SRA Playing for the Headlines?

Jeremy Barnett practises from St Pauls Chambers, Leeds. He represented Mr Dhariwal and the partners of Sanders and Co before the SDT. He was instructed in Sanders by Ian Coupland, Partner of Lewis Nedas Law.

A Review of some SDT Cases

A review of a number of recent SDT cases shows the SRA increasing its profile. Commentators are asking if this is the SRA preparing to make a case for separation from the Law Society.

At a seminar held at the Law Society Jeremy Barnett reviewed a number of recent SDT decisions and concluded that the SRA have clearly been investigating classes of cases, and called for more transparency as to how some of the priorities are selected.

The recent cases deal with the following types of allegations:

Stamp Duty Land Tax Avoidance Schemes

These continue to feature before the SDT at Farringdon, following initial interest in an area of practice that was clearly high on the agenda of HMRC, as the majority of cases talk about ‘the amount of SDLT that was avoided’ as a benchmark of seriousness. Although some initial cases ran into difficulties following the service of expert evidence, there has been a continued trickle of decisions including:

Dixon Law (Leeds)

This related to 47 transactions, where two SDLT schemes were used, resulting in £2m SDLT avoided. In this case a regulatory settlement was reached, where a rebuke was issued.


A senior partner brought in fees of £52,000 from 158 transactions which cost HMRC £3m in lost tax. He was fined £1500 and agreed to pay £14,000 costs in a regulatory settlement which avoided referral to the SDT.

Axiom Legal Financing Fund

A number of cases were brought following the collapse of the Caribbean based Axiom Legal Insurer, which lent money to ‘no win no fee’ law firms to fund cases in the hope of higher returns when their cases were successful. When the fund collapsed, receivers, Grant Thornton, recovered £12.3 million of the £120 million held by the fund at the time of the collapse.  Cases were brought against solicitors, some involved in the scheme, some close to the scheme, and some who demonstrated that they were innocent victims. Richard Barnett. This is a 112 page ruling concerning the ex Law Society Council Member and his firm Barnetts, who signed a litigation funding agreement with Axiom Legal Financing that was for payment of disbursements, but had been sold to cover general case funding.

There was a catalogue of findings including dishonesty, conflict of interest, failing to act in the clients best interests, providing false information on an indemnity renewal form. His partner Anthony Swift, was cleared of many charges and suspended. There was a claim by the SRA for £408,000 in costs.

The case was that they knew that Tangerine (the agents) made no proper assessment of the Firm’s ability to pay, that they knew the agents were not prudent and they were aware of the huge fee that Tangerine was entitled to which made the loan too risky and was suspicious in nature.
Sanction: Mr Barnett was struck off as dishonesty and other allegations were made out, even though it was not motivated by personal gain. The Tribunal found that prospective and actual clients reading about solicitors behaving in such a way were likely to think again before taking legal advice.
‘If it sounded too good to be true it almost certainly was too good to be true’, as both Respondents had found to their cost.

Lindsays from Liverpool [Rehab4Life] 3 partners were struck off. They drew down £3.1m from a £15m facility, claiming that the agreement had been varied orally to allow the finance to be used for general funding. The Tribunal found that they should have spotted a fraud as the lender didn’t ask for security.

Christopher Hale [Roher and Co], where 60% had been owned by Tim Schools (who was also struck off) – Hale allowed some money to go to non solicitors of questionable integrity and whilst on notice that Axiom’s investment manager was dishonest.

Drake Legal – Jason Libby used £456k from a £3m facility but the SDT believed his case that he thought he was entitled to do so. They also accepted his case that he wouldn’t have used the money if he had thought it was wrong. He had to pay costs of £46k (reduced from £80k) even though he had to pay the sum of £215,000 back to Axiom.

WE Solicitors: David Wingate and Stephen Evans were also cleared – as they relied on Richard Barnett who was at this stage acting for Axiom!

High Risk Investment Schemes/Use of client account as escrow

This is the most interesting area of recent case law, which coincides with a warning on the SRA website, issued on 21st September 2016, which refers to an earlier warning dated September 2013.

The warning ‘that those operating dubious schemes seek the involvement of solicitors to give their scams an impression of credibility or security’ was followed up by a press release that said ‘These scams were a particular issue in the late 1990s to early 2000s and are now again becoming increasingly common. We have seen an increase in reports of such scams, with initial analysis showing reports having approximately doubled in the last eighteen months’.

The SRA also issued a press release on 21st September 2016. Despite causing a firestorm of interest from the national press in a number of recent cases, there was no mention in the press release, of the confusion around the use of escrow accounts by solicitors.

The Current Rule

The current rule is 14.5 published on 1st November 2016 which says:

‘You must not provide banking facilities through a client account. Payments into and transfers or withdrawals from a client account must be in respect of instructions relating to an underlying transaction ( and the funds arising therefrom) or to a service forming part of your normal regulated activities’

See also the guidance note:
Rule 14.5 reflects decisions of the Solicitors Disciplinary Tribunal that it is not a proper part of a solicitor’s everyday business or practice to operate a banking facility for third parties, whether they are clients of the firm or not.

This rule adopts the decision of Cranston J in Patel v SRA 2012 [29.11.12 [Moore-Bick LJ and Cranston J ] [2012] EWHC 3373 (Admin)which made it clear that instructions must relate to an underlying legal transaction. There has been a great deal of litigation around this issue, as many solicitors have traditionally operated escrow or stakeholder services in conveyancing and other transactions. It is clear now that, even if these are disclosed to a firm’s PI insurer there is still a risk that they will be struck down as not providing a legal service.

The rationale behind the rule is that there is an inherent conflict of interest where a solicitor acts as a stakeholder – which of his clients should he prefer if a dispute breaks out between the parties? The case of Wood v Burdett 2003 made it clear that this was the position, but the guidance was generally misunderstood by many solicitors and other professionals who advise in this area, especially reporting accountants who specialise in Solicitors Accounts Rules work. [The author has conducted his own unofficial market research that shows the majority of experienced solicitors and some members of the judiciary are still under the mistaken belief that managing an escrow service is part and parcel of a busy solicitors practice].

Decisions on Sanction

There have also been a number of recent decisions of the SDT in cases where solicitors have managed escrow services for fraudulent or irregular schemes. An analysis of the cases shows that the usual sanction for such an activity, even where a large amount of money goes through the client account [examples are of £10m and £32m], is a financial penalty, sometimes coupled with a suspension order. It is only in cases where there have been findings of dishonesty that the sanction of a striking off order has been imposed. In addition, large costs orders were imposed in the majority of cases.

Merralls 2016 11309-2014: Strike off for Diamond scheme £5m where dishonesty was found. See article on this blog dated 23rd January 2016 for a full discussion of the case.

Goldberg: strike off for a range of breaches involving investments in a water purification scam where there was a finding of dishonesty.

Sanders: [Not yet published] Suspension order and costs for the partners. This related to the collapse of the £30 million Brazil Eco House Scheme. There were findings that the solicitors breached principles of integrity and raised real conflicts of interest but also that the solicitors went into the scheme honestly and withdrew as soon as they were able, taking appropriate steps to protect investors funds which remained in escrow.

Patel: (2012) EWHC 3373: Court of Appeal. Cranston J upheld fine of £7,500 and costs of £20,000 including VAT.

Connick: (11226-2014): fine of £40,000 for SAR breaches including investment schemes where he had been deceived by third parties

Agombar: (11092-2012): fine of £15,000 for experienced solicitor engaged in transactions which “bore the hallmark of fraud” who had investigated the guidance on escrow services.

Fuglers: v SRA (2014) [Popplewell J] EWHC 179 (admin) (QB). £10m went through the solicitors client account to defeat Football Creditors Rule

Norman: (11485-2016): fine of £10,000 for providing a banking facility over 10 month period and taking loans from clients

Dhariwal: (1150 -2016) fine where £10m went through the escrow scheme for a dual regulated firm for investments in diamonds, graphene etc. This had been declared to the reporting accountants and the SRA and there was a voluntary withdrawal from the scheme.

SRA slow to move?

The press release by the SRA coincided with the decisions in Dhariwal and Goldberg who were both named in the press release., This resulted in both solicitors facing extensive press interest at home and work, which at times became very unpleasant. Although the press releases were strictly accurate, there was little or no mention of the mitigating features that were found by the tribunal.. There was also no mention of the confusion around managing escrow accounts.
Was the SRA slow to warn its members about the risks? There was an initial warning about High Risk Investments on 10th September 2013, two weeks before Mr Dhariwal asked the SRA for advice on whether or not to conduct the scheme, but he was not referred to this warning when he asked for advice. The FCA put out a detailed warning on 14th February 2014, and the SRA followed with a warning on Escrow services on 18th December 2014.Sanders had had an audit inspection by the SRA on 11th April 2013 but the escrow failings were not picked up.

In Sanders, the SRA considered an intervention to protect the remaining clients but lawyers acting for the firm negotiated a settlement to protect those funds. At the later SDT hearing, the SRA alleged that the partners had been slow to take out an interpleader application in the High Court to protect the remaining clients, an allegation that was rejected by the tribunal.

The speed and emphasis of the press releases in relation to high risk investment frauds has catapulted the SRA into the national media, perhaps part of a plan to increase their profile ahead of a review by government of the relationship between the SRA and the Law Society as regulators of the profession. See Law Society Gazette 21st January 2016 ‘Society clashes with SRA over potential split’.

Although there has been criticism of the SRA in the Law Society Gazette by practitioners who feel that they are making it increasingly difficult for small firms to continue in practice, the regulator would say that they are merely doing their best to protect consumers and support the rule of law and the administration of justice. Critics would however draw their attention to the SRA mission statement which includes ‘ to encourage an independent strong diverse and effective legal profession’ and ask if sometimes, they are too keen to increase their own profile for other reasons?

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Jeremy Barnett

Jeremy Barnett

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