Issue 7 Autumn 2007

Contents

The Better Regulation Executive: making a difference?

New regulatory regime for estate agents.

Professional Advisers Beware

Article by Dan Stowers, Cartwright King

Fraud is on the increase, every week new figures are released stating how many billions of pounds UK commerce loses to fraud and how the government is committed to fighting it.
With this in mind the Government passed the Fraud Act 2006 which came into being on the 15 January 2007. The intention behind the Act was to simplify the law in order to make successful prosecutions easier to come by. Some 8 months on however a number of key terms are still vague and, perhaps more worryingly, it appears that the provisions have been drafted so widely that should an innocent professional adviser be faced with an investigation they may be faced with real difficulties in showing that they acted honestly.
The Fraud Act makes it an offence to fail to disclose information to another person where there is a legal duty to do so. Another section in the Act makes it an offence to dishonestly abuse their position, this position would include the relationship between a professional and their client.
These are significant steps and ones which professional advisers should sit up and take notice of.”
These offences do not require the “victim” to be deceived, nor does there have to be any financial loss.
As the boundary between the civil and criminal law become increasingly blurred there is always the fear that those making what may be called a good bargain, through their superior knowledge and skill, could, under this act fall foul of the new provisions. Whilst the adviser may have been caught previously if they acted dishonestly, now they definitely will.
Advisers perhaps now need to ask themselves a number of questions including:-
Would it be an offence to fail to disclose levels of commission on products researched for that client?
Is the effect of the commission on the respective products fully explained to the client?
Does it matter if the client was happy with the recommended product and did not know of the others?
Do I have to go to the client with all of the products I find?
Do I consider all products?
Do I always use the same provider without checking they are still the most competitive?
The answer to these questions is quite possibly yes. Of course, the issue boils down, as it always does, to whether the abuse of position or failure to disclose was dishonest. It seems it is not enough to say that the answers to the question are academic as the client received the best product at the most competitive price available.
It is said that the burden to prove a case, always remains with the prosecution. While that may be true in theory, anyone who has been the subject of an investigation will tell you differently. Would your records show that you had provided full information to your client? Would they show that you had considered every reasonable option? If not, then you could be in serious difficulty.

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Financial Services Authority Update

Article by Jeremy Barnett, St Pauls Chambers
The FSA has recently unveiled a new division to tackle the risks posed by the
evolution of financial crime. The new Financial Crime and Intelligence Division has been established to created a recognised centre of excellence to provide leadership, tools and expertise needed to maintain the integrity of the UK’s financial sector.
The FCID will specialise in information security and hi-tech crime, and will work together with other law enforcement agencies and regulators, including the Serious Organised Crime Agency [SOCA] which has taken over the work of the National Hi Tech Crime Unit.
A More Principles Based Regualation MPBR approach was announced in the 2007/8 Business Plan. Firms will have increased flexibility to decide which busines and operating processes are appropriate to their activities, to eliminate redundant proceses, reduce duplication and lead to lower costs. This approach should prevent small firms being deluged with bulletins and other communications.
All firms now must complete their work on the Treating Customers Fairly TCF principle, by the end of December 2008. The FSA will expand the range of TCF online tools and begin the rollout of regional workshops. A framework is being devised to identify potential TCF risk areas. Tough action against those who fail to comply has been threatened.Regulatory focus has turned to concentrate on illegal offshore Bolier Rooms. In one High Court Action, a solicitor and his former firm were ordered to pay compensation to UK residents who had purchased shares through the firm, when the firm acquired the shares from the unauthorised broker at a discount of £2 –5 per share.
A new voluntary reporting system designed to cut out financial crime has been announced in the insurance sector. Insurance firms and intermediaries are being called on to inform the FSA when they suspect criminal behaviour. Examples given include misappropriation of client money, failure to pass on premiums, falsifying customer details or issuing false cover notes or certificates. A number of criminal and FSMT decisions are now reported on the cases digest at www.regulatorybreach.com/sentencing.html..
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Solicitors Disciplinary
Article by James Bourne-Arton, St Pauls Chambers
Recent Appeals
1) DONKIN v LAW SOCIETY [2007] EWHC 414 (Admin)
2) MACLEAN WILLIAMSON v LAW SOCIETY [2007] EWHC (Admin)
3) BRIAN CONNOLLY v LAW SOCIETY [2007] EWHC (Admin)
Although all three cases have different facts and different charges it emerges from the first two cases that with regard to good character references they will assist in rebutting allegations of dishonesty but will not necessarily help in preventing being struck off even when the charges do not include dishonesty.
In Donkin the appellant was a solicitor who had taken money from three client accounts to discharge liabilities of his practice. He had repaid the money with interest at the client account rate. In each case this had been recorded in the firm’s accounts. He had however not informed two clients of his actions and had not ensured each client had sort independent advice. He had 30 years of previous unblemished practice and provided the court with 47 references from other members of the legal community. At first instance the tribune found against Mr Donkin and struck him off the register. On appeal the Court found that the Tribune had not given the necessary weight to the good character evidence in relation to the question of dishonesty. The matter was sent back for a rehearing. The case of Donkin can to a certain extent be contrasted to that of MacLean Williamson. In that case Mr MacLean Wilkinson was charged not with offences of dishonesty but breaching Solicitors Accounts Rules 1998. His accounts had been examined following his failure to inform all his clients that his practicing certificate was suspended due to bankruptcy. It was held that he had failed to deal with the law society in a proper manner, had failed to comply punctiliously with the rules and of utmost gravity had abdicated his responsibility to his clients.
He too had thirty years in practice and had been a deputy district judge for 14 years. The tribune at first instance struck him off as he has damaged the good reputation of solicitors and had fallen short of the standards integrity, probity and trustworthiness expected of a solicitor. The decision was appealed on the basis the penalty was too harsh considering the years of unblemished record in practice. The tribune’s decision was upheld by the Court of Appeal. The appeal court held that the penalty was sever for a man of many years unblemished practice but the solicitors’ profession only retained its high reputation by demanding the highest standards from its members. The third case Brian Connolly is of a completely different nature and touches upon a number of areas. This is due to the number of allegations Mr Connolly faced, the tribune at first instance found proved 36 allegations of conduct unbefitting a solicitor. Perhaps the most interesting area dealt with on appeal is in relation to conflict of interest. Mr Connolly was charged with continuing to act for two clients when a significant conflict had arisen between. This was contested by Mr Connolly as the existence of a conflict was a matter of professional judgement and could not in itself justify the finding of a disciplinary offence. The tribune disagreed and found the matter proved.
On appeal it was held that generally an honest and genuine decision of a solicitor on a question of professional judgement did not give rise to a disciplinary offence, but that did not mean for a solicitor to act where the was a significant risk would not give rise to a disciplinary offence. If a solicitor did not honestly and genuinely address the issue he could be guilty of an offence. It would seem that the important aspect in relation to conflicts of interest is important to remain alive to possible conflicts and show that it has been honestly and genuinely considered.
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Chinese toy recalls update
Article by Jeremy Barnett, St Pauls Chambers
Following the clampdown by US regulators on Chinese toy importers, the UK authorities have followed suit, in a full blaze of media attention. In an earlier article the view was expressed that the massive growth in media attention is unwarranted bearing in mind the huge volume of Chinese toys sold in the US ( estimate annual spend of $22 billion) compared with the small number of offending products. It is felt that the whipping up of public hysteria about
substandard products is a substitute for the imposition of trade barriers to prevent the collapse of the US manufacturing sector.
On 6th August 07, Rapex announced the withdrawal of 83 Nickelodeon and Sesame Street toys by Mattel. Following the visit of the Commissioner for
Consumer affairs, Meglena Kuneva to China. As a result of the visit, Chinese authorities have agreed to step up their enforcement activities and prepare a report for the EU- China leaders summit in November. They have also announced an increase in training seminars following the signing of a memorandum of understanding between the two countries.
Toys withdrawn include the ‘sing n giggle Tool Bench’ by Fisher Price, the ‘Batman Magna Flight’ figure and certain ‘Polly Pocket’ items which have an
offending magnet which looks like a silver button on certain fashion accessories.
Later recalls have been announced in respect of Sarge Cars and a number of Barbie Doll products. On 5th September, the EU commissioner announced a meeting with the CEO of Mattel to review the framework for the RAPID Alert system which has assisted the voluntary recall over the summer.
A programme of has been announced to analyse existing system of market surveillance, to analyse the regulatory framework, to discuss the legal and technical mechanisms for an accelerated response, to discuss strengths and weaknesses of the system and practical solutions. The Commission also intends to meet with toy industry representatives to identify scope for wider improvements.
It is understood that Mattel have withdrawn over 20 million toys recently. The CEO of Mattel Bob Ekhart has assured consumers that new heightened test procedures have uncovered issues with lead in paint. These include sampling of all vendor paints, unannounced inspection at every stage of production and extra batch testing following each production run. The product recall is a model of excellence, clearly showing which products are affected and how to return faulty products. This demonstrates clear contingency planning, as called for in the new General Product Safety Regulations 2005. Despite all the furore in the media, it has to be remembered that there have been no recent reported accidents or injuries sustained by children licking or sucking toys which have excessive lead contained in the paint. Experts maintain that tolerances within the regulations are generally considered to be excessive in view of the amounts of paint that would need to be eaten to exceed the minimum danger level.
The most common cause of lead poisoning in children is deteriorating [chipping and peeling] lead-based paint on the exterior of houses and schools. Lead paint litigation is a growing industry in the USA - see for example http://www.leadpaintinjuries.com where a ‘lead paint injury lawyer can help you file a claim for compensation online…
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The Better Regulation Executive: making a difference?
Article By Jeremy Barnett St Pauls Chambers
The Better Regulation Executive has an interesting area for new ideas, which allows interested surfers the chance to consider important topics such as:
Idea Reduce the time it takes for a haggis to be created.
Problem for each haggis that leaves the big haggis factory, it is necessary to fill out 3 forms, two of which are in zulu.
Solution. Perhaps if the forms were in a more understandable language they’d be easier to fill in . Also, my dog has a bit of a gimpy leg, perhaps you wonderful people can help me with that too!
[The official reason for rejecting the idea is that it was intended to be humorous or has no part about government policy or regulation.]
Idea Open an office of bureaucrats to cut bureaucracy
Solution. Close the office.
For those who are still interested, The following FAQ also appear on the website http://www.cabinetoffice.gov.uk/regulation/faqs/index.asp.
Q? Why does the UK need regulation?
A... It is about finding more effective ways of delivering protection without placing unnecessary burdens on those who are regulated so that businesses can be more productive, public services more efficient and social enterprises freed from bureaucracy.
Q? Is it true that regulation has cost UK businesses over £30 billion since 1997?
A...The real costs of administering new regulations are a fraction of this figure. Indeed, 90% of the regulations passed last year had no substantial impact on business at all.
Q? Is it true that the Government introduces 4000 new regulations every year?
A...No, this confuses the number of Statutory Instruments (Sis) with the number of regulations on business. The number of Statutory Instruments introduced each year has ranged from 3,200 to just under 3,500 during the last decade. Over 95% of SIs actually have little or no substantial impact on business and many are temporary for example, traffic restrictions to undertake essential road works.
After a close inspection of the answers, one is driven to ask the question, what is the point of this initiative?.
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New regulatory regime for estate agents.
Article By Jeanette Harwood Walker Morris
The Consumers, Estate Agents and Redress Bill (the Bill) received its second reading in the House of Commons on 19 March 2007 and has been committed to a Public Bill Committee.
The Bill is intended to regulate estate agents and at the same time bolster the rights of home buyers and sellers through an industry-wide redress scheme. In addition, the Bill contains proposals relating to doorstep selling, the creation of a consumer advice service and redress schemes for energy and postal service customers.
The Bill regulates those who carry out ‘estate agency work’– this is the definition used in the Estate Agents Act 1979 (the Act), which along with the Property Misdescriptions Act 1991 and the Housing Act 2004, is the principal statute regulating the activities of estate agents. Importantly, this definition exempts rentals so that the Bill will not affect lettings or property management.
Licensing of estate agents
Estate agents are subject to a ‘negative licensing’ system under the Act, by which any person can set up in business as an estate agent, but the OFT has the power to ban agents that they consider unfit to practise. The Bill strengthens the regulatory powers of the OFT by expanding the circumstances in which the OFT can consider the fitness of an estate agent to practise and consequently to take enforcement action against them.
Redress schemes
The Bill will require estate agents to belong to a redress scheme for the purposes of all complaints relating to estate agency work carried out in relation to residential property.
Note that this does not extend to commercial property. Since 2006, when the main estate agents trading body, the National Association of Estate Agents (NAEA), made it a mandatory requirement of membership, around two thirds of estate agents have subscribed to the voluntary Ombudsman for Estate Agents Scheme. However, there are many that have not done so which leaves a significant number of consumers (particularly those who have instructed a non NAEA-member agency unable to obtain redress other than through the courts.
Once the Bill’s redress scheme provisions become law, the schemes will handle complaints about estate agents relating to their acts or omissions in respect of Home Information Packs (including the giving of advice as to whether such a Pack is required) and award compensation where complaints are upheld. Evidence of serious misconduct will be referred to the OFT.
Since the Bill restricts approved redress schemes to handling complaints relating to Home Information Packs, if an estate agency arranged for an outsider provider to prepare its Home Information Packs, or arranged for seller clients to prepare their own, then they would not need to join a scheme. However, the Bill does empower the Secretary of State to require all estate agents to belong to a redress scheme for the purposes of all complaints against estate agents by buyers and sellers of residential property and the Government has indicated its intention to legislate “as soon as possible” to extend the coverage of redress schemes to include other kinds of consumer complaints about estate agents.
Refusal to join a redress scheme will be treated as an undesirable practice under the Act. Continued refusal to join a scheme will lead to a banning order under the Act. The requirement is to join a scheme, as distinct from the existing Ombudsman scheme. The Ombudsman has been calling for it to be the sole provider of a scheme in order to prevent unscrupulous estate agents from shopping around to find the least muscular scheme. It is too early to tell whether the Government has taken heed of his warnings.
Duty to keep records
The Bill will oblige estate agents to make records, and to keep records, including records of offer letters, for a period of six years. Additional powers will be conferred on the OFT and Trading Standards to require access to premises and to demand on-site production of records, including transactional records, where there are reasonable grounds to suspect that an agent has not complied with the Act. This aspect of the Bill should not be too controversial – the latest version of the OEA Code of Practice already requires clients to be sent a copy of letters confirming their offers and to keep a written or computerised record of all offers received (including the date and time of such offers) and the client’s response.
The Bill is notable also for its omissions. It does not, for example, impose any threshold requirement to acting as an estate agent; it does not introduce a licensing requirement; it does not make membership of a professional body compulsory and it does not impose a minimum professional standard for estate agents. Even so, the Bill will inevitably have costs implications – the redress schemes will need to be funded – and estate agents will need to focus on their practices regarding record generation and retention. The Bill’s provisions relating to estate agents are likely to become law in April 2008.
The Tenancy Deposit Scheme
The Tenancy Deposit Scheme came into force on 6 April 2007. The new regime affects all landlords and letting agents who take a deposit/bond from tenants. Landlords must ensure that they comply with the new legislation, as any breach will constitute a criminal offence which may carry severe penalties.
The Scheme has arisen as a result of the Housing Act 2004, which required the Government to put in place arrangements for safeguarding tenancy deposits. The rules apply to all new assured shorthold tenancies created after 6 April in England and Wales. They do not apply to tenancies created before that date. Under the new regime, when a landlord or letting agent takes a deposit from a tenant, the deposit must be protected in a tenancy deposit scheme which has been approved by the Government. There are two types of tenancy deposit protection scheme available for landlords and letting agents: insurance based schemes and a custodial scheme.
Under insurance based schemes, landlords and letting agents retain the deposit/bond they obtain from their tenants, but need to take out Government-approved insurance policies in the tenant’s favour, to insure against the risk of the landlord failing to repay the tenant any money owed. The Government has awarded contracts to two companies to run insurance based schemes: Tenancy Deposit Solutions Ltd and The Tenancy Deposit Scheme. The alternative is to pay deposits/ bonds received from tenants into a Government-approved custodial scheme. At present there is only one custodial deposit protection scheme, run by the Deposit Protection Service. The deposit is held by the service provider until it is time for it to be repaid at the end of the tenancy. This service is funded from the interest earned from deposits held. All schemes provide a free dispute resolution service. Landlords are obliged to provide the tenant with details of which scheme applies to the deposit/bond within 14 days of receiving it.
If landlords fail to do this, they will be unable to regain possession of the property using notice-only grounds under section 21 of the Housing Act 1988. In addition, tenants can apply to the court asking for the prescribed information. If landlords then fail to comply with the request, the court can make certain orders in the tenant’s favour; either that the landlord pays the deposit into a scheme or that the landlord repays the deposit to the tenant. The court will also have to order that the landlord pays the tenant a sum of money equal to three times the amount of the deposit. This will be a considerable sum which will probably eliminate any profit made from the tenancy. It is therefore essential that landlords and letting agents comply with the new Scheme, to prevent the loss of their rights and the imposition of a severe fine.
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