Compensation Fund claims for solicitor mortgage fraud exceed £100 per mortgage in 2011

Lenders are annoyed about the way the compensation fund is being managed in light of new figures from the SRA that indicate that mortgage fraud claims against the compensation fund for fraud by solicitors are higher than most conveyancers realise

Following a recent data cleansing exercise the SRA has reclassified 147 claims in 2011 against the compensation fund as “mortgage fraud”.

This reclassification of cases has than doubled the number of cases where claims have been made for compensation against a solicitor who they believe has committed mortgage fraud. The SRA have indicated that these figures are lower than in previous years.

The 326 cases in 2011 where claims were made amounted to more than £65M pounds or just over £100 for every purchase involving a mortgage in England and Wales.

This does not take into account claims made against professional indemnity policies where there have been innocent partners or claims where individuals hold themselves out as solicitors when they are not. The total claims of mortgage fraud encompassing of all types of redress against fraud and including both solicitors and licensed conveyancers have been involved are much higher.

The SRA is unable to say how many of these compensation fund claims originate from mortgage lenders.

Of the £65M claimed in 2011 only £1.8M has been paid out against 77 of the claims. The amount claimed for these 77 claims was £20M so the discretionary fund is paying out only 10% of what is claimed where cases have been processed. This does not mean that solicitors did not commit mortgage fraud that resulted in these losses but is reflective of the fact that the fund is a discretionary fund that is intended to only cover those areas set out in the Compensation Fund Rules, these are:-

“3.3 (a) he has suffered or is likely to suffer loss in consequence of the dishonesty of a defaulting practitioner or the employee or manager or owner of a defaulting practitioner; or

(b) he has suffered or is likely to suffer loss and hardship in consequence of a failure to account for money which has come into the hands of a defaulting practitioner or the employee or manager or owner of a defaulting practitioner, which may include the failure by a defaulting practitioner to complete work for which he was paid; in the course of an activity of a kind which is part of the usual business of a defaulting practitioner and, in the case of a defaulting licensed body, the act or default arose in the course of performance of a regulated activity

3.4 For the purposes of rule 3.3(b)

(a) an individual whose dealings with the defaulting practitioner have been in a personal capacity and who has suffered or is likely to suffer loss due to a failure to account shall be deemed to have suffered hardship; and

(b) a body corporate, or an individual whose dealings with the defaulting practitioner have been in a business capacity and who has suffered or is likely to suffer loss due to a failure to account must provide evidence to satisfy the SRA that it, he or she (the body or individual) has suffered or is likely to suffer hardship.>

A grant may, at he sole discretion of the SRA, be made as an interim measure."

SRA Compensation Fund Rules 2011

Speaking to a number of lenders (none of whom wanted to go on the record) there was a clear sense of annoyance. Until recently many claims dating back 3 or 4 years remain unprocessed but the SRA’s decision to outsource the management ofthe Compensation Fund to a firm of solicitors has resulted in a new flurry of activity on old cases. Whilst this catch up may be necessary many lenders have recently recived the rejection of claims outright even when they feel thatsolicitors have blatantly and wilfully sent in certificates on title with the intention to walk away with the funds.

This catch up processing is likely to harden lenders views on which frms of solicitors they will instruct in future on their panels.

Two lenders indicated that where the SRA outsourced firm finds even the smallest amount of contributory negligence by a lender the whole claim is rejected. Both lenders claim this is unfair particularly in cases where solicitors just sent in COT and ran off with the mortgage advances in cases of blatant fraud

The compensation fund had reserves at the end of 2011 of £48M with another £14M due but not received due to delays with mySRA and the renewal season

A spokesperson from the CML said “We have actually seen a marked decrease in the number of mortgage fraud cases in recent times. The number of cases being reported to us are at around 40 per cent of the levels that they were when it was on the increase, and many of those cases are at the lesser end of the scale, for example for unregistered charges.

The SRA has worked hard with other partner organisations over the last couple of years to address the situation, specifically turning information gathered into action — for example the creation of a dedicated Mortgage Fraud Reporting Line – and this has undoubtedly helped reduce the number of cases being reported.”

“Lenders and honest solicitors have faced considerable financial loss as a result of solicitor fraud and the Financial Services Authority (FSA) has made it clear that it expects lenders to be active in mitigating the risks arising from financial crime. The CML has been working with the Solicitors Regulation Authority and the Law Society of England and Wales to address lenders and solicitors’ concerns around solicitor fraud. “

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