In a financial climate when interest rates remain low, investment schemes offering high returns will continue to be attractive. While most schemes are genuine, there will always be people who seek to exploit those who are seeking a quick return on their savings. Rina Amin, risk and compliance solicitor at Howard Kennedy, provides some top tips on how to spot a dubious investment scheme.
The SRA’s report on their thematic review of dubious investment schemes states that in the last five years it has taken 48 solicitors and two firms to the Solicitors Disciplinary Tribunal (SDT) resulting in 16 strike offs, eight suspensions and £870,000 worth of fines for their part in dubious investment schemes.
The review found that the type of dubious investment schemes which solicitors are most likely to be involved in fall into one of the following categories:
- buyer-led developments or refurbishments – for example, residential and commercial student accommodation blocks
- fractional developments – for example, hotel rooms, car parking spaces and self-storage units
- alternative investments – for example, diamonds, fine wines, rare earth metals/minerals or carbon credits
- complex financial products – for example, bank instruments, credit notes, loans, shares, pensions and mini bonds
The breaches of the Principles and Codes of Conduct for Solicitors and Firms that has led to disciplinary action are explained in detail in the SRA’s review but in summary are as follows:
Principle 2 – act in a way that upholds public trust and confidence
The involvement of solicitors in a dubious investment schemes which result in huge levels of financial loss will give the perception of wrongdoing, even though in most instances solicitors did not make any financial gains from the scheme itself.
Principle 3 – act with independence
Some of the solicitors involved in dubious investment schemes were found to be reliant on the referrals from the promoters. Although the fee was nominal, it was the volume involved that made it lucrative.
It was also found that in many cases there was an existing relationship (either personal or business) with the promoter and these factors led to the solicitor or firm not scrutinising the investment scheme adequately to the detriment of the buyers.
Principle 5 – act with integrity
In many cases, the solicitor’s involvement was not justified; there was no legal work or underlying legal transaction.
In such circumstances, the solicitor’s involvement gave the scheme a veneer of credibility to the buyers.
In addition, solicitors featured in the promotional brochures which in some cases referenced their regulated status providing buyers with comfort that the scheme was above board and their money secure.
Principle 7 – act in the best interests of each client
Many of the solicitors were found to have failed to advise the buyer about the risks involved.
Some limited their retainers to exclude advice about the scheme, but the SRA saw this as a failure to act in the client’s best interest and therefore misconduct.
It was also found that solicitors acted in circumstances where there was a clear own interest conflict or in some cases a direct conflict.
Code of Conduct for Firms/Solicitors rule 4.2/3.2
In order to advise a buyer, a solicitor must have expertise in the investment.
Many of the solicitors disciplined by the SRA acted in investment schemes involving complex financial products when they did not have the ability to assess the credibility of the scheme and advise on the risks.
As mentioned, limiting the retainer will not mean you are absolved from your duty to act in the best interests of your client.
If it’s suspected that the scheme is fraudulent or high risk, the SRA expects the solicitor to provide full and frank advice to the buyer client and cease to act for the promoter.
It goes without saying that this can only be done if the solicitor understands the scheme and has the relevant expertise to analyse the risks.
Code of Conduct for Firms/Solicitors rule 1.2
When a solicitor is acting solely for the promoter of the scheme, they must ensure they are not abusing their position by taking unfair advantage of the buyer. They have a duty to ensure buyers are treated fairly and advise them to obtain independent legal advice.
In some cases, buyers incorrectly assumed the solicitor was representing them and trusted the solicitor to act in their interests. Where the solicitors were acting for a buyer, there was a failure to analyse and advise the buyer of the risks.
Code of Conduct for Firms/Solicitors rule 6.1
In their review, 55% of the firms were found to have acted where there was an own interest conflict.
Being a panel firm for the promoter which provided a steady income for the firm meant they overlooked their duty to act in the best interests of the buyer.
How to mitigate the risks
Make sure you understand the scheme and carry out due diligence on all parties involved:
- have policies for dealing with investment schemes to ensure the correct level of scrutiny
- consider what legal work is involved; are you simply providing a banking facility with no underlying legal work?
- carry out risk assessments for all new matters
- consider whether there is an own interest conflict; what is the firm’s relationship with the promoter?
- do not act for the promoter and the buyers
- read the SRA’s warning notices on dubious investment schemes as the type of schemes being used are always evolving
It’s worthwhile noting that even if a scheme is genuine it does not mean a solicitor or firm will not face disciplinary action if they are found to have breached the Principles or Codes of Conduct.
The full report is recommended reading for any firm at risk of becoming involved in dubious investment schemes.