SDT rulings send out warning to law firms over relationships with debt recovery companies

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17 June 2013

Collins: growing number of issues

Law firms must not allow arrangements with debt recovery companies to compromise their independence, the Solicitors Regulation Authority (SRA) has warned, after two solicitors were fined heavily for allowing litigation to be carried out in their name.

The SRA also reminded them that the argument which says ‘work being undertaken is in the best interests of the client’ is not a catch-all defence to charges that other behaviour breaches professional conduct rules.

The SRA warning note also covered “firms being involved in overly-aggressive correspondence”, after one of the two firms disciplined was fined for sending letters “which could have been perceived as threatening in their demands for payment”.

The SRA further flagged the dangers of firms making misleading claims and being associated with “debt recovery agencies carrying out reserved legal activities as if entitled to do so”.

It highlighted updated guidance issued by the Office of Fair Trading (OFT) in November which comprehensively outlined obligations to treat debtors fairly and not to mislead them. It explained: “Debtors should not be subjected to aggressive practices, inappropriate coercion, or conduct which is deceitful, oppressive, unfair or improper, whether unlawful or not.”

Solicitors can be referred to the OFT for non-compliance with this guidance by the SRA because the OFT has granted a group consumer credit licence to the Law Society – managed by the SRA – which covers consumer credit work carried out by regulated persons.

One recent Solicitors Disciplinary Tribunal (SDT) case involved arrangements with debt recovery businesses that “facilitated the conduct of litigation by the debt recovery company when it was not permitted to do reserved legal activities”.

Further, it “had also given the misleading impression to opposing parties and the court that the solicitor was responsible for conducting litigation which in fact was being conducted by the debt recovery company”.

Misleading and apparently threatening letters were also sent. The solicitor was fined £40,000 and ordered to pay £35,000 costs. In the second case, similar charges were made but without the letters. That solicitor was fined £15,000 with costs of £50,000.

Richard Collins, the SRA’s executive director for policy, said: “There have been a growing number of issues raised about firms involved in debt recovery… We have seen some firms argue that the way in which work is being undertaken is in the best interests of their client and is therefore in accordance with principle 4.

“It is necessary for firms to adhere to all of the principles, and therefore an argument that breaches of other principles are justified by principle 4 is unsustainable.”

Meanwhile, the Legal Services Board (LSB) has found that the SRA is unable to say how long disciplinary cases take from end to end due to a “potentially important systemic weakness”.

A review of the SRA’s investigation and enforcement activity said the failure was down to the assessment, investigation and tribunal files each being logged separately on the SRA’s IT system.

More broadly, the LSB concluded that the investigation and enforcement process is complex, with three different points in the process where the decision can be taken on whether to build a case that can be referred to the tribunal.

It invited the SRA to look at its processes and also to help with the LSB’s own project to review the sanctions and appeals provisions across the regulated provisions and where statute might need amending.

Finally, Legal Futures can reveal that the Law Society is examining the viability and cost/benefit of the SRA adopting charitable status. A feasibility study from City law firm Withers, which won a tender to advise on the charity law aspects, came to a positive conclusion, while PwC – advising on the tax implications – has recently submitted its final report.

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