All bridging finance firms, including those that do not provide regulated mortgage finance, are required to register with the Financial Conduct Authority (FCA) under the Money Laundering Regulations. However, not all firms are aware of this or have applied for registration.
Some firms rely on their solicitors both for anti-money laundering checking and for general advice where there is a “whiff” of possible fraud. This places a massive onus on solicitors and may backfire on the lender.
Much fraud in mortgages is due to identity theft. What is especially worrying are recent cases, such as one involving a major City law firm, Mishcon de Reya. Deputy High Court judge David Railton QC accepted that both Mishcon and the purported seller’s solicitors, had acted honestly and innocently in carrying out their respective roles.
However, Judge Railton carried on to say that as Mishcon had insurance to cover the loss suffered in full, and was therefore in a better position than the client to face the consequences. This meant the ‘only practical remedy’ open to the client was to target the City firm.
In another case last year, the High Court ruled that conveyancers on both sides of a fraudulent £470,000 transaction were liable. The seller’s solicitors were found to have not made sufficient enquiries to link the seller to the property. The buyer’s conveyancers were held to be responsible for not drawing attention to any concerns after asking whether the purported owner was entitled to sell the property.
So, does this let the lender off the hook and what part should the broker play? Both broker and lender should not rely on the Mishcon case, which is subject to appeal. Both should do the appropriate due diligence. It does, however, mean that lenders’ instructions to solicitors should clearly state what they expect in respect of checking, if only to protect themselves.
Firms should make their solicitors aware of their own underwriting basis and standards. Also, if recovery involves litigation, firms should send representatives to assist their solicitors or barristers, to avoid prejudice due to misconceptions about the nature of bridging, especially in provincial courts.
Lenders should also be aware that the requirements of the fourth Money Laundering Directive (4MLD) must come into effect through national law by 26 June 2017. Requirements include checks on persons with significant control and independent verification of ownership.
As with other EU regulatory measures, the Brexit referendum does not change anything. As the FCA clearly states: “Until exit negotiations are concluded, the UK remains a full member of the European Union and all the rights and obligations of EU membership remain in force. During this period the government will continue to negotiate, implement and apply EU legislation.”
Whatever else the coming election may bring, the above will continue to apply.