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Nicola Laver

Editor, Solicitors Journal

Solicitors warned of dubious investment schemes and risk of personal liability

Solicitors warned of dubious investment schemes and risk of personal liability


Solicitors have been issued with a new warning in relation to dubious investment schemes after the regulator uncovered poor standards of practice

Solicitors have been issued with a new warning in relation to dubiousinvestment schemes after the regulator uncovered poor standards of practice. 

According to a Solicitors Regulation Authority (SRA) report, solicitors failed to carry out proper due diligence in more than half of the cases featured in the report.  

The report followed a review of the types of schemes, what sort of firms got involved and how that happened. 

It looked at a sample of 40 cases where a solicitor’s involvement in dubious investment schemes had reported to the SRA up to 2019. 

It highlighted dubious investment risks which left people at risk of falling victim to such schemes.  

It said hundreds of millions of pounds’ worth of losses have been reported to the SRA over recent years, linked to dubious investment schemes – with some schemes individually causing financial losses of more than £1m. 

The regulator has therefore warned lawyers to be vigilant when advising on investment schemes; and in response, the Law Society also warned of the potential for personal liability of law firm principals for a portion of related financial losses. 

Examples of poor practice among firms included acting for the sellers of potentially dubious investment schemes. 

Concerningly, in 63 per cent of cases proper due diligence on those who ran the schemes had not been carried out; and no checks at all were done in a fifth of cases.  

The SRA also found that firms working on such schemes were too often focusing on the interests of the scheme promoter only instead of properly protecting consumers' interests. 

The updated warning notice urges solicitors to be alert to practices such as those that breach the solicitors’ accounts rules; risky schemes presented as routine conveyancing or investment in ‘land’; and those labelled, for instance, as mini-bonds, but are in fact speculative investments promising a high return and the buyers’ money is not being used in the way the seller it says it will. 

SRA chief executive Paul Philip said it will continue to take “robust action” where solicitors are involved.  

He commented: “While most solicitors would never willingly participate in such schemes, those that do, whether knowingly or not, lend a veneer of credibility which sellers can exploit to help persuade people that their offer is legitimate. 

“Not only does that harm those who buy into these schemes, it undermines confidence in the profession as a whole.” 

He added that dubious scheme operators look at the warnings issued by regulators “and adapt accordingly”. 

He warned solicitors to “never be complacent – stay up to date, do your due diligence and if in any doubt, do not get involved”. 

Law Society of England and Wales president Simon Davis welcomed the renewed warning to solicitors and commented: “Concerns about fraudulent investment schemes were a significant motivation behind the SRA's recent decision to reform the Compensation Fund, and to reduce the maximum claim from £2m to £500,000. 

“These activities pose a risk to the ongoing viability of the Fund, and – because the Compensation Fund is paid for by a levy on SRA-regulated firms and individuals – place a considerable burden on the profession as a whole. 

“Solicitors should also be aware that if, as a result of their unwitting involvement in a fraudulent investment scheme they receive multiple similar claims, there is an aggregation clause in the SRA’s minimum terms and conditions for professional indemnity insurance, which can place a cap of £2m (or £3m for incorporated firms) on an insurer's liability for ‘a series of related matters or transactions’. 

“If the aggregation clause is triggered, then the principals of the firm could find themselves personally liable for any claims in excess of that cap.” 

The SRA has taken 48 solicitors and two firms to the Solicitors Disciplinary Tribunal over the last five years for their involvement in investment schemes. 

This led to 16 strike offs, eight suspensions and £870,000 worth of fines.