Future perfect?

The annual Risk Management Roadshow concluded in June. Training materials will be issued shortly for practices to use as part of their own risk management training programmes and to assist practices review their own risk controls in respect of current and emerging areas of risk.

One particular section of the Roadshow discussion materials which provoked much debate amongst participants was a series of scenarios designed to prompt discussion of the extent to which emerging, future risks can be anticipated and proactively controlled to minimise practices’ exposure to future claims.

The scenarios which featured in the Roadshow materials are reproduced here along with comments reflecting the Roadshow discussions.

Taxation of trusts

Changes in relation to taxation of trusts were introduced by the Finance Act 2006. From a risk management perspective, what do you consider to be the pros and cons of adopting the following alternative approaches to wills held by your practice on behalf of clients:

• do nothing
• review all wills and write to clients affected by the changes
• circulate a note on the impact of the Finance Act and invite clients to get in touch if they require advice or wish changes made to their wills

Comment

What are the risks involved in doing nothing? Has any continuing duty to review/advise been taken on? Does any such duty arise by implication? If a case by case review were undertaken, is that inferring acknowledgment of the existence of such a duty? What if some wills are reviewed and, ultimately, updated whereas others are overlooked in the review process?

Several delegates indicated that they felt “do nothing” was an inappropriate response. However all were clear about the scale of the logistical challenge of undertaking a review of wills in their strongrooms, and the consensus of opinion seemed to be along the lines of the comments of one practitioner:

“The perceived wisdom gleaned from seminars I have attended was that we should review existing wills to see whether changes need to be made to provisions for young children – very often a standard A&M trust would be used but these will be now be taxed as discretionary trusts, so parents may wish instead to create a trust for a bereaved minor or an 18-25 trust… This is a huge undertaking and we have concluded that an easier alternative is to circulate a note on the changes in the Finance Act and ask clients to get in touch if they want to discuss any changes. For my part this is the route we have gone down, but even identifying the clients to send this to has been pretty time-consuming.”

Regarding terms of engagement, query whether terms of engagement for wills could usefully exclude any obligation to keep wills under review and to flag up future changes, e.g. in succession law or taxation?

Equity release plans

Commentators are predicting that equity release (or home income reversion) plans could be the subject of a future mis-selling saga. Do you think these concerns:

• could have potential implications for the Master Policy?
• will have no implications for the Master Policy?
• have no relevance to the profession whatsoever?

Comment

To date, there have been no Master Policy intimations of claims or circumstances relating to alleged negligence etc in advising clients on equity release plans or equivalent – but does that mean that there are no risks for solicitors associated with advising on these products?

The combination of a number of factors (e.g. property/loan values and complexity, and the possibility of any future downturn in the housing market bringing a return of negative equity which might leave equity release borrowers exposed) has led insurers to flag up such plans with solicitors as a serious risk issue which should be treated with caution.

Major PI insurers in Australia and England & Wales have issued warnings specifically to their solicitor clients about the dangers associated with this type of work. In England and Wales, some qualifying insurers require solicitors to make a declaration regarding the number of cases where advice has been given on home income plans or equity release plans.

Marsh addressed the risk dimension of equity release work in a Journal article in November 2006.

Agricultural tenancy notices

In last year’s (2006) Roadshow, there was a case study addressing the critical date for serving notice on the landlord of an agricultural holding when acting in the executry of the farm tenant who has made a bequest of their tenancy. That discussion was prompted by the fact that there had been five intimations, some of them very costly, in the space of five months at the end of 2005/beginning of 2006.

Do you think it is reasonable to explain the absence of any intimations since January 2006 by reference to:

• the risk alert that was issued to all practices, and other risk management coverage of this situation, during the first half of last year?
• external economic/business factors, e.g. the interest of landowners in development or diversification of their land holdings?
• good fortune?!

Comment

The pattern of intimations seems to suggest that the profession has successfully prevented further claims arising by:

• spotting/flagging executries which involve the requirement to serve such notices and getting the notice served timeously;
• avoiding taking on executries which involve the requirement to serve such notices (or otherwise avoiding taking on responsibility for service of notices).

By their nature, these are claims which come to light very quickly after an error/omission so one would expect there to be no significant time lag between the expiry of the (21 day) notice period and intimation of a claim/circumstance by the practice concerned.

Alternative explanations might include the possibility that there have been periods of time when landlords of agricultural tenancies had a particular incentive (e.g. the ability to renegotiate rental terms and conditions; ability to collect a grant or subsidy that is tied to occupation of the land; defeating tenants’ statutory right to buy, etc) for taking the point if a notice was late, whereas otherwise they were less rigorous about asserting their right to contest a bequest/transfer.

Identity fraud/theft

According to literature produced by an organisation that provides professional indemnity insurance for solicitors in Canada, the following type of fraud is becoming increasingly common in that jurisdiction.

The fraudster gets himself registered as the sole unencumbered proprietor of a house belonging to someone else. He then arranges a loan on security of the house. If questions are raised, the fraudster explains that he frequently makes investment property purchases part-financed “retrospectively” in this way. The fraudster disappears with the loan advance, leaving the lender with a worthless security… and a claim against a solicitor?

Do you consider it would be:

• possible for such a scam to be perpetrated here?
• impossible for such a scam to be perpetrated here?
• entirely academic from a risk management perspective?

Comment

It is difficult to say whether, if this scenario occurred here, there would be any potential exposure in these circumstances to a claim from: the lender? the true owner?

Leaving aside the risk/likelihood of a valid claim, it would clearly be preferable, if at all possible, to avoid altogether any potential involvement in such a situation.

In the last few months, there has been a Master Policy intimation relating to a situation where a fraudster masqueraded as someone else in the purchase of a residential property with the benefit of a substantial (£200,000+) loan. Another firm of solicitors has recently discovered that they have marketed residential property on instructions from tenants masquerading as the owners.

Query whether the ID checks required under anti-money laundering legislation, however rigorously applied, will necessarily detect attempted identity fraud/theft of this type? What precautions is it practicable to take in order to minimise the risk that the practice unwittingly becomes involved in facilitating an identity fraud?

Avoiding complaints to the SLCC

Which of the following approaches do you think would be the best approach to adopt to minimise the risk of your practice being the subject of a complaint to the Scottish Legal Complaints Commission after 1 October 2008?

• adopt a more selective approach in taking on new clients/new instructions?
• plan to resolve complaints without recourse to the Commission wherever possible and enhance the client relations partner’s complaint resolution skills?
• include a provision in your terms of engagement to the effect that all disputes of whatever nature will be determined exclusively by reference to arbitration/mediation?!

Comment

What is the potential incentive for seeking to avoid complaints reaching the Commission? Presumably, for the most part, all the same incentives for seeking to avoid complaints, currently, to the Society – and for avoiding client dissatisfaction generally. Having said that, particular fears and concerns have been voiced about the potential impact of the Commission and its powers:

• will the Commission perhaps apply different/lower tests/standards in deciding complaints and complaints including an element of negligence?
• will the Commission take account of factors such as contributory negligence or failure to mitigate loss in determining awards in respect of such complaints?
• will the Commission adopt an unduly “pro-complainer” approach to complaints?

Whatever the ultimate reality of the Commission regime, the fundamental reasons for aiming to avoid client dissatisfaction will remain, but the prospect of the new regime may be a catalyst for review of firms’ policies and practices. Some are taking steps now to:

• adopt a more selective approach to vetting/acceptance of new clients/new instructions;
• improve their internal complaints/dispute resolution processes and skills.

It seems to be generally accepted that there will be no ability to “contract out of” or otherwise exclude the statutory jurisdiction of the Commission in relation to service complaints, although every reason to seek to resolve complaints without recourse to a formal determination by the Commission.

ALISTAIR SIMS AND MARSH

Alistair Sim is a Director in the FinPro (Financial and Professional Risks) National Practice at Marsh, the world’s leading risk and insurance services firm. To contact Alistair, email: alistair.j.sim@marsh.com .

The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues.

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