Guidance: Part V - Professional Practice
Loans
Rule 20
How do I deal with bridging loans?
You must not enter into a bridging loan agreement on behalf of a client in circumstances which may impose on you personal liability for repayment in the event of default by the client. Bridging loans must always be in writing and you must give the lender full details of the client and what the arrangements are for repayment.
Can I lend money to a client?
Yes – but you should consider whether a conflict of interest might arise.
Rule 21
Can I borrow money from a client?
No – unless the client has been independently advised about the loan or is in the business of lending money. (N.B. Personal and business loans are not covered by the Guarantee Fund.)
Secured Loans to Solicitors Etc
These notes have been prepared with the help of the Director of Professional Practice. If you are unsure how your specific case is affected by the Rule, enquiries are welcomed before you begin to act.
Rule 22
(a) CREATION, VARIATION and ASSIGNATION of SECURITIES
What loans are affected?
Secured loans to any of the principals in the practice or their spouse or civil partner, or any partnership of which they or their spouse or civil partner are a partner or any company in which they or their spouse or civil partner are shareholders (except holdings of less than 5% of quoted companies).
Can we act for the partners or their spouse or civil partner?
Yes – the Rule only prohibits acting for the lender.
Can we act for the lender if the borrower is a consultant, associate or employee of the practice?
Yes – provided the consultant, associate or employee is not married to, or a civil partner of, a partner in the practice (or member if it is an incorporated practice or multi-national practice) and provided no partner, or spouse or civil partner of a partner, is guaranteeing the loan.
Can we act for the lender where the borrower is the parent, brother, sister, son or daughter of a partner?
Yes – provided that no partner, or spouse or civil partner of a partner, will be guaranteeing the loan.
Why are guarantors included?
Rule 22 (3) defines 'loan' as including any obligation to pay money. That includes a guarantee of a loan to somebody else, even though it is only a contingent obligation.
Can we act in a variation or assignation of an existing standard security?
Again the firm can act for the borrower, but not for the lender as the Rule applies equally to variations and assignations as it does to the constitution of a standard security.
(b) DISCHARGING SECURED LOANS
What about discharges?
The firm may not act for the lender until the borrower’s obligations have been fully implemented.
At what stage in relation to a discharge does a solicitor act for a lender?
Only at the stage where the discharge has been executed and is held by the solicitor on behalf of the lender before the loan has been repaid in full. Drafting the discharge is done on behalf of the borrower, not the lender.
Can I send the Discharge direct to the lender for execution?
Yes – but you must advise them not to return it to you but to either retain it until the loan has been redeemed or to send it to their own agents for onward delivery to you only after the loan has been redeemed.
(c) OTHER QUERIES
If I am buying a property with the aid of a secured loan, can the seller’s solicitors act for the lender?
No - the Society’s Professional Practice Committee takes the view that there is a conflict of interest between the seller and the lender to a purchaser.
If I am buying property and another firm are acting for the lender, can the lenders forward the loan funds direct to my firm or do they have to go through their own solicitors first?
The loan funds can be remitted direct to your firm if another firm are acting for the lender. Receipt of the loan funds does not of itself constitute acting for the lender.
Who should I contact at the Law Society if I am still in doubt about Rule 22?
You should contact Bruce Ritchie of the Professional Practice Department (Direct Line 0131 476 8124).
Powers of Attorney
Rule 23
Do I need to keep a list of Powers of Attorney?
Yes – the Designated Cashroom Partner must keep an up-to-date list of active and dormant Powers of Attorney in the name of any solicitor for submission with the Accounts Certificate.
Rules 8(2) and 23
What records do I have to keep to operate a Power of Attorney?
A clear record of money paid in or out of the client’s own bank account should be kept in a client ledger and cash book. Where you have exclusive control of the client’s bank account then that bank balance should be treated as client funds which should be included in invested funds held for named clients.
What effect does the Adults with Incapacity (Scotland) Act 2000 have?
If you are dealing with a continuing Power of Attorney, you must ensure that client funds are treated as client monies and are recorded in the invested funds records and reconciled.
Updated: July 2009
