Lorraine Richardson provides a reminder of conflicts of interest in conveyancing, focusing on a key area where risk can arise: acting for both the buyer and seller in a transaction
Global pandemic. Lockdown. Conveyancing departments only just tentatively returning to their offices. Many still on furlough. Conveyancing solicitors have got more to worry about than conflicts of interest, haven’t they? It might seem that way, but avoiding conflicts is an ongoing professional duty. Also, I would suggest that the current upheaval makes conflicts more likely, and thus more of a risk for conveyancing firms.
Firms regulated by the Solicitors Regulation Authority (SRA) should have conducted a review of their internal processes to identify conflicts of interest when the new SRA Code of Conduct for Solicitors, RELs and RFLs was introduced in November 2019. The emphasis of the code is now very much on personal responsibility, which means that every solicitor should be thinking about not only their own actions, but also the actions of the people whose work they supervise, such as paralegals, secretaries and support staff.
All conveyancing staff, of whatever experience, should be encouraged to trust their instincts in relation to conflicts
The code describes the standard of professionalism expected of solicitors, who must exercise their judgement in applying the standards, and decide on an appropriate course of action.
A key phrase from the SRA is: “You are personally accountable for compliance with this code – and any other regulatory requirements that apply to you – and must always be prepared to justify your decisions and actions.”
A serious failure to meet the standards or a serious breach of regulatory requirements may result in the SRA taking regulatory action. Solicitors are reminded that a failure or breach may be serious, either in isolation or because it comprises a persistent or concerning pattern of behaviour.
The 2019 code has been slimmed down even further than the previous version, published in 2011 (the SRA Code of Conduct 2011). There is thus no guidance contained within the code itself as to what behaviour may or may not constitute compliance. Since publishing the code, the SRA has added some separate guidance and examples.
This article is written from the perspective of solicitors. Licensed conveyancers are governed by a different conduct and conflicts regime.
How are conflicts defined in the code?
Before considering conflicts in the context of residential conveyancing, let’s remind ourselves about what the code says about conflicts. There are two key points (my italics):
- “you do not act if there is an own interest conflict or a significant risk of such a conflict” (6.1)
- “you do not act in relation to a matter or particular aspect of it if you have a conflict of interest or a significant risk of such a conflict in relation to that matter or aspect of it…” (6.2).
There are two exceptions to the rule against acting for two or more clients in a conflict situation: where clients have a “substantially common interest” or where they are “competing for the same objective”. The latter may apply to an auction situation, but generally speaking, these exceptions do not apply to everyday residential conveyancing transactions.
A “conflict of interest” is defined in the glossary as a “situation where your separate duties to act in the best interests of two or more clients in relation to same or related matter conflict”.
An “own interest conflict” is defined as “any situation where your duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with your own interests in relation to that or a related matter”.
It should be relatively straightforward for most solicitors to identify an own interest conflict. So, for example, in a conveyancing context, a solicitor should not act for a client to whom the solicitor is selling their own property, or lending money.
Does the code only apply to actual conflicts?
Anyone considering conflicts of interest should also remember that an actual conflict of interest is not the requirement. The purpose of the conflict guidance is to avoid conflicts arising in the first place. This is why solicitors must always be looking out for “significant risk” of a conflict. A significant risk is sufficient for you to decline to act.
It may be a cliché, but prevention is better than cure: avoiding a conflict in the first place is far better than trying to clear up the mess if a conflict arises.
To be clear, let’s remind ourselves what we are thinking about when considering conflicts of interest in conveyancing. Solicitors should be looking for conflicts of interest when they are acting for two or more clients in relation to the same matter.
Central to this is the fact that solicitors need to consider whether a conflict arises in relation to the parties who are wishing to sell or buy the same property. This is, of course, the classic ‘acting for the seller and buyer in the same transaction’ scenario. This is the subject of this article. There are, of course, other situations in conveyancing where a conflict might arise – but they are for another day.
Is a preliminary conflict check sufficient to comply with the code?
Most conveyancing firms will have a conflict check set up at the beginning of a transaction, when the file is opened. It is often carried out by the accounts team or the person who opens the file, and will usually involve checking the firm’s database to establish whether the firm has acted for the seller or buyer before. The conflict check should also involve establishing whether the firm is already acting for the seller or buyer in relation to the property in question, since another fee-earner may already have a file open on that transaction.
This is an important first step in relation to conflicts. However, it often does not directly involve the solicitor or fee-earner with conduct of the file. It is also not the only check which should be carried out.
While this preliminary conflict sweep will enable the fee-earner to tick the relevant box on the file checklist, it does not mean that the issue of conflicts has now been dealt with on that file. What many fail to appreciate is that looking out for conflicts, anticipating them and acting accordingly should be a continuing process throughout the entire transaction. It is not a one-step process.
Why is it important to address potential conflicts before they happen?
The reason why identifying and avoiding a potential conflict is so important is because if a conflict between clients arises during the transaction and the solicitor concludes that they are unable to continue acting, they should inform the clients accordingly, and cease to act. The solicitor should also advise the affected clients to seek legal advice elsewhere.
It does not take much imagination to see how disruptive this could be in a conveyancing transaction – not only to the clients involved, but also for the entire chain. The affected clients would invariably be extremely angry, and may consider pursuing a complaint. The firm would also be unlikely to recover any fees for the work carried out. In addition, of course, there may also be conduct consequences for the relevant fee-earner. It is therefore not difficult to see why identifying a conflict before it arises is so critical.
Can we act for both the seller and buyer?
When considering whether it is appropriate to act for the seller and buyer in the same transaction, some solicitors will apply the following criteria to conclude that they are able to proceed:
- the clients are established clients of the firm
- separate fee-earners act for the seller and buyer, and
- each fee-earner is based in a different office.
These may look familiar. These criteria are, in fact, the exceptions to the prohibition for acting for seller and buyer which applied in the 2007 Solicitors’ Code of Conduct. They have not been applicable since 2011. While they might be helpful indicators when considering the overall risk of conflict, they are not in themselves exceptions which allow the firm to act.
I would suggest that the starting point is that the firm does not act for the seller and buyer in the same transaction. The fee-earners involved should try to justify to themselves why they should act, and note their detailed considerations on the file. If the firm decides it can act in this situation, it should then obtain informed consent in writing from all affected clients, to allow the firm to act.
I suggest, however, that acting for the seller and the buyer in the same conveyancing transaction should be an exceptional event, and certainly not something which occurs frequently. It is necessary to ensure that it is in each client’s best interests for the firm to act.
If a firm concludes that it should act for seller and buyer in the same transaction because it does not want to lose both sets of legal fees, this is a classic example of the firm putting its own interests above those of their clients.
Can firms accredited under the Conveyancing Quality Scheme act for both parties?
Firms accredited under the Conveyancing Quality Scheme (CQS) must comply with the Law Society’s Core Practice Management Standards (CPMSs). These require that firms have in place a policy on the handling of conflicts (3.9), which includes:
- the definition of conflict
- training for all relevant members of staff to identify conflicts
- steps to be followed when a conflict is identified
- steps to be followed when acting on both sides of a transaction
- steps to be followed if the conflict subsequently occurs
- how to manage possible conflicts of interest between a lay client and a lender client.
The CPMSs go on to require firms to have a procedure to accept or decline instructions (5.2), which must include how decisions are made:
- to accept instructions from new and existing clients
- to stop acting for an existing client
- to decline instructions
- if a conflict of interest arises between the lay client and the lender client or between a seller and buyer client (if the practice is acting for both).
The general guidance notes on this point say: “Practices should include information in the terms of business that explain to clients the circumstances in which they may stop acting.”
This is interesting, because it means that the Law Society does not impose an absolute bar on acting for both the seller and buyer in a conveyancing transaction. However, it is quite clear that firms should have a process to be followed in this instance, and that all relevant staff should be trained on it.
How should we decide whether we can act for both parties?
When assessing whether a conflict of interest may have arisen, or be likely to arise, a firm must assess whether:
- the clients’ interests are different
- its ability to give independent advice to the client may be fettered
- there is a need to negotiate between the clients
- there is an imbalance in bargaining power between the clients, or
- any client is vulnerable.
In the event of any one of the above circumstances arising, the firm may conclude that there is a significant risk of conflict arising, and should therefore decline to act for one of the parties.
In its guidance to the SRA Code of Conduct 2011, the SRA’s starting point on acting for seller and buyer was that to do so would tend to suggest that the firm is not meeting its obligations where conflicts are concerned. While this specific guidance has not been repeated (as yet) by the SRA, it is fair to say that the SRA is unlikely to have relaxed its view on this matter.
If a firm decides that it can act in a conflict situation and that it is in the clients’ best interests do so, it must:
- reasonably believe that the clients understand the issues and risks
- advise the clients in writing
- obtain the clients’ written informed consent
- believe that acting is in the best interests of all clients
- believe that the benefits to the clients of the firm acting outweigh the risks.
It is fair to say that law firms have vastly differing approaches to matters of conflicts of interest: some firms take conflicts of interest very seriously and have a clearly defined process to follow, while others give this little or no thought.
An example of best practice in this area is a situation where a partner, independent of the conveyancing department, has responsibility for conflicts of interest. If the firm is faced with having to consider whether to act for seller and buyer in the same transaction, each fee-earner completes a pro forma giving details of the client, transaction, circumstances and reasons why they consider it would be appropriate to act; and the conflict partner considers these arguments.
Remember: conflicts are a continuum throughout the life of the transaction, not just a box to be ticked at the beginning
In effect, the relevant fee-earners must convince the conflicts partner that it is appropriate for the firm to act. The conflicts partner could then send the relevant letters explaining the risks to the clients for signature and return.
This process has the benefit of transparency and a degree of independence in relation to decision-making on conflicts within the firm.
However you choose to manage your conflicts process, remember that any matters of conduct – but particularly conflicts – should be approached as you would approach a maths question in an exam: show your workings. Solicitors should ensure that their decision-making process and conclusions reached are recorded accurately and properly on every file. In this way, if a conduct decision is subsequently challenged, you can produce your reasoned decision.
Matters of conduct can rarely be reduced to simply right or wrong. There is always an element of subjectivity. I would argue that if a solicitor has reached a conclusion which is evidenced by clear reasoning, such a decision would be harder to challenge than one where there is no demonstration on the file of the thought processes involved.
What practical issues would we need to address if we decided to act for both parties?
Simply requiring clients to be represented by different fee-earners is not sufficient to avoid the conflicts issue, because it is the firm as a whole that is acting for the clients. This becomes easier to envisage when we think about issues such as accounts ledgers, access to client files (whether paper or electronic), and holiday cover.
If a firm concludes that it can act for seller and buyer, each fee-earner should think about how ‘contamination’ of the file by the other can be avoided. Some firms can put up electronic firewalls in their case management system to stop either fee-earner from accessing the file of the opposing fee-earner’s client.
How should the firm handle holiday or emergency cover (or everyone having to leave the office in the event of a global pandemic)? If a firm employs a regular locum who, say, covers fee-earner A one week and fee-earner B the next, that locum will see the files of each fee-earner. This would be sufficient to give rise to the significant risk of conflict that the firm should be aware of. Remember: conflicts are a continuum throughout the life of the transaction, not just a box to be ticked at the beginning.
Remember also that the specific requirements of any lender must be considered if a firm concludes that it can act for seller and buyer in the same transaction.
A caveat: the importance of gut and instinct
I suggest that all staff in a conveyancing team, of whatever experience, should be encouraged to trust their instincts in relation to conflicts. A junior member of a team may realise that something feels wrong, even though they might not know why. All staff should be encouraged to act on those instincts and report to a more senior member of their team. All staff should understand that they should not challenge clients directly about conflicts of interest (or indeed any other matter) unless they are competent to do so. However, “knowing what you don’t know” is a powerful risk management tool when it comes to compliance with the code.
I have two pieces of advice for anyone in the legal profession where matters of conduct are concerned. First, if it feels wrong, it probably is. Second, if a solicitor is sufficiently vexed about a matter that they feel the need to seek the input of a colleague, that in itself is probably sufficient to indicate that they should err on the side of caution and not take the next step.
As with many conduct issues, conflicts of interest are subjective. It is thus likely that some practitioners reading this article may vehemently disagree with my comments or conclusions. In my view, this is an acceptable reaction, as there is often no right or wrong with matters of conduct.
If this article has prompted solicitors to think about conveyancing conflicts and how and when they might arise in their particular practice, then I deem that a success. The next step for those solicitors who have been prompted to think about conflicts is to ensure that everyone working with them has been appropriately trained to recognise conflicts of interest and to understand the firm’s processes and requirements as to how to deal with them.
Conflicts of interest must be avoided. There is a high risk of a conflict arising in conveyancing matters, and we must always be alive to the possibility of a “significant risk” of conflict arising between two or more clients. If an actual conflict arises, we must send both clients away, resulting in dissatisfaction for the clients and probably zero fees for that transaction. Practitioners’ views on conflicts will differ depending on their attitude to risk, and everyone is entitled to take a different view. But all practitioners should evidence their decision-making processes on each file, in case of future scrutiny.
Anyone wanting further guidance direct from the SRA can contact its professional ethics helpline for solicitors (on 0370 606 2577 or via firstname.lastname@example.org). However, firms may wish to ensure that any communication with the helpline is made with the knowledge and consent of the fee-earner conducting the file in question.
Another useful resource is the Law Society’s guide on conflicts of interests in conveyancing, last updated in June 2020.