Lettings: No exemption from client money protection schemes for lawyers
The First-tier Tribunal has upheld an £8,400 fine imposed on a law firm for not belonging to a client money protection (CMP) scheme while collecting rent for properties owned by clients.
Judge Brian Kennedy KC rejected the contention of Shropshire firm Harfitts that, as a regulated law firm, holding the money in its client account was sufficient protection.
“As a solicitor, the appellant has a greater understanding of the legal obligations that apply as well as having some expertise in reading and interpreting legislation,” the judge said.
“The appellant is aware that there are wayward solicitors and that is why protection for the consumer is required and provided by the legislation engaged herein.”
The Client Money Protection Schemes for Property Agents (Requirement to Belong to a Scheme Etc.) Regulations 2019 say that organisations undertaking property management or letting agency work must be a member of one of the six available CMP schemes.
In its submissions to the tribunal, Shropshire Council stressed there was no exemption for solicitors, unlike in the rules of redress schemes for letting agents, where access to the Legal Ombudsman is deemed sufficient.
The CMP regulations post-dated these and so “a similar exemption for legal professionals could have been incorporated into the regulations but was not”.
The council also argued that protection by virtue of being a regulated law firm was not as extensive as CMP schemes.
While schemes must hold appropriate insurance which “covers any foreseeable liability which may arise in connection with the failure of scheme members to account for client money”, the Solicitors Regulation Authority did not.
Harfitts describes itself as ‘solicitors and property agents’. The council initially fined it £19,250 for failing to join a CMP scheme – the maximum is £30,000 – with the fact it is a law firm considered an aggravating factor.
On internal appeal, this was reduced to £8,400, after the firm said it only managed two properties on behalf of clients, and also offered a tenant finding service. The council also recognised that, by holding the money in the firm’s client account, “some steps were taken to protect client money”.
Harfitts argued before the tribunal that, as it only engaged in letting and/or property management work in its capacity as solicitors, it was not a property agent for the purposes of the regulations.
It only managed rent collection for two long-standing clients – approximately £500 a month for each property – with the money paid out each month “as an additional legal service following the original preparation by the [firm] as the clients’ solicitors of their shorthold tenancy agreements”.
In also challenging the level of the fine, the firm said that, since two fee-earners left last year, founder Paul Harfitt was the only fee-earner, alongside a part-time bookkeeper and a part-time receptionist.
“We have a modest turnover and income and a fine of £8,400 would be a very severe blow to our resources. At the time of making these submissions, it is unclear what the future holds for this firm.”
But Judge Kennedy rejected Harfitts’ submissions and found that the council acted reasonably in mitigating the penalty as it had.
“I have not been provided with any or sufficient evidence that the imposition of the revised penalty will cause undue hardship, and I am not persuaded that the revised penalty is unfair or unreasonable in all circumstances.”
Mr Harfitt told Legal Futures that, at 74 years old, he did not have “the stamina or resources to fight this any further”.
“It is hard to understand why a solicitor’s highly indemnified client account is not enough to satisfy this legislation – even though it is apparently enough in Scotland –or why firms of solicitors in England seem able to collect rents for deceased client landlords when dealing with probate cases with impunity during the administration period and without any additional client account protection.”
He said he remained “particularly aggrieved” by the “disproportionate” nature of the fine, given he only collected a small amount of rent for two properties, although he acknowledged his website did at the time advertise a property management service.
Alexandra Cosgrove, lead officer for property and lettings work for Central England Trading Standards Authorities, who led the investigation into Harfitts, said: “The authority was told that it is fairly common practice for solicitors to manage properties for long-standing clients, especially where they’ve carried out conveyancing work.
“The judgment is very clear… This decision could have serious implications for the legal profession and potentially other professions carrying out very minimal letting agency work as a sideline to their primary business.”
Isobel Thomson, chief executive of Safeagent, a not-for-profit accreditation scheme for lettings and management agents, added that the ruling also highlighted that where a solicitor carried out probate work and rented properties are part of an estate where tenants paid rent to their firm, this could be classed as ‘letting agency work’ or ‘property management work’, which may require them to be a member of a CMP scheme.
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