Industry News

Investment Schemes and Client Account - SRA Warning Notice

04 November 2016

The SRA has updated its Warning Notice on investment schemes, due concerns over the increasing number of such schemes, and has said it will be highlighting the risks to the public.  

Over the past 20 years that it has been warning about these schemes, the SRA has closed down law firms and brought other disciplinary action, including some prosecutions and imprisonment, against those who have been involved in them.  

Now it warns that not only may indemnity insurers refuse to pay for losses arising from these schemes, but those paying into them without 'extreme care' may not receive any compensation.  Schemes involving foreign property are particularly problematic due to difficulties recovering money in a different jurisdiction.

It is particularly concerned that law firms are being used to give the impression of credibility or security to such schemes and warns against those firms which continue to facilitate dubious schemes, particularly those specifically designed to circumvent the red flags raised by the SRA and other regulators (eg advertising profit rather than very high returns).  

The SRA goes so far as to say that schemes involving solicitors should suggest a need for caution: honest schemes should not require solicitors and certainly money should not be sent to or via their client (sometimes called an escrow) account.  The SRA advises members of the public to obtain their own independent legal advice, rather than using the adviser recommended or required by the investment company.

In addition, (and as per the SRA’s warning over the years about improper use of client accounts) practices should not allow their client accounts to be used to commit a fraud and to launder the proceeds, by purporting to act in a genuine underlying transaction.  

The SRA says high yield schemes where investors are offered extraordinary returns are clearly realistic and ‘non-sensical’.  Claims are often made about a lucrative market in a new or unusual investment and the SRA is aware of schemes involving (purported) carbon credit trading, diamond trading, fine wines, rare earth minerals, land banking, hotel rooms, overseas agricultural rights, famous works of art (being the security) and property developments abroad.  Solicitors who are involved in these schemes are likely to have their practice closed down urgently and to be held to be acting dishonestly, as it is ‘so dangerous and imprudent to become involved in them’.

The relevant regulatory provisions which could be breached by being involved in such a scheme include the Principles of integrity, independence, acting in the best interests of the client and behaving in a way that maintains the trust the public places in you and the provision of legal services.  

Action: staff should be familiar with the Warning Notice and the serious potential sanctions for failing to comply with their responsibilities in this area.  The practical tips set out in paragraph 21 of the Warning Notice are particularly useful.  You should also ensure that checks are in place at various stages (new client, matter opening, file supervision) and relevant personnel are on alert for signs of deliberate or inadvertent involvement of the practice in such investment schemes. 


Ian Braithwaite
Client Relationship Manager

T: 0845 056 3949
M: 0743 727 4046

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