Q. What are the current risk issues we should be prioritising in terms of our training and awareness programme for colleagues and in reviewing our risk controls?
A: Judged by the current experience, there is no doubt that property/conveyancing-related risks call for the greatest risk management focus at this time. The claims experience demonstrates the wide range of risks that colleagues need to be aware of, and controls required in order to minimise the potential for claims.
It is residential property-related claims which have been by far the most frequent in the recent Master Policy claims experience. Most frequent of these have been claims at the instance of lenders who have suffered losses following borrower default and subsequent repossession and resale. In some cases the lender alleges that there is a problem with the ranking of their security, or with the title to the secured property, which has caused them some loss. However, the vast majority of such claims have involved allegations of failures in reporting in accordance with the CML Handbook or other instructions.
In commercial property, claims by lenders have been relatively infrequent. When they have arisen, the cause has most often been failure/delay in recording deeds, or failure to procure the lender’s required priority of ranking. Occasionally, commercial clients have sought to pursue claims alleging negligent failure to anticipate and provide contractual protection for, or warn them of, the impact of potential adverse scenarios such as a collapse in property values.
Commercial leases have been a common denominator in the experience of higher value claims, and although these are not frequent, they have proved costly. There have been Journal articles and risk alerts flagging the heightened risk, in times of recession, of landlords taking advantage of the slightest error or omission in a tenant’s exercise of a break option. The claims experience suggests that the safest approach is to ensure compliance with the precise letter of all conditions attached to break options – time limits, method of service, address for service of notices, and any preconditions of break options.
For more detail on the Master Policy claims experience, refer to the Marsh website for Scottish solicitors. If you need a reminder of your firm’s username and password for this site, contact Nada Jardaneh at Marsh: email@example.com
Q. What action do you believe we ought to be taking to address these risks?
A: As always, it’s crucial that colleagues, and those with assigned responsibilities for management of risk, are fully aware of where the risks lie in their own activities and in the activities of their teams, departments and the firm as a whole. Awareness is key to effective mitigation of risk in practice.
Different risks call for different types of control. For example, the risk of claims arising out of ineffective exercise of break options appears to demand a consistent, methodical approach supported by checklists or aides-mémoire. In the absence of these controls, there is a risk that one or more of the critical requirements will be missed in the pressurised circumstances of last minute instructions from the client. For suggested approaches to this area of risk, see for example “Breaking up is hard to do”, Journal, September 2009, 42.
In relation to purchases of commercial property development sites, experience of specific allegations made by developers and funding providers points towards ensuring the effective communication of key information. In part, this may mean “If in doubt, report to the client”. In other words, even when representing an experienced or sophisticated client, it is probably safest not to assume that the client knows and understands, say, the implication of including, or not including, a particular provision in the contract. If the absence of a potential contractual protection (such as a minimum price, a backstop date or a time limit) ultimately proves prejudicial to the client, they may seek to blame their professional advisers, including solicitors. Be clear who in their organisation has authority to give instructions and needs to be informed.
A further risk control in this type of engagement involves taking extra time to ensure that the scope of engagement and the firm’s responsibilities are clearly defined. If there are aspects of the transaction which the solicitor considers other advisers are being engaged to advise on, that should be spelt out. Otherwise, in the event of a claim alleging failure to advise or warn, the client may seek to take advantage of unclear scoping of the firm’s engagement. If other advisers have been more precise in spelling out exclusions from the scope of their engagement, that could make it more difficult to demonstrate that any omission to advise/warn was outside the scope of the solicitor’s responsibilities.
For further commentary on the importance of clear scoping engagements, see for example “Don’t be tempted”, Journal, January 2012, 37. Avoiding claims by lenders alleging failure to report in accordance with the CML Handbook involves points already made – being fully aware of the scope of the engagement (in this case, the lender will have defined the scope, subject to any specific agreed qualifications), and having reliable disciplines or processes to ensure that relevant issues are reported to the lender. Where issues have been reported, the Handbook requires that the lender’s instructions are obtained before proceeding with settlement. The Society’s CML Handbook Checklist is available on www.lawscot.org.uk/media/433880/cml_handbook_checklist.pdf
Q. Are there any emerging risks that we ought to be anticipating in our training and awareness programme and in our risk controls?
A: Identifying and targeting current and emerging claims risks is one of the objectives of the Society’s Insurance Committee, and the committee continues to regard information security as a developing area of risk. This is understandable, particularly as the use of technology increases and working practices continue to evolve.
There has been a focus on information security risks awareness in training events, including a module in the eLearning programme on Marsh’s website. (For access, see above.)
Another of the committee’s risk targets remains the exposure of the profession to external fraud in its various guises. An urgent risk reminder has just been issued by the Society alerting the profession to fraudsters’ attempts to gain access to firms’ bank accounts via online banking systems, and eliciting disclosure of password and PIN information. Masquerading as bank staff, they have proved themselves determined, sophisticated and convincing.
There are other examples of the potential exposure of solicitors to fraudsters’ activities (see example in panel). Keep up to date with risk alerts and other sources of information on frauds and scams.
Solicitors handling the administration of an executry estate contacted a beneficiary overseas to notify him of his entitlement to a share of the estate. At intervals thereafter, there were email exchanges regarding progress with the estate.
When the solicitors emailed the beneficiary in connection with a payment to account, the beneficiary responded with details of his bank account. However, it transpired that this email was not from the beneficiary, but from a fraudster who had intercepted the email correspondence. The bank details were for the fraudster’s bank account.
Fortunately, the solicitor handling the executry was suspicious of the email and made contact with the beneficiary (not by email) to establish whether it was genuine. His vigilance meant the attempted fraud was thwarted.
This case study demonstrates the need to be alert to the possibility of interception of email and postal communications; to have good procedures to establish the authenticity of bank details prior to remitting funds; and to have procedures to identify any change in payment instructions and to require reliable confirmation of new bank details prior to remitting any payments.
Alistair Sim and Marsh
Alistair Sim is a former solicitor in private practice who works in the FinPro (Financial and Professional Risks) National Practice at Marsh, global leader in insurance broking and risk management. To contact Alistair, email firstname.lastname@example.org 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. Marsh Ltd is authorised and regulated by the Financial Conduct Authority.
In this issue
- Cold case examination of early childhood evidence
- Incentivising employee ownership
- The diversity imperative
- Towards a more inclusive democracy
- Journal magazine Index 2013
- Reading for pleasure
- Opinion: Campbell Read
- Book reviews
- President's column
- RoS's services for solicitors
- Issues for the Union
- Critical mass
- Is this where it ends?
- Testing capacity
- Making plans for auto-enrolment
- Loosening the purse strings
- Data: don't be caught out
- Punished enough?
- Prior statements practice
- Family business musings
- TUPE: armour not gold-plated?
- Pension policy - a vote winner?
- Scottish Solicitors' Discipline Tribunal
- In with the system
- Check and double-check
- Lender Exchange ahead
- Have you the capital?
- How not to win business: a guide for professionals
- Reflections from the Complaints Commission
- Ask Ash
- Danger spots
- It's the name of the game
- Law reform roundup
- Conference aspires to judicial diversity