Directors of Optima admit breaching rule 1 and enter agreement with the SRA and submit to a “severe reprimand” for being ahead of the game

Many conveyancers have relished the news that Optima have been investigated by the SRA. Some are claiming that by reaching an agreement with the SRA to change its corporate structure and management to avoid further breaches of the rules shows how “evil” external investment into the legal profession will be.  We take a slightly different perspective on this series of events and suspect that Optima may not actually lose any clients by this and may in fact continue to go from strength to strength.
When ABS are allowed does any one really think that models like this will not be accepted as within the boundaries of acceptable regulation?
For any organisation that is successful and forces change on a market there will always be those that are envious and jealous and will rub their hands with glee when a player is challenged by its regulator.  However the impact of Optima coming into the market and acquiring a number of legal businesses has forced an improvement in quality and service in many of its competitor.  It has caused many conveyancers to improve their businesses to survive.
When Optima came up with the innovative idea that they would provide a service to lenders to chase conveyancers for outstanding registrations many conveyancers ended up with considerable extra administration.  But those conveyancers that experience Optima in this way should never have been in the situation in the first place.  They should have discharged their obligation to their clients.  These conveyancers now seem to be seeing this as validation that Optima was in its day to day activity acting improperly but the SRA report does not suggest that clients suffered or that the day to day activity was actually improper.
The fear that Optima would use its financial and technological strength to “wipe out” conveyancers as we presently know them has been palpable for a number of years and has encouraged many to innovate and seek to improve their service.  Today’s Conveyancer welcomes new competition into the market.
Others have buried their heads in the sand hoping that the “threat” of Optima would go away.  So when The Lawyer broke the news that Anthony Ruane and Philip Robinson of Optima had faced an investigation in 2007 into their conduct arising from the corporate structure and management of Optima it was not a surprise that we received anonymous emails from a people relishing the fact and urging us to report that “what comes around goes around” or stating “payback time”.
In essence severe breaches of the rules cannot and should not be accepted but the sector should welcome well managed and well funded organisations as competitors because innovation does challenge us all to consistently improve the quality of service that we deliver to our clients.
Reading the reported decision at the SRA website is well worthwhile for all in the sector. Link here to full comment on the SRA site.
It appears that they have tried to remove the names of some of the organisations involved but the reported agreement states:
Background
2. On 14 May 2007, the Solicitors Regulation Authority ("SRA") carried out an inspection of OLS and produced a Report dated 28 May 2007 ("the Report").
3. The Report and subsequent investigations identified that:
(a) The Directors of OLS had compromised their independence as solicitors by entering into an Option Agreement dated 23 May 2006 with "X" a commercial non solicitor entity, by which X could acquire the entire shareholding of OLS for a nominal consideration of £1.00;
(b) The Directors and OLS acquired "Y", another law firm for nominal consideration at the request of X;
(c) At the date of the Agreement with X, five of the nine "managers" on the Operational Board of OLS were employees of X. The firm’s "Chief Executive" was also an employee of X;
(d) The firm outsourced its administrative, pay roll, HR and IT services to X under an outsourcing agreement;
(e) The majority of the firm’s income was paid to X to fund the Outsourcing Agreement and payment of a high interest rate on the capital loans provided by X;
(f) Salaries for OLS staff were paid by X through their payroll system and then later reimbursed by OLS;
(g) The loan facility between X and the firm contained default clauses which were unduly onerous to OLS;
(h) X acted as financial guarantor to contracts entered into by OLS, to fund the acquisition of new businesses;
(i) OLS had extensive reporting obligations to X which were in excess of a normal commercial lender arrangement;
(j) The Directors of OLS issued a debenture which contained a charge over the firm’s book debts and failed to adopt safeguards against putting client’s confidential information at risk in the event that the charge was enforced.
4. Following extensive discussions between the directors of OLS and the SRA, it was agreed by the Directors that they would restructure this business model and their arrangements with X.
Undertaking
5. Mr Philip Michael Robinson and Mr Anthony Ruane undertake that they will:
(a) Abide by the structure and contents of the new arrangements with X and will seek approval from the SRA as to any significant departure from those arrangements;
(b) Refrain from any action which may amount to or which could lead to a regulatory breach of a kind similar to those described in this agreement;
Submission to findings
6. The Directors and OLS make, and the SRA accepts, the following admissions:
(a) That, by entering into an Option Agreement for X to acquire that Director’s entire shareholding for a nominal sum, the Directors Breached Rule 1 (a) of the Solicitors Practice Rules 1990, Rules 1.03 and 14.04(4) of the Solicitors’ Code of Conduct 2007 and Part I I, paragraph 8 of the Solicitors’ Incorporated Practice Rules 2004;
(b) The Directors and OLS acquired Y, another law firm for nominal consideration at the request of X in breach of Rule 1 (a) of the Solicitors’ Practice Rules 1990 and Rules 1.03, 14.01 and 14.04 of the Solicitors’ Code of Conduct 2007;
(c) That by having five of the nine managers on the Operational Board of OLS who were employees of X the Directors gave these persons the opportunity to unduly influence the control of the practice in breach Rules 1(a) and 7 of the Solicitors Practice Rules 1990 and Rule 1.03 and 8 of the Solicitors’ Code of Conduct 2007, of Part I I, paragraph 7 of the Solicitors’ Incorporated Practice Rule 2004 and/or Rule 14 of the Solicitors’ Code of Conduct 2007 and the Solicitors’ Recognised Bodies Regulations 2007;
(d) That by the payment of service charges and high interest payments on capital loans, that exceeded the market rate, the arrangement was not indicative of an arms length transaction. That by the employment of a high number of X employees staffing key functions, including the firm’s Chief Executive, and forming the majority of staff at the firm’s business premises, the Directors have compromised their control and independence in breach of Rule 1(a) of the Solicitors Practice Rules 1990 and Rule 1.03 of the Solicitors’ Code of Conduct 2007;
(e) That by agreeing in a Facility Agreement that the loan facility from X was "immediately due and payable" on certain default events, the Directors have compromised the ability of the firm to function properly in breach of Rule 1(a) of the Solicitors Practice Rules 1990 and Rule 1.03 of the Solicitors’ Code of Conduct 2007;
(f) That by permitting X to act as a financial guarantor to contracts, including the acquisition of new business, the Directors have compromised their independence and have acted in breach of Rule 1(a) of the Solicitors Practice Rules 1990 and Rule 1.03 of the Solicitors’ code of Conduct 2007;
(g) That by agreeing to extensive reporting obligations to X as outlined in the Facility Agreement dated 23 May 2006, the Directors have acted in breach of Rule 1(a) of the Solicitors Practice Rules 1990 and Rule 1.03 of the Solicitors’ Code of Conduct 2007;
(h) That by the issuing of a Debenture which contained a charge over the firm’s book debts, the Directors failed to adopt the safeguards against putting clients’ confidential information at risk in the event that the charge was enforced, and have acted in breach of Rule 1(a) of the Solicitors Practice Rules 1990 and Rule 1.03 and/or 1.04 of the Solicitors’ Code of Conduct 2007.
Mitigation
7. Philip Michael Robinson and Anthony Ruane have undertaken a substantial restructure of their business and their agreements with X in order to address the SRA’s concerns, and to rectify the breaches which have occurred. The new structure and arrangements provide for the following:
(a) The Option Agreement which allowed for the purchase of the shareholding in OLS for a nominal sum has been cancelled completely without any form of replacement:
(b) A Deed of Arrangement which acts to determine all existing agreements that were of particular concern to the SRA has been introduced;
(c) Y is to remain as a separate legal entity and will operate in accordance with these new arrangements;
(d) The transfer of the employment of the Chief Executive Officer from X to OLS;
(e) A revised Facility Agreement ensures that OLS has no obligation to provide any information to X which could result in a breach of the firm’s obligations regarding client confidentiality;
(f) A Transitional Services Arrangement provides for all 234 employees of X who are currently outsourced to OLS and Y to be TUPE transferred into OLS and Y with the exception of five IT infrastructure personnel;
(g) A revised loan agreement has been entered into with X that does not compromise the independence of OLS;
(h) The Directors have provided an express declaration that the structure is fully represented by the documents produced to the SRA and there are no other side arrangements or agreements.
8. The Directors entered into their arrangement with X when alternative business structures were being discussed generally, but acknowledge that their arrangements went further than was allowed by the rules.
9. The Directors have cooperated fully with the SRA in providing information about the arrangements, and most importantly have taken extensive steps at considerable expense to the business to rectify the position, by substantially renegotiating their agreements and commercial arrangement with X.
10. The SRA considers that the overall circumstances of the firm’s relationship with X would justify a referral to the Solicitors Disciplinary Tribunal. The SRA considers that the substantial restructure of the agreements with X will restore the independence of the Directors free from direct influence of a non-legal entity.
Outcome
11. Mr Philip Michael Robinson and Mr Anthony Ruane being the Directors responsible for these breaches submit to a severe reprimand
12. Mr Philip Michael Robinson and Mr Anthony Ruane agree that they will pay the costs of the investigation in the sum of £7,236.00 within 14 days of the finalisation of this agreement.
13. Mr Philip Michael Robinson and Mr Anthony Ruane agree that they will not act in any way inconsistent with this agreement by, for example denying the misconduct admitted in paragraph 6 above.
14. Mr Philip Michael Robinson and Mr Anthony Ruane agree that this outcome may be published by the Solicitors Regulation Authority and that it may also be disclosed to any person upon request or otherwise.
15. The SRA considers that this sanction is proportionate to the circumstances of this matter, particularly having regard to the extensive steps taken to rectify the position and the Director’s cooperation with the SRA throughout. Solicitors are reminded of the importance of retaining their independence, and not entering into alternative business structure arrangements in advance of permitted arrangements. Solicitors who ignore that advice, and do not seek to regularise their practice will be at risk of regulatory action including a referral to the SDT.
16. If the undertaking referred to in paragraph 5 above or any other terms of this agreement are not complied with or if Mr Philip Michael Robinson and Mr Anthony Ruane acts in any way inconsistently with this agreement, Mr Philip Michael Robinson and Mr Anthony Ruane accept that the Solicitors Regulation Authority may take the appropriate regulatory action , including referral to the Solicitors Disciplinary Tribunal on the original facts and allegations, and also on the basis that Mr Philip Michael Robinson and Mr Anthony Ruane’s failure to comply with the RSA constitutes a breach of Rule 1 of the Solicitors’ Code of Conduct 2007. Mr Phillip Michael Robinson and Mr Anthony Ruane agree that it is not open to them to challenge the validity of such a referral by reference to the facts agreed in this RSA.
17. The Solicitors Regulation Authority in entering this agreement accepts that Mr Robinson and Mr Ruane, when entering into the arrangements which have been the subject of the SRA’s investigation, relied on legal advice and representations including those from leading Counsel which stated that the arrangements were valid. Despite this Mr Robinson and Mr Ruane now accept the Solicitors Regulation Authority’s decision that the arrangements did in fact infringe the regulations as set out above.
Dated this day 3 August 2010
Mr Robinson and Mr Ruane “
David Middleton
Legal Director
(for the Solicitors Regulation Authority)
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