Know your client – or else

There is always the risk that the client onboarding process can be seen as being little more than a regulatory requirement of the SRA and quality standards such as Lexcel or the Legal Aid Specialist Quality Mark. On this basis there may be risks of censure by the regulator or a finding of a non-compliance with any of the applicable standards in the event of default. It is, however, a process of much greater significance to the firm and clients alike, as was illustrated by the recent disciplinary case brought by the SRA against Anthony Gale. This concerned two transactions which had failed, largely through his poor handling of them.

In the first case in 2016 Gale had been approached by an accountant C in relation to a property owned by A who had the mental age of a 12 year old. This was stated to be a limited retainer in which the adviser would do little more than sign the ID forms and transfer deed so as to sell the property to a company controlled by C. Gale stressed that he was acting with a limited retainer in this matter, but although he continued to communicate further with C as the matter progressed he did not do the same with A. Nonetheless, at a later stage he claimed to be no longer acting for C on grounds of a conflict of interests.

In fact no payment was made to A by C who was subsequently convicted of fraud to the value of £332,000. The SRA then became involved in relation to the apparent vulnerability of client A, and despite accepting that a solicitor would not usually be required to “travel outside” their instructions they would be required to investigate any relevant unusual features of a matter in order to be able to provide the advice required by the client.

In the second case Gale had been instructed by G on the sale of a property that was actually owned by E, where E’s son told Gale that his father had gifted the property to G for his having paid off the outstanding mortgage on the property. Gale did not take the precaution of checking this with E directly but nonetheless signed the contract in the name of E as the seller, acting on his ostensible authority.

The whole matter then failed to proceed as a result, rather unsurprisingly, of a dispute between the parties. Gale was then found to have been in breach of his duties which had resulted in his client having been taken advantage of. The SDT therefore found that Gale had failed in his “know your client” obligations, with particular concerns as to the risks of fraud in conveyancing transactions, conflict considerations and failure to consider the relevant considerations in acting for vulnerable clients.

By way of further commentary on this case decision the requirements of acting through an agent are now as set out in the Legal Affinity Group AML Guidance Note at section 6.16.3, which provides that an adviser may assume that a client is acting on their own behalf unless this is clearly not the case from the facts of the matter. Where an agency situation does arise the adviser should be alert to the risk that the relationship might be being used to perpetrate a fraud, as was certainly the case in the first of these two transactions. The LSAG guidance suggests that “understanding the reason for the agency, rather than simply accepting documentary evidence of such at face value, will assist to mitigate this risk”. The suggestion has also been made that in higher risk agency situations further verification of the beneficial owner’s identity should now be obtained to the same degree that would be needed for individual clients.

As to the wider aspects of this case it is important to remember that there is more to the client onboarding process than simply setting out what will be done for the client and the contractual terms that will apply. The adviser’s wider professional duties of care will be found in the Code of Conduct for Solicitors which lays down a responsibility to consider the client’s “attributes, needs and circumstances” (3.4). It follows that any apparent lack of capacity by that client in the matter must therefore be considered.

Finally on this topic Infolegal has a template vulnerable clients policy in its template Office Procedures Manuals, which is available to all subscribers to the Infolegal service.  Although still not yet a formal requirement as such by the SRA, quite clearly it represents the direction of travel so far as all such issues are concerned. This would also be what is, in effect, now required by way of a safeguarding policy in the revised legal aid requirements at A4.1 of the Specialist Quality Mark. Infolegal members will find these templates at section 2.18 in both of the Infolegal Firms and Sole Principals Manuals, and at 2.17 in the Sole Practitioners’ Manual.

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