Solicitors and investment fraud

29 December 2016




This report is about the risk to the public, and indeed to the reputation of the profession, caused by the small number of solicitors who become involved in helping investment schemes that may well be frauds.

 

Introduction

In this year's Risk Outlook we identified risks to the integrity and independence of solicitors as one of our priorities. Solicitors must meet high professional standards set independently in the public interest and I know the vast majority do so. But when things go wrong it is important that we take robust action to protect the public and public confidence in the profession.

This report is about the risk to the public, and indeed to the reputation of the profession, caused by the handful of solicitors who become involved in helping investment schemes that may well be frauds.

We know the vast majority of solicitors and law firms would not knowingly become involved in such schemes, but you should all be aware of the signs.

Solicitors and law firms are widely respected and the promoters of fraudulent investment schemes sometimes actively seek the involvement of solicitors to give their activities an impression of credibility or security.

Where solicitors are involved in such schemes, we will take action in the public interest, and this report gives cases studies of such action.

In a time of very low interest rates, investors are being tempted by promised returns which, even if they are 10 percent are still 10 times more than banks and building societies offer on savings accounts. We have warned the profession in the past and taken action to stamp out law firm involvement in fraudulent schemes. We issued a further warning notice in September telling solicitors, again, about the risks of involvement in such schemes.

We are aware that some solicitors believe that they can act in relation to these schemes as long as they limit their involvement. But where there are warning signs, they will be at risk of serious misconduct and often of dishonesty.

I hope this report will help solicitors and the public identify potential frauds. We have included some case studies to demonstrate the harm that can be caused to the public and the consequences solicitors have faced when they have not met their professional obligations.

As we reform our regulation, we are working to offer solicitors more flexibility to provide services in a way that suits their customers. But less bureaucracy does not mean less accountability. On the contrary, it means that high professional standards are all the more important. This report goes to the heart of professionalism and offers insight into an area that both the public and solicitors need to be very aware of.

Paul Philip

Chief Executive

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  1. Under Part 20 of FSMA, solicitors and law firms can conduct some, but not all, investment activities for clients if the activities are:
    • incidental to the provision of professional services provided by the firm and
    • are complementary to the provision of a particular service to a particular client and
    • they account to the client for any commission received.
  2. Rule 3 of the SRA Financial Services (Scope) Rules 2001 sets out a list of activities that professional firms cannot conduct under the exemption.
  3. Some frauds involve the conduct of unauthorised investment business, mostly commonly " collective investment schemes". For example, Financial Conduct Authority, eight convicted for role in unauthorised collective investment scheme, June 2015
  4. We do not need to prove that a scheme is a fraud. We take action where risk factors suggest the scheme is dubious and may be a fraud.
  5. Over 55's at heightened risk of fraud, says FCA, Financial Conduct Authority, May 2016.
  6. Wood-Atkins SDT Case No. 11270-2014.
  7. SRA Principles 2011.
  8. Where two or more SRA Principles come into conflict the one which takes precedence is the one which best serves the public interest in the particular circumstances, especially the public interest in the proper administration of justice. Compliance with the Principles is also subject to any overriding legal obligations SRA Principles, 2011.
  9. A solicitor was committed to prison for 6 months when he did not comply with a court order to fulfil his undertaking. See Citadel Management Inc v Thompson [1998] Lexis Citation 3090.
  10. We issued various warnings about investment fraud and improper use of client accounts from the mid-1990s onwards.
  11. See the dishonesty findings in Beresford v SRA in which payments were “dressed up” as administration and other fees when they were referral payments, England and Wales High Court (Administrative Court) Decisions, Case No: CO/4142/2009 EWHC 3155 Admin, 2009
  12. See SRA v Steele SDT Case No. 10956-2012. This was reduced on appeal to four years four months
  13. See SRA v Horsfall SDT Case No. 11031-2012.
  14. SRA v Farmiloe SDT Case No. 10257-2009. SRA v Yildiz SDT Case No. 10997-2012.
  15. Neuberger J, in Dooley v The Law Society (2000).
  16. See Simms v Law Society 2005 England and Wales High Court (Administrative Court) Decisions, Case No: Case No: CO/778/2004 EWHC 408 Admin, 2005
  17. Wood-Atkins SDT Case No. 11270-2014.