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Conflict of interests

25 August 2011

1 Introduction

1.1 Who should read this practice note?

All solicitors should read this practice note.

1.2 What is the issue?

The Solicitors Regulation Authority (SRA) implemented outcomes-focused regulation (OFR) in October 2011. OFR is a move away from a rules-based approach to one that focuses on high-level outcomes governing practice and the quality of outcomes for clients.

The SRA has published a Handbook, which sets out all the SRA's regulatory requirements. It outlines the ethical standards that the SRA expects of practices and practitioners and the outcomes that the SRA expects them to achieve for their clients.

The SRA Handbook includes a Code of Conduct (the 'SRA Code'), which replaced the Solicitors' Code of Conduct 2007 (the '2007 Code'). The SRA Code establishes outcomes-focused conduct requirements and each chapter outlines outcomes and indicative behaviours (IBs).

The SRA Handbook and Code has been in force since 6 October 2011. Accordingly, the 2007 Code and all of its rules and guidance no longer apply to solicitors' conduct, save in respect of any review by the SRA of conduct taken prior to 6 October 2011 to which the 2007 Code will still be applied.

An overview of OFR can be found on the Law Society's website. This provides information on what the SRA Handbook contains, including a summary of the chapters in the Code of Conduct and a summary of the reporting requirements included throughout the Handbook.

This practice note provides you with an overview of conflict of interests in the SRA's new Handbook. This information on conflict of interests looks very different to that provided in the 2007 Code and, in line with OFR, there is much less information and guidance. The detailed rules in the SRA Code are generally replaced by outcomes and IBs and conveyancing is no exception.

The outcomes as written maintain the current policy position on conflict of interests, but this has been written in the new outcomes-focused way. This may leave it open to practices to innovate and find new ways by which they might satisfactorily achieve the necessary outcomes in the SRA Code.

This practice note includes:

  • What is own interest conflict and client conflict?
  • How do I assess if there is a conflict of interests?
  • Exceptions when you may act when there is a client conflict
  • Acting for a buyer and seller
  • Acting for clients who are the lender and borrower
  • Relations with third parties in a conveyancing transaction

1.3 Professional conduct

The following sections of the SRA Code are relevant to this issue:

  • Chapter 1 on Client Care
  • Chapter 3 on Conflict of interests
  • Chapter 4 on Confidentiality and disclosure
  • Chapter 11 on Relations with third parties

1.4 Status of this practice note

Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.

Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them.

For queries or comments on this practice note, contact the Law Society's Practice Advice Service.

1.5 Terminology

Must - A specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.

Should -

  • Outside of a regulatory context, good practice for most situations in the Law Society's view.
  • In the case of the SRA Handbook, an indicative behaviour or other non-mandatory provision (such as may be set out in notes or guidance).

These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.

May - A non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.

SRA Code - SRA Code of Conduct 2011

2007 Code - Solicitors' Code of Conduct 2007

OFR - Outcomes-focused regulation

SRA - Solicitors Regulation Authority

IB- indicative behaviour

A glossary of other terms used throughout this practice note is available on the SRA website.

2 SRA Principles

There are ten mandatory principles which apply to all those the SRA regulates and to all aspects of practice. The principles can be found in the SRA Handbook.

When thinking about how to meet the outcomes in the SRA Code, you must consider the principles, which apply across the Handbook including the SRA Code. You should always bear in mind what the ten principles are and use them as your starting point when implementing the outcomes.

3 Conflict of interests in the SRA Handbook

3.1 Definitions in the SRA Handbook

  • 'Conflicts of interests means any situation where:
    1. you owe separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict, or there is a significant risk that those duties may conflict (a 'client conflict');or
    2. your duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with your own interests in relation to that or a related matter (an 'own interest conflict')'

  • 'Own interest conflict, for the purpose of Chapter 3 of the SRA Code of Conduct, means any situation where your duty to act in the best interests of any client in relation to a matter conflicts, or there is a significant risk that it may conflict, with your own interests in relation to that or a related matter.'
  • 'Client conflict, for the purpose of Chapter 3 of the SRA Code of Conduct, means any situation where you owe separate duties to act in the best interests of two or more clients in relation to the same or related matters, and those duties conflict, or there is significant risk that those duties may conflict.'
  • 'Substantially common interest, for the purposes of Chapter 3 of the SRA Code of Conduct, means a situation where there is a clear common purpose in relation to any matter or a particular aspect of it between the clients and a strong consensus on how it is to be achieved and the client conflict is peripheral to this common purpose.'
  • 'You' and 'your' is used throughout the SRA Code of Conduct and applies to individuals and to firms collectively. In the introduction to the Handbook the SRA note that their approach to regulation has two elements: firm-based requirements and individual requirements. It focuses on the practices of regulated entities as well as the conduct and competence of regulated individuals. This approach allows the SRA to take regulatory action against firms or individuals, or both, in appropriate cases.

3.2 Relevant chapters

Chapter 3 in the SRA Code deals with the handling of conflict of interests.

Other relevant chapters in the SRA Code are:

  • chapter 1 on Client care which is about providing a proper standard of service
  • chapter 4 on Confidentiality and disclosure which is about the protection of clients' confidential information and the disclosure of material information to clients,
  • chapter 7 on Management of your business and
  • chapter 1 on Relations with third parties.

These chapters set out outcomes IBs. The outcomes are mandatory and must be met. The IBs are non-mandatory but provide examples of how you may demonstrate that you have met the outcomes.

3.3 What is 'own interest conflict' and 'client conflict'?

3.3.1 What does the SRA Code say?

Outcomes 3.4 and 3.5 in chapter 3 outline the prohibition on acting in conflict situations.

Conflict is defined as a conflict between your duty to act in the best interests of two or more different clients ('client conflict') or between your interests and those of a client ('own interest conflict').

You must not act where there is a conflict, or a significant risk of conflict, between you and your client.

If there is a conflict, or significant risk of conflict between two or more current clients you must not act for all or both of them unless the matter falls within the exceptions outlined in outcomes 3.6 and 3.7 in chapter 3.

The general position encompasses all situations where acting in the best interests of one client in a matter would result in prejudice to another client in that matter or a related matter. In addition to these outcomes, you must also consider chapter 1 on Client care which is about providing a proper standard of service and taking into account the individual circumstances of clients. Particularly outcome 1.1 which requires you to, 'treat your clients fairly'. Chapter 4 on Confidentiality and disclosure is also important to consider.

3.3.2 How does this compare to the Solicitors' Code of Conduct 2007?

The definition of conflict set out in outcomes 3.4 and 3.5 is the same as that in Rule 3.01 in the 2007 Code.

3.4 How do I assess if there is a conflict of interests?

3.4.1 What does the SRA Code say?

Outcomes 3.1, 3.2 and 3.3 in chapter 3 outline the systems and controls that you must have in place to enable you to identify and assess potential conflict of interests. It is by using your systems and controls that you will be able to identify potential conflicts.

Outcome 3.2 outlines that you must have systems and controls to identify 'own interest conflict'. These should be appropriate to the size and complexity of your practice and the nature of work undertaken. IBs 3.8, 3.9 and 3.10 set out examples of methodology or actions that may demonstrate you have not achieved this outcome.

Outcome 3.3 sets out that you must have systems and controls to identify 'client conflict'. These should be appropriate to the size and complexity of your practice and the nature of work undertaken. IBs 3.2, 3.3 and 3.4 have been included as examples of how you might demonstrate that you have achieved this outcome.

3.4.2 How does this compare to the Solicitors' Code of Conduct 2007?

Rule 5.01 in the 2007 Code outlined that, 'you must make arrangements for the effective management of the firm as a whole, and in particular provide for the identification of conflicts of interests.'

3.4.3 Is this a change in position?

The outcomes and IBs in the SRA Code place emphasis on the requirements for you and your practice to ensure that you have effective systems and processes in place to identify conflict of interests.

Outcomes 3.1, 3.2 and 3.3 outline in some detail the requirements for practices to have effective systems and controls and also set out separately the requirement to have these in place for both 'own interest conflict' situations and 'client conflict' situations.

Further information is provided through the IBs, which give examples of how you can meet the outcomes to ensure that you have effective systems and processes in place to be able to identify conflicts effectively.

For example, you may tend to show that you have met outcome 3.3 if you decline to act for clients whose interests are in direct conflict. The example used is claimant and defendant in litigation (IB 3.2).

Procedures for identifying conflict of interests will be different for every practice and, in line with OFR, there is no single objective test as to whether there will be a conflict in any given situation or not.

Rather, identifying potential conflicts in differing scenarios is a judgment for you and your practice and one that you will need to be able to justify should you decide to act.

3.5 Exceptions to acting in client conflict situations

Outcomes 3.6 and 3.7 in chapter 3 outline exceptions where it may be possible to act even if there is a client conflict. When deciding whether to act in these situations, the overriding consideration remains as expressed in Principle 4, which is to, 'act in the best interests of each client'.

You must consider whether in acting for all/both clients the benefits to the clients outweigh the risks. These outcomes reflect the fact that there may be situations where, despite a conflict of interests, the clients' separate best interests are served by you acting for two or more clients, where the qualifying conditions of a 'substantially common interest' are met.

It is important that you and your practice always exercise caution when acting in accordance with these exceptions. In the Law Society's view it would be good practice to record your decision and reason for it if you decide to act in these circumstances.

3.5.1 Substantially common interest

Substantially common interest is defined in the SRA Code as, 'for the purposes of Chapter 3 of the SRA Code of Conduct, means a situation where there is a clear common purpose in relation to any matter or a particular aspect of it between the clients and a strong consensus on how it is to be achieved and the client conflict is peripheral to this common purpose.'

While this definition envisages situations of clear common purpose, this is not the same as situations where there is a common interest.

Outcome 3.6 provides for situations when there is a client conflict and clients have a substantially common interest and you can act for both clients. It may in certain situations be disproportionate, for example in terms of cost, for clients to engage separate solicitors. However engaging this exception is dependent upon,

  • you having a reasonable belief that the clients understand the relevant issues and risks
  • the clients have given informed consent in writing
  • it being reasonable for you to act for all the clients
  • it being in the best interests of the clients
  • the benefits to the clients of you acting outweigh the risks
  • the clients know and understand what you will be doing and any limitation to the work you are undertaking for them both

IBs 3.5, 3.11 and 3.12 are examples of how you may/may not demonstrate that you have met this outcome.

You must always keep a situation where you are acting for two or more clients under review. This includes deciding whether, at any time, a point has been reached where it would be untenable to continue to represent both clients without either of them being prejudiced. For example, if one of the conditions set out above is no longer being fulfilled or you cannot act in a fair manner then you must cease acting for one or both clients.

3.5.2 Competing for the same objective

Outcome 3.7 provides an exception for situations when there is a client conflict as the clients are competing for the same objective, but you can still act for both clients. This exception is dependent upon,

  • you having a reasonable belief that the clients understand the relevant issues and risks
  • the clients confirming in writing that they want you to act
  • there being no other client conflict in relation to the matter
  • unless the client agrees, no individual acts or is responsible for the supervision of the work done for, more than one of the clients
  • it being reasonable for you to act for all the clients
  • the benefits to the clients of you acting outweigh the risks.

IBs 3.5, 3.6 and 3.13 are examples of how you may/may not demonstrate that you have met this outcome.

This outcome applies to specialised areas of legal services where clients are sophisticated users of those services.

3.5.3 How does this compare to the Solicitors' Code of Conduct 2007?

These exceptions were previously outlined in chapter 3 on Conflict of interests in the 2007 Code.

In relation to outcome 3.7, previous guidance notes to chapter 3 in the 2007 Code outlined that, generally, this exception will apply in transactional work in the commercial field where clients give their consent.

It highlighted that it is important for you and your practice to exercise caution when proposing to act under this exception in categories of work where to do so is not already accepted business practice.

3.6 Acting for a buyer and seller

3.6.1 What does the SRA Code say?

IB 3.14 in chapter 3 of the SRA Code is about acting for a buyer and seller and outlines that you may tend to show that you have not achieved the outcomes by, 'acting for a buyer (including a lessee) and seller (including a lessor) in a transaction relating to the transfer of land for value, the grant or assignment of a lease or some other interest in land for value.'

3.6.2 How does this compare to the Solicitors' Code of Conduct 2007?

Rules 3.07 to 3.15 in the 2007 Code dealt with acting for buyer and seller and prevented firms from acting for buyers and sellers of land as being a conflict of interests.

It also set out limited circumstances when firms could act for more than one party in conveyancing, property selling or mortgage related services, but always provided that there was no conflict of interests.

3.6.3 Is this a change in position?

No, insofar as you are still not permitted to act for the buyer and seller where there is a conflict of interest or a significant risk of conflict (Outcome 3.5 and IB 3.14). However, the detailed rules under which you could act for a buyer and seller have been removed. The decision still rests with you and your practice as to whether there is a conflict or significant risk of a conflict in the given circumstances.

The status of this IB is non-mandatory in comparison with Rules 3.07 to 3.15 in the 2007 Code which were mandatory. There is no specific mandatory outcome in chapter 3 of the SRA Code in relation to acting for seller and buyer.

3.6.4 Assessing whether or not there is a conflict of interests

The SRA have indicated in its quick guide, 'Outcomes-focused regulation at a glance' that it believes acting for buyer and seller is an area which carries a high risk of conflict of interests and that it does not expect you to act for buyer and seller routinely.

In the instances when you might decide that you can act under the SRA Code for both buyer and seller, it is up to you in these circumstances to show the basis for your decision and justify your actions to the SRA. In the Law Society's view it would be good practice to record your decision and reason for it if you decide to act in these circumstances.

If you decide to act in a particular circumstance then you should actively monitor this situation for a conflict arising as there could be considerable implications for each of the clients and for others involved in a conveyancing chain if you need to withdraw because of a conflict situation.

If you decide that there is no conflict of interests between a buyer and seller then you must consider whether there is any risk of not adhering to any of the principles.

The key principle you should take into account is principle 4, 'act in the best interests of each client'. Other key principles are principle 2 'act with integrity', principle 3 'not allow your independence to be compromised' and principle 5 'provide a proper standard of service to your clients'. Chapter 4 on Confidentiality and disclosure is also important and more information on this is outlined below.

3.6.5 Confidentiality and disclosure

You must take into account chapter 4 of the SRA Code. This chapter is about the protection of clients' confidential information and the disclosure of material information to clients.

Outcome 4.3 sets out that, 'you ensure that where your duty of confidentiality to one client comes into conflict with your duty of disclosure to another client, your duty of confidentiality takes precedence.'

There may be a situation where a buyer wants you to keep information confidential but this information may be material to the seller. In this situation your duty of confidentiality would prevail and you would usually have to cease acting for the seller. Another example is when a situation arises where questions posed to the seller and buyers are inconsistent and there is a mismatch which then could lead to a conflict.

In addition, you may also find that confidentiality issues arise in relation to former clients. The duty to maintain confidentiality about the affairs of your client is ongoing and as a general rule you must not disclose information about any client, present or former, without their consent.

You must consider confidentiality issues carefully when considering acting for buyer and seller.

3.7 Acting for clients who are the lender and borrower

3.7.1 What does the SRA Code say?

IB 3.7 in chapter 3 of the SRA Code is about acting for clients where one is the lender and the other the borrower. It states that it 'tends to show that you have achieved the outcomes' by, 'acting for clients who are the lender and borrower on the grant of a mortgage of land only where:

(a) the mortgage is a standard mortgage (i.e. one provided in the normal course of the lender's activities, where a significant part of the lender's activities consists of lending and the mortgage is on standard terms) of property to be used as the borrower's private residence; and

(b) you are satisfied that it is reasonable and in the clients' best interests for you to act;

(c) the certificate of title required by the lender is in the form approved by the Society and The Council of Mortgage Lenders.'

3.7.2 How does this compare to the Solicitors' Code of Conduct 2007?

There was considerably more information provided on acting for lender and borrower in the 2007 Code. Rules 3.16 to 3.22 covered this matter, and these rules were intended to avoid conflict of interests or manage them in common transactions where they could easily otherwise arise.

The 2007 Code outlined that you must not act for both lender and borrower on the grant of a mortgage of land if a conflict of interests exists or arises.

You may act for lender and borrower if it is the case of a standard mortgage using the approved certificate of title. Download the Law Society and Council of Mortgage Lenders Approved Certificate of Title (PDF).

3.7.3 Is this a change in position?

As in rule 3.16 of the 2007 Code, the new SRA Code describes a set of circumstances where you can act for a lender and borrower. IB 3.7 provides an example of when it may be possible to act for a lender and borrower.

The status of this IB is non-mandatory in comparison with rules 3.16 to 3.22 in the 2007 Code which were mandatory.

There is no specific mandatory outcome in chapter 3 of the SRA Code in relation to acting for clients who are the lender and borrower in individual or corporate matters. However, you must only act for borrower and lender where there is no client conflict or no significant risk of a conflict occurring (outcome 3.5). The risk of conflict is high if non standard terms are being used or in the case of a standard mortgage the approved certificate of title is not being used.

3.7.4 Assessing whether or not there is a conflict of interests

IB 3.7 in the SRA Code is an example of how you might meet the outcomes in chapter 3 and you should not assume that in these circumstances there is no conflict of interests and it is therefore always permissible to act. You must consider each case in light of the outcomes and principles.

In the Law Society's view it would be good practice to record your decision and reason for it if you decide to act in these circumstances.

You must comply with the principles in the Handbook and the key principle you should take into account is principle 4 which is to, 'act in the best interests of each client.'

The SRA have indicated in its quick guide, 'Outcomes-focused regulation at a glance' that there is likely to be an increased risk of a conflict of interests if the mortgage is an individual mortgage of land at arms length as the terms may be prejudicial or may involve negotiation. Outcome 3.3 sets out that you must have systems and controls to identify 'client conflict' to enable you to assess all the relevant circumstances, including whether there is an imbalance in bargaining power between the clients. This point is re-stated by IB 3.4 which sets out that you may tend to show you have achieved the outcomes (in chapter 3) by 'declining to act where there is unequal bargaining power between the clients.'

3.7.5 Confidentiality and disclosure

You must at all times take into account chapter 4 of the SRA Code. This chapter is about the protection of clients' confidential information and the disclosure of material information to clients.

Outcome 4.3 outlines that, 'you ensure that where your duty of confidentiality to one client comes into conflict with your duty of disclosure to another client, your duty of confidentiality takes precedence.'

There may be circumstances when a borrower discloses information which you have an obligation to keep confidential but which you also have an obligation to disclose as material information to the lender.

For example, if you are made aware that a borrower has lost their job, you have an obligation to keep this confidential but this may be material information that you also have an obligation to disclose to the lender.

In this situation your duty of confidentiality would prevail and you would have to cease to act for the lender.

In addition, you may also find that confidentiality issues arise in relation to former clients. The duty to maintain confidentiality about the affairs of your clients is ongoing and as a general rule you must not disclose information about any client, present or former, without their consent.

You must consider confidentiality issues carefully when considering acting for clients who are the lender and borrower and in relation to the exceptions within outcomes 3.6 and 3.7.

3.8 Relations with third parties in a conveyancing transaction

3.8.1 What does the SRA Code say?

Chapter 11 in the SRA Code, on Relations with third parties, sets out requirements to ensure that you do not take unfair advantage of those you deal with, and that you act in a manner which promotes the proper operation of the legal system.

Chapter 11 sets out what is known as the ''contract races'' rule, which is about dealing with more than one prospective buyer in a conveyancing transaction.

Outcome 11.3 states that 'where you act for a seller of land, you inform all buyers immediately of the seller's intention to deal with more than one buyer.'

3.8.2 How does this compare to the Solicitors' Code of Conduct 2007?

Chapter 10 in the 2007 Code outlined the contract races rule. Rules 10.06 stated that where a seller instructs you to deal with more than one prospective buyer or is directly involved with another prospective buyer you must, with the client's consent, immediately inform the conveyancer of each prospective buyer or the prospective buyer if acting in person.

3.8.3 Is this a change in position?

Outcome 11.3 in the SRA Code on the contract races rule is less detailed than the information provided in the 2007 Code.

One change from the 2007 Code is that the rule provides that you must have had the client's consent to inform all buyers immediately of the seller's intention to deal with more than one buyer. This is not an explicit requirement in Outcome 11.3 which only specifies that you inform all buyers immediately of the seller's intention to deal with more than one buyer.

However, you will still need the seller's consent to disclose the information, since this is confidential to the seller's retainer. If you cannot disclose the information because the seller will not agree, then you would need to cease acting to avoid breaching principle 2 and failing to achieve outcome 11.3.

4 Retainers

When acting for two or more clients, there may be situations where you can continue to act for them. However, you will need to make clear that there are defined areas of conflict on which you cannot advise and one or more of them may need separate advice.

When this situation arises your retainer with your clients should be limited to exclude those areas of work or advice.

5 More information

5.1 Advice and guidance

5.1.1 Law Society

5.1.2 Other

 
 
 

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