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13.01.22

Seeking the costs of an unsuccessful regulatory prosecution: when can a costs order be made against the SRA?

Under Rule 43 of the Solicitors (Disciplinary Proceedings) Rules 2019, the Solicitors Disciplinary Tribunal (SDT) may make such an order as to costs as it thinks fit.  The SDT is required to consider (a) the conduct of the parties and whether any or all of the allegations were pursued or defended reasonably, (b) whether the Tribunal’s directions and time limits imposed were complied with, (c) whether the amount of time spent on the matter was proportionate and reasonable, (d) whether the hourly rate and the amount of disbursements claimed is proportionate and reasonable and (e) the paying party’s means.  Whilst cost awards are frequently made against respondents found guilty of misconduct, costs orders in their favour following failed prosecutions by the regulator have been something of a rarity.  Historically, this has been limited to cases involving exceptional circumstances (for instance, where a complaint should never have been pursued to the Tribunal).  In Baxendale-Walker v The Law Society [2007] EWCA Civ 233, the Court of Appeal endorsed this approach.   

More recently in Competition and Markets Authority v Flynn Pharma Ltd & Ors [2020] EWCA Civ 617, the Court of Appeal reviewed the position in relation to costs orders against regulators.  Lewison LJ stated the following general principles:-

"i) Where a power to make an order about costs does not include an express general rule or default position, an important factor in the exercise of discretion is the fact that one of the parties is a regulator exercising functions in the public interest. 

ii) That leads to the conclusion that in such cases the starting point or default position is that no order for costs should be made against a regulator who has brought or defended proceedings in the [tribunal] acting purely in its regulatory capacity.

iii) The default position may be departed from for good reason.

iv) The mere fact that the regulator has been unsuccessful is not, without more, a good reason. I do not consider that it is necessary to find "exceptional circumstances" as opposed to a good reason.

v) A good reason will include unreasonable conduct on the part of the regulator, or substantial financial hardship likely to be suffered by the successful party if a costs order is not made.

vi) There may be additional factors, specific to a particular case, which might also permit a departure from the starting point."

Notably, 'exceptional circumstances' has been replaced by 'a good reason to depart from the normal rule'.

Two recent decisions of the SDT have demonstrated when unsuccessful proceedings will or won't result in the SRA (Solicitors Regulation Authority) being ordered to pay the accused practitioner's legal costs.

In SRA -and- Jamil Ahmud, the SRA was ordered to pay £191,875.80 of Mr Ahmud’s costs in defending a prosecution that it ultimately withdrew. The SDT ordered an interim payment of £40,000.  Mr Ahmud had been representing Client A.  The crux of the allegation against Mr Ahmud was that in a case against Client A’s opponent, Mr Ahmud had submitted a bill of costs on behalf of Client A showing a greater hourly rate than he had actually charged Client A. The work in question went up to August 2012. This was said to breach numerous SRA Principles 2011, specifically on the basis of dishonesty.  In essence, Mr Ahmud had always claimed that the differing hourly rates reflected the fact that Client A was struggling to sell his home at the material time causing financial difficulties which left him unable to meet his costs obligations. The lower hourly rate was an interim one only, and upon conclusion of the case Client A would be able to meet the full liability for costs.  Mr Ahmud was also alleged to have later submitted a disproportionate bill of costs for his firm’s own claim against Client A, and also failed to comply with a Production Notice issued by the SRA. The latter point was defended on the basis that the SRA had closed its investigation file in 2016, only to re-open it one year later without telling Mr Ahmud. In the intervening period, he had destroyed various papers relating to the case leaving him unable to comply with the Production Notice.

The crux the SRA’s mistake was not to seek a witness statement from Client A himself until January 2020. It eventually applied to the SDT to withdraw all the allegations in July 2020, stating that information was gleaned from Client A between January 2020 and May 2020, and that parts of Client A’s account were consistent or broadly consistent with the account which had always been given by Mr Ahmud. On the basis that the primary allegation was withdrawn, the remaining allegations were not felt sufficiently serious to amount to professional misconduct. 

Paragraphs 65-73 of the SDT’s decision are excoriating, setting out five mistakes made by the SRA in the prosecution, the most startling being their first one: “The Financial Investigation officer had interviewed (Mr Ahmud) in 2016 and he had provided an explanation for what had gone on. The client care letter subsequently produced was consistent with that explanation. There was nothing in the client care letter which indicated professional misconduct. The (explanation given) was, on the face of it, credible.  If the SRA had wanted to take matters further, or test the explanation given by (Mr Ahmud), they should have gone to Client A then, and they did not do so. The first error was therefore not verifying the solicitor/client arrangements with Client A at that stage”

The SRA contended that the client care letter dated January 2016 had not been provided by Mr Ahmud until June 2019, and it was a carbon copy not on headed notepaper, nor signed by Client A. But the SDT rejected the notion that the delay in producing this client care letter was pivotal to the subsequent problems in the SRA case, pointing out that no SRA approach was made to Client A for seven months after the client care letter emerged.  The Tribunal considered the factors in Competition and Markets Authority, with the SRA arguing that awarding costs against it would have a ‘chilling effect’ on the instigation of future prosecutions.  However, in the instant case the SRA failed to follow the relevant evidence objectively, instead setting off on what appeared to be a pre-ordained conclusion without consulting the key witness. Costs consequences can arise even where a prosecution is later withdrawn after new evidence has been assessed. The decision to pro-actively withdraw proceedings does not avoid the risk of a costs order if the original errors were sufficiently serious.

In SRA -and- Liz Ellen 2021, a junior solicitor was cleared by the SDT following a full hearing.  However, the SDT reached a different decision on costs.
Ms Ellen was alleged by the SRA to have ‘caused or allowed’ Mishcon de Reya's client account to be used as a banking facility for five transactions while she was at the firm between 2011 to 2015. These multi-million-pound payments were made to so-called ‘deal wreckers’ who could prevent a football transfer. It was alleged Mishcon was seen as a reliable go-between by both the agents and the football club involved. Mishcon previously admitted accounts rules breaches in relation to four of the five transactions, admissions the Tribunal Chairman said were ‘properly made’. Mischon had been fined £25,000 for these breaches, with £32,500 SRA costs.

During her hearing in October 2021, Ms Ellen’s counsel said she had been a ‘relatively junior solicitor’ from 2011 to 2015 when the payments were made and had no power to authorise them. Although she was portrayed as the common factor in many of these transactions, Ms Ellen was cleared of allegations that she was responsible for using the firm’s client account to pay third parties involved in football transfers.

The SDT found that she was a junior solicitor at the time and: “The [Mischon] partner and authorising partners were each responsible for ensuring that any payments were made in compliance with the solicitors accounts rules. In these circumstances, we find that there had been a break in the chain of causation such as it could not be said that Ms Ellen had caused the payments to be made. As such, we find that [Ellen] neither caused nor allowed the payments to be made.”

However, in defending herself Ms Ellen incurred over £534,000 in defence costs for a fully contested hearing.  She applied for costs against the SRA in December 2021, arguing that the SRA’s case against her had been ‘legally and factually flawed’ and that she had been singled out for blame by the SRA, rather than the Mischon partners.  However, Tribunal chair Andrew Spooner said proceedings had been ‘properly and reasonably brought’ and there was ‘no good reason to deviate from the default position that no order for costs should be made’.  The full judgment in Ms Ellen’s case is yet to be published.

Obviously, defending oneself before the SDT can be a debilitating and very costly process. Whether a successful respondent can recover those costs from the SRA is fact-sensitive. However, it seems that early cooperation by the respondent, coupled with any failure by the SRA to investigate the facts objectively, are good building blocks in establishing a potential costs liability.

 

Call us on 020 3603 6069 or email to find out how our specialist regulatory solicitors can help if you are facing SDT proceedings or an SRA investigation, or any other form of regulatory action.


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Articles are intended as an introduction to the topic and do not constitute legal advice.


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