Last week, the Solicitors’ Regulatory Authority (“SRA”) published a Regulatory Settlement Agreement (“RSA”) – effectively the result of a plea bargain between solicitor and regulator – in which LZW Law Limited accepted it had failed to act in its clients’ best interests and had acted in transactions in which there was a significant risk of conflict between the interests of two or more clients.
The RSA arose from an investigation into LZW’s participation in certain schemes – once commonplace, now less so – which had as their intention the avoidance of stamp duty land tax on certain (typically residential) purchases. LZW’s financial interest in those schemes was modest: it charged each (and there were 203) client between £250 and £500 for the extra work involved in effecting the scheme. The lion’s share of the profits on those schemes – typically calculated by reference to the purported stamp duty land tax saving – would have been enjoyed by the promoters.
As others have observed, the fine paid by LZW was a relatively modest £2,000 plus costs of £6,965. The aggregate of these sums is, as can immediately be seen, substantially less than the fees earned by LZW. Others have found this difference remarkable; for what little it’s worth, I do not.
What interests me is the role of Counsel in the scheme.
The conflict of interest referred to in the RSA was between LZW’s borrower clients (those purchasing the properties in question) and its lender clients (providing the monies by which the purchases were to be effected on the strength of the security in the property). It is a common feature of stamp duty land tax avoidance arrangements that they can impair the quality of the lender’s security. Although there is no explicit finding that these arrangements had that effect, the RSA does state that LZW had failed to disclose “material” information to its lender clients (being the borrowers’ participation in the schemes).
In mitigation, LZW pointed out that it had taken advice from Counsel as to whether it was obliged to disclose to lenders the fact of its putative borrower clients having entered into SDLT schemes. To this the RSA observed:
That “However” is rather troubling. It is not said that the barrister (who, sadly, goes unnamed) is not competent to give that advice. Nor is there any finding that the barrister – instructed by LZW and owing a duty to LZW – has a conflict of interest. Indeed, one might consider that, if the SRA regarded the barrister as having had a conflict of interest, that would have mitigated LZW’s breach because the fault would have been the barrister’s rather than LZW’s.
However, if one proceeds, cautiously, from the assumption that the barrister had no conflict of interest one is left in a rather uncomfortable position. The SRA has held, in effect, that the degree to which a solicitor can rely on a barrister’s advice is dependent on whether the barrister has advised on a related tax avoidance scheme.
If this is right, we have two tiers of specialist tax barrister: those the SRA recognises the bar’s clients can fully rely on and those they cannot.
Is the barrister’s client here the solicitor, or the property purchaser?
In any event, a solicitor cannot rely on counsel’s advice blindly – at the minimum, counsel must be competent and experienced in the relevant field, and properly instructed. Was a tax barrister the right person to be giving advice to the solicitor on their professional obligation of disclosure to their two clients – the purchaser and the lender? Indeed, might the barrister have had a conflict of interest themselves.
Jolyon, I broadly agree with you, but it is even worse than that if you read this link: http://www.lawgazette.co.uk/analysis/comment-and-opinion/the-problem-with-rsas/5040754.fullarticle
See following extract from link below re this point:
“First, an adviser who properly instructs and follows the advice of specialist tax counsel will generally have discharged his duty, although an adviser cannot simply abdicate responsibility: see further Matrix Securities Ltd v Theodore Goddard  PNLR 290”
The SRA should intro APNs for penalties and skip this tribunal malarkey…
Yes, indeed, but that is about whether the tax advice is right or wrong, and whether the solicitor was negligent.
My question is whether specialist tax counsel is the right person to be giving advice on a solicitor’s professional obligations.
Even applying the negligance test – the entitlement to rely on properly instructed counsel’s advice, except where it is obviously wrong – it seems appparent to me that failure to disclose to the lender is at the very least a technical breach of the solicitor’s obligation of disclosure, even if the lender’s interests are not actually prejudiced.
It begs the question where do you stop? Do you also need to consult counsel who is an expert on property finance re solicitor obligations to lenders or just a specialist regulatory counsel? What if, as is not uncommon, tax counsel mentions the views of such other counsel in his own tax opinion in support of his own view etc. Is it realistic to expect clients to shell out for all these counsel opinions especially when there are usually tight deadlines to completion? What if such a counsel opinion (that could be a generic opinion dated before the purchase) was obtained after the event to support lender non-disclosure? Also, if you read the Grindrod SDT case in the link below you will see that the SDT did not find any lender conflict problem with 2 of the SDLT schemes; only one of them and that was for very particular reasons re CML guidance. http://www.solicitorstribunal.org.uk/Content/documents/11030.2012.Grindrod.pdf
I suspect s/he was giving advice, more, on the question whether it would impact on the quality of the lender’s security… but if I’m wrong, you’re right…
I believe LZW involved a “drop and bounce” scheme, like the one involving an unlimited company in Grindrod where there were adverse findings.
I am not suggesting that the solicitor (or indeed the client) should ordinarily need to obtain a multiplicity of opinions from different specialist counsel. I am suggesting that we should not be too surprised that the advice of tax counsel (whatever it was) was not the determinative factor in this disciplinary matter.
This was a settlement agreement, though – perhaps the solicitor should have continued fighting all the way to the tribunal.
Congratulation, by the way, Jolyon, on your elevated rank. The new gown is on order I am sure 🙂
I agree with the Law Society article i.e. it is more or less a no-brainer to accept a RSA from the SRA compared to risking them taking you to the SDT given the choice even if you are probably totally innocent. (And of course the SRA know it.)