we are going to do and the actions we will take to address identified risks.
| Risk |
Regulatory tools |
Conflicts of interests
Examples:
Acting for a buyer and seller where there is a conflict or a significant risk of a conflict of interests. For example, acting for an elderly, vulnerable client selling their property to their child for whom you also act.
Acting for a borrower and lender where the borrower client has provided inaccurate information to the lender to obtain a mortgage and the firm are aware of this.
Acting for a buyer and lender if the lender has a significant interest in the ABS conveyancing practice.
|
We will make use of:
Desk-based engagement with a firm to address complaints of conflict in conveyancing transactions. Consideration as to why the complaints arose and a request for documentary evidence to assess the systems and controls a firm has in place to identify conflicts and a review the firm's policy on conflicts.
Supervisory visits to a firm to evaluate the systems for identification and assessment of conflicts and consider the effectiveness of the implementation of the systems, the training provided to staff and the processes for the monitoring and review of the firm's systems
Thematic work across firms that undertake conveyancing to proactively consider how conflicts are identified and addressed. Engaging with firms to help them with their systems and controls and understanding of proper practice.
|
Referral arrangements
Examples:
Accepting business from an introducer of conveyancing work where the clients are required to enter into an agreement with the introducer which is not in their best interests and the firm do not advise about this.
Allowing an introducer to influence the work firms do for clients. For example, not undertaking appropriate searches on a property because the introducer has asked the firm not to do that work for whatever reason.
Accepting work from an introducer where the firm has reason to believe the clients have been misled into instructing the firm. For example, a developer tells buyers they have no choice but to instruct a particular firm.
|
We will make use of:
Desk-based review of information provided by firms under the reporting and notification requirements in the new Handbook.
Placing increased information requirements on firms assessed as being of greater risk to our regulatory objectives due to the nature or number of their referral arrangements.
Thematic work across firms that engage with introducers for the provision of business to assess whether referral arrangements adhere to the Principles and achieve the Outcomes in the new Handbook. Determining any potential consumer detriment and evaluating how firms monitor relations with introducers.
Rigorous, robust and proportionate enforcement action where firms put their interests or the interests of the introducer before the interests of their clients. This could include: plans to address identified weaknesses, fines under our statutory powers, regulatory settlement agreements, conditions on a firm's authorisation, or intervention should the need arise for urgent regulatory action to be taken.
|
Costs information
Examples:
Providing inaccurate or misleading information to consumers about fees. For example, describing overheads such as the costs incurred in conducting customer due diligence (to comply with Money Laundering Regulations 2007) in a conveyancing transaction, as disbursements in a firm's advertising.
Failing to clearly explain fees. For example, not making it clear to clients whether a firm will render a charge if the sale or purchase is aborted.
|
We will make use of:
Desk-based review of a firm's client care information and publicity with a view to feeding back contemporaneously on issues that we consider pose a risk.
The SRA may engage in "mystery shopper" exercises with firms to evaluate and determine if costs information and publicity about charges is accurate and not misleading.
The SRA may undertake consultations with consumer groups to better understand the expectations consumers have of firms and what they need to make informed decisions about the costs of conveyancing transactions.
Where information is inaccurate or misleading we will consider appropriate responses including: "Dear Compliance Partner" letters, plans to address identified weakness and regulatory settlement agreements. Where firms are unwilling to change behaviours and provide clear and transparent information to consumers we will take robust enforcement action ranging from the use of conditions on an individual's practising certificate, financial penalties and/or restrictions on a firm's licence.
|
Financial stability
Examples:
A firm that is dependent upon one introducer for all of their conveyancing work or specialises in conveyancing and have no other work streams or plans for diversification into other areas of law.
A further downturn in the economy which might indicate that those firms that specialise in conveyancing may become financially unstable.
|
We will make use of:
Desk based review of information provided by firms under reporting and notification requirements; the analysis of financial viability in the conveyancing sector and on an individual firm basis.
Desk based consideration of business and financial plans, profit and loss statements, balance sheets, information on a firm's borrowing capacity or credit line and evidence of indemnity insurance.
Identification of conveyancing firms who may be more vulnerable to financial instability followed by targeted visits to those firms to stress test their business plans to determine if they pose a risk to consumers and our regulatory objectives.
|
Property-related fraud and money laundering
Examples:
A well-intentioned firm failing to understand the need for, or failing to implement, systems and controls in their conveyancing department to comply with the Money Laundering Regulations 2007 and/or to identify and assess potential property fraud making them vulnerable to fraudsters who use them to launder money or defraud institutional lenders.
An ill-intentioned firm which deliberately and systematically fails to implement systems and controls to prevent money laundering and/or property fraud because it is complicit in such activities and profiting from them.
|
Property-related fraud and money laundering
We will undertake visits to firms where there are indications of property-related fraud and/or money laundering to assess what action is appropriate.
If appropriate, assistance will be given on the implementation of systems and controls to mitigate the risks of property-related fraud and/or money laundering.
Where there are indications of property-related fraud or money laundering these will be investigated thoroughly and proportionate and decisive enforcement action will be taken. This will include intervening into firms where such action is justified in the public interest.
|
Identifying and managing risks
It is a firm's responsibility to identify and manage the conveyancing-related risks they face.
Whilst an individual within a firm may have responsibility for, and ownership of, the systems and controls for managing risk and ensuring compliance, all managers will be accountable for addressing the risks within a firm. It will be down to the firm and its managers to generate a culture of compliance and risk awareness to ensure adherence our Principles, achievement of the Outcomes in the new SRA Code of Conduct and compliance with the Rules in the new Handbook.
We will use a variety of engagement strategies and tools to test the systems and controls firms put in place to address the risks they face. Whilst it is down to a firm what systems and controls are put in place, the following questions may assist.
Questions to assist
| Issue |
Questions to assist |
| Governance, infrastructure and stability |
Does the firm have a governance structure with effective oversight and responsibility for their risk management systems?
How are risks relating to conveyancing identified, monitored and mitigated?
How does the firm monitor its financial stability?
Is the firm financially dependent upon conveyancing work or one introducer of conveyancing work?
How vulnerable is the firm's conveyancing work to changes in the economic climate?
What steps is the firm taking to ensure that they continue to be economically viable?
|
| The application of the new Handbook |
Have the firm considered how the new Handbook applies to their conveyancing work?
How does the firm demonstrate they have considered the application of the new Handbook to their work?
Who has ownership of this aspect of the firm's risk management systems?
|
| Assessment of the risks faced by the firm |
How does the firm assess conveyancing-related risks?
How does the firm record these risks?
Who has ownership of these risks?
How regularly does the firm re-assess these risks?
|
| The controls the firm has in place |
What systems does the firm have in place for identifying and assessing conflicts in conveyancing transactions?
How does the firm ensure that if it has arrangements with third parties who introduce conveyancing business that their independence and integrity is not compromised?
How does the firm manage any introducer relationships?
How does the firm ensure that its publicity about charges and costs information is accurate and not misleading?
Who approves the firm's publicity?
What systems does the firm have in place to identify property-related fraud and/or money laundering?
How regularly does the firm re-evaluate the systems and controls in the conveyancing department?
Who has ownership and responsibility for these systems and controls?
|
| Training on risk |
What training does the firm provide to employees (new recruits and current employees) on managing the risks relating to conveyancing work within the firm?
How regularly does the firm provide training to staff on managing the risks relating to conveyancing transactions?
How does the firm record what training has been provided and to whom?
How does the firm evaluate the effectiveness of training?
|
| Monitoring the risks/How the controls work in practice |
What procedures does the firm have in place to test whether the systems for managing conveyancing -related risks work in practice?
Does the firm have a mechanism for feeding back on the effectiveness of its systems and controls?
How does the firm ensure that changes are implemented and cascaded?
Who has ownership of the monitoring of the conveyancing-related risks and evaluation of how the firm's systems and controls work in practice?
|
The systems and controls firms decide to put in place to address the conveyancing-related risks will be a matter for professional judgement taking into consideration the following:
- the size and complexity of the firm,
- the nature of the conveyancing work undertaken (e.g. "e-conveyancing"),
- the firm's client base (e.g. are clients local or national?).
Key to the successful implementation of systems and controls to manage and mitigate conveyancing-related risks will be the generation within a firm of a "risk culture" amongst all employees. Managers will play a vital role in championing this approach and embedding a "risk culture" within the firm so that it influences every aspect of conveyancing work.
We will test the effectiveness of a firm's systems and controls for managing the risks associated with conveyancing. We will engage with firms to help them manage and mitigate risks. The questions detailed above aim to highlight issues that firms may need to consider. Ultimately, responsibility for the implementation of effective risk management systems and controls remains with a firm. However, enforcement action may be taken against an individual if they are particularly culpable.
We will work with other regulators, in particular the FSA, on matters such as property-related fraud to ensure there is a robust regulatory regime to tackle those issues across the market.
OFR at a glance
The SRA has produced a transition manual, "OFR at a glance" published in conjunction with the new Handbook. It includes questions and answers on ethical dilemmas including managing risk and compliance. However, "OFR at a glance" and this Supervision and Enforcement Strategy are not intended to replace or be a substitute for a firm's own internal procedures and decision-making processes.
The results from our engagement with firms will further inform future thematic work across the profession. We will tackle issues where they occur within individual firms and across a wider spectrum of firms where appropriate. Our work and this strategy will inform our policy development and help ensure that we deliver on our regulatory objectives.
Equality impact
We are considering the equality impact of our proposals to regulate conveyancing under our new outcomes-focused regime and our experience of piloting the Strategy will inform this work. In our recent review of client financial protection, it became clear that we needed to review our approach to regulating conveyancing work which is a high risk area of work. We will focus on the potential equality impact of our approach on the profession, particularly firms undertaking conveyancing work, and on consumers of legal services. Our recent consumer research indicated that 21 per cent of all people using solicitors in the last five years were using solicitors' conveyancing services, making it the most commonly-used legal service .
As the SRA developed this Strategy, we considered its potential equality impact and have identified that there are significant gaps in the evidence available to the SRA. For example, we are currently unable to accurately identify which solicitors' firms are most likely to be affected by the Strategy because we don't have reliable data about the range of work that firms offer. We will have much better data when we introduce our new approach to authorisation from October 2011 and in the meantime we will ensure that we pilot our draft strategy with a diverse range of firms. We will pay particular attention to the experience of small firms and sole practitioners, where female sole practitioners and Black and minority ethnic (BME) two partner firms are over represented. We found from the equality impact assessment of the new SRA Handbook (which will come into effect in October 2011 when we will have moved fully to outcomes-focused regulation) that this sector of the profession in particular was concerned about the impact of the changes on them.
Our proposed approach to supervising the particular areas of concern we have identified in conveyancing is clear from the Strategy and will help the profession, and ultimately consumers, to understand the SRA's expectations.
In terms of the impact of our proposals towards consumers, we have carried out research (PDF 12 pages, 470K) that shows the majority of people using legal services believe a satisfactory outcome is shaped by three factors:
- the time taken to deliver the legal service,
- the value for money provided, and
- the quality of service received.
Through our engagement and research work with consumers we will continue to assess the extent to which outcomes-focused regulation—and the Strategy, as part of that approach—are effective in positively influencing these factors and providing satisfactory outcomes for consumers.
A full equality impact assessment of the Strategy will be published.
Please use www.sra.org.uk/conveyancing to link to this page.