Supervision and enforcement strategy for conveyancing
Published 19 April 2011 | Last updated 21 August 2014
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 SRA Code of Conduct and compliance with the Rules in the new Handbook.
This strategy builds upon the effective regulatory work associated with conveyancing we have been doing over recent years. In particular, our work in addressing the risks posed by firms engaged in property-related fraud and money laundering and out targeted and proportionate enforcement action to address these risks.
We will identify firms with whom we will engage on matters in the following ways:
- at the point of authorisation,
- through our information gathering processes,
- through our interaction with other regulators/intelligence agencies,
- from information provided to us by consumers, and
- through the work of our Risk Centre.
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 be proportionate to the risk posed.
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.
The SRA focus on the risks to consumers and the regulatory objectives posed by
- activities undertaken by firms and individuals,
- areas of law in which they practice,
- 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 of and adherence to the professional principles.
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 recognizes the risks and improves its approach than we would with a firm which is unwilling to accept or address the risks identified.
Following 100 visits to firms carrying out conveyancing work in 2012 we identified the following conveyancing related issues that pose a risk to our regulatory objectives.(See Conveyancing Thematic Study: Summary Report, March 2013 (PDF 13 pages, 167K) and Conveyancing Thematic Study: Full Report, March 2013 (PDF 60 pages, 1.6MB).)
The risks are listed in the order considered the biggest risk to conveyancing:
- removal from lender panels/Economic downturn/Competition caused by financial instability,
- property related fraud and money laundering,
- conflicts of interests,
- costs information (including publicity about fees),
- referral arrangements.
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 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, the regulators and the Compensation Fund ("the Fund"). A significant proportion of the value of payments from the Fund represents payments related to fraud in connection with conveyancing activities.
Firms need to evaluate the risks posed by property-related fraud and money laundering and determine what policies, procedures, systems and controls to put in place to minimize the possibility of being used, unwittingly, as a vehicle for criminal activity. Firms need to consider monitoring and re-evaluating their systems and controls at appropriate times.
Conflict of interests
Any transaction involving the acquisition of rights over land is very likely to involve negotiations on behalf of a client(s) 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 a duty of disclosure and a duty of confidentiality when acting for buyer and lender.
Firms providing 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.
Conveyancing is a price-competitive and highly commoditized 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 need to assess whether their approach to costs and publicity about fees complies with our Principles, achievement of the Outcomes in the SRA Code of Conduct and compliance with the Rules in the Handbook.
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 documents of information from third parties, including law enforcement agencies.
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.
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/or
- mortgage/financial advisers .
Referral arrangements could compromise a firm's integrity, professional judgment and/or independence. For example, placing reliance on a single third party for a significant proportion of a firm's conveyancing business could also impact upon their financial stability.
Firms 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 SRA Handbook.
Firms also need to determine whether their financial stability is at risk because they are dependent upon one introducer/referrer for their conveyancing business. 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.
Conflicts of interests
Acting for a buyer and seller where there is a conflict of significant risk of a conflict of interests
Acting for an elderly or 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
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 of the firm's policy on conflicts.
Supervisory visits to a firm to evaluate the systems for identification and assessment of conflicts and to 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.
Engaging with firms to help them with their systems and controls and understanding of proper practice i.e. considering how conflicts are identified and addressed.
Providing inaccurate or misleading information to consumers about fees.
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
Supervisory 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.
Where information is inaccurate or misleading we will consider appropriate responses including issuing a letter or advice or warning asking for a compliance plan to address identified weaknesses 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 license.
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 does not advise about this.
Allowing an introducer to influence the work firms do for clients. For instance, 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 instance, a developer tells buyers they have no choice but to instruct a particular firm.
|We will make use of|
Supervisory review of information provided by firms under the reporting and notification requirements in the Handbook.
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, with individuals being subject to referral to the Solicitors' Disciplinary Tribunal.
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 specialize in conveyancing may become financially unstable.
We will make use of
Supervisory 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 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 out regulatory objectives.
Property-related fraud and money laundering
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.
We will make use of
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 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 a responsibility for 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 to ensure adherence to our Principles, achievement of the Outcomes in the SRA Code of Conduct and compliance with the Rules in the Handbook.
We will use a variety of engagement strategies and regulatory 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
1. 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?
2. The application of the Handbook
Have the firm considered how the Handbook applies to their conveyancing work?
How does the firm demonstrate they have considered the application of the Handbook to their work?
Who has ownership of this aspect of the firm's risk management systems?
3. 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?
4. 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 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?
5. 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?
6. 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?
The systems and controls the firm decides to put in place to address the conveyancing-related risks will be a matter for professional judgment taking into account 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 they local or national?).
Key to 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 the 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.
Please use www.sra.org.uk/conveyancing to link to this page.