SRA: conflicts of interest between lenders and buyers
Leading Surrey firm Mundays has been fined £2,000 by the Solicitors Regulation Authority for using stamp duty land tax (SDLT) avoidance schemes which saved clients over £2.5m.
Though the firm did not charge for this extra service, the scheme promoters, including two companies which went into administration last year, pocketed £1m in fees.
Valerie Toon, managing partner of Mundays, told Legal Futures that the firm had stopped advising on the schemes in 2012, and the “lines in the sand” as to what was acceptable had changed, making it hard for firms.
In a recently-published regulatory settlement agreement, the SRA said it inspected Mundays, based in Cobham, in May 2013. The Cobham area has some of the highest property prices in the country and large houses regularly sell for several million pounds.
“During the course of the inspection, the firm provided details of conveyancing transactions where SDLT mitigation or avoidance schemes were utilised by the firm’s clients,” the SRA said.
“The report identified that, between November 2009 and March 2012, the firm had undertaken 25 conveyancing transactions where clients had been a party to a SDLT scheme to avoid paying stamp duty. This resulted in clients avoiding SDLT worth £2,595,291.25.”
The SRA said the total fees billed by the promoters through the firm, including VAT, amounted to £1,007,762.
The scheme promoters included Inventive Tax Strategies and associated Sterling Tax Strategies Limited, both of which went into administration at the end of last year.
Another company, Mulbury Hamilton Tax Chambers Limited, is facing a proposal to strike it off the Register of Companies, the SRA said.
According to a progress report on Sterling Tax Strategies, published in July this year by administrators Smith & Williamson, counsel’s opinion was obtained on the last three of the company’s stamp duty schemes which had not already failed. Counsel agreed with the administrators’ solicitors, Pinsent Masons, that the schemes had no prospect of success.
The SRA said the principal aim of the schemes was “not only to convey title but also to enable the purchaser client to either avoid or minimise” paying stamp duty.
“HMRC issued technical newsletters in August 2007, June 2010 and April 2013, which demonstrated that HMRC did not consider the schemes to be legitimate tax avoidance schemes, especially since the introduction of anti-avoidance legislation in December 2006.”
The SRA said HMRC had since assessed stamp duty as being due on the transactions promoted by Inventive and Sterling and by one of Mulbury’s schemes.
The regulator said Mundays was under an obligation to disclose to its clients, both purchasers and lenders, all relevant information about the schemes.
“In 15 of the matters, the firm did not tell the lenders that the purchaser client was using a SDLT scheme to avoid paying stamp duty. Nor did it tell the lenders how the transactions were structured.
“Therefore the firm did not give material information to the lenders which enabled them to reach an informed decision as to whether to proceed with the mortgage offer or renegotiate terms.
“The firm did not inform their lender clients that, in some cases, options had been granted with completion dates to take place in the future.
“In failing to disclose material information, the firm failed to act in the best interests of their lender clients.”
In the same way, the SRA said Mundays did not advise the buyers as to what would happen if the schemes were unsuccessful, and the buyers sought repayment of the fees from the promoters.
“This is particularly relevant now that two have gone into administration and a third is facing dissolution,” the regulator said.
“In relation to those schemes where completion was delayed either due to an option be granted or a trust being created, the firm failed to advise the buyers as to the consequences of entering into such schemes, and the effect that the sub-sale or subsequent assignment might have on any future dealings that involved the property, for example remortgage, estate planning or future sale.”
The SRA said the firm had acted where there was a conflict between the interests of lenders and buyers, and in only two cases had lenders been informed about the schemes.
In mitigation, the regulator said the firm no longer implemented any of the stamp duty schemes and did not charge extra for using them.
The firm admitted in the settlement agreement that it “failed, alternatively facilitated, permitted or acquiesced in a failure to disclose material information to lender and/or purchaser clients, and in so doing failed to act in the clients’ best interests”.
It also admitted that it “behaved in a way that is likely to diminish the trust the public places in the profession”, contrary to the Solicitors Code of Conduct.
The firm accepted that it had acted in transactions where there was a conflict or a significant risk of a conflict between the interests of two or more clients.
Mundays was rebuked for the breaches, fined £2,000 by the SRA – the maximum it can currently fine without a referral to the Solicitors Disciplinary Tribunal – and agreed to pay costs of £5,000.
In a statement, Valerie Toon, managing partner of Mundays, said: “The shifting sands of public opinion around complex but completely legal tax schemes have given professional regulators a challenge.
“It’s only right they change the focus of their regulation accordingly – although it does mean the lines in the sand between what’s acceptable and what’s not move around, which is hard for firms.
“We absolutely respect the decision of the SRA on this one and accept that our judgement that there was no conflict of interest between the parties to the schemes we were advising on, was wrong.
“We have now reviewed all our conflicts policies – in fact we completed this exercise long before this SRA investigation, prompted by the new outcomes-focused regulatory regime. Staff have had face-to-face training on this (and on all our other policies) and it is covered in our induction programmes for new staff.
“And we in fact stopped advising on these schemes altogether in February 2012, again long before this investigation, following SRA guidance advising the schemes were high risk for firms for a number of reasons.
“It’s important to understand also that these conveyancing schemes accounted for less than 1% of our turnover at the time we advised on them, and we never charged extra for implementing them, which the SRA accepts.”
Do buyers have a prima facie case to seek compensation from the SIF on the grounds of poor or insufficient advice ?