Law Society and the alarm bells

Business Opinion: Whatever the final outcome of the proceedings against errant solicitors Michael Lynn and Thomas Byrne, it …

Business Opinion:Whatever the final outcome of the proceedings against errant solicitors Michael Lynn and Thomas Byrne, it is already clear that their wayward property investments have opened up a nightmare scenario for the Law Society, writes  Arthur Beesley

Lynn's known liabilities now amount to some €70 million and Byrne's are in the region of €36 million. Hapless is one of the kinder words that comes to mind when it is considered that the society conducted separate investigations into both men in the no-so-distant past but failed to uncover the rot in their business empires.

As recently as December last year, the society found Byrne guilty of professional misconduct for allowing a €1.69 million deficit in his client account in May 2005 and for allowing personal transactions of his own to be drawn from the client account.

Alarm bells were ringing, but not loudly enough. Byrne was allowed to return to work with a €15,000 fine - now his whereabouts are unknown.

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The society investigated Lynn in 2004 after a complaint from one of his clients, but concluded that the matter "did not constitute grounds to warrant intervention". It did not pursue the case further. Now Lynn is embroiled in the most spectacular of financial scandals.

This is bad, bad news for the society. That both men successfully evaded detection - even when under the specific scrutiny of its investigators - seriously undermines its credibility as regulator of the profession. As banks across the board review their loan portfolios, new cases may come to light in the coming days and weeks, but with the combined liabilities of Lynn and Byrne now exceeding €100 million, the damage is already done.

These two cases prove on their own that self-regulation is not working. Moreover, their very scale means the society cannot seriously deploy the argument that Lynn and Byrne are mere "bad apples" among good lawyers. If the system cannot root out a financial fiasco until it is much too late, then the system needs to be changed radically.

With many of the biggest lending institutions in the State deeply in the red as a result of their dealings with Lynn and Byrne, powerful forces might now be mobilised against the society retaining its regulatory role. Yes, the society is a staunch defender of its patch, but this particular affair has exposed a fundamental weakness in the way property deals are done. Unfortunately for the society, the problem lies within its own purview.

At issue is the use of solicitors' undertakings to close property transactions. In effect, such undertakings are a mechanism to enable solicitors to close a deal without producing title records to the lender and to draw down loans without immediately registering the bank's security.

This system replaced the three-way closing of transactions, when vendor, purchaser and lender were each represented by a solicitor.

Instead of three lawyers being present when a property changes hands, the undertakings system enables a single solicitor to give effect to the legal transmission of a deal. Though infinitely more efficient, ie far less time- consuming, it depends on each party having absolute trust in the solicitor who makes the undertaking.

Lynn and Byrne are both alleged to have abused the mechanism to draw down multiple mortgages on the same properties. For the financial institutions in question, trust in these fellows is now coming at a very high price. For their fellow solicitors, confidence in the system is seriously undermined. The profession may never be the same again.

Given that the lender takes on the most risk when property deals are done, the clamour to tighten up the system will come from the banking sector. While the financial regulator may well have something to say on this matter, it has been characteristically mute in the last fortnight, limiting its public utterances on the affair to a single sentence.

So what can be done? Returning to the system of three-way closures would certainly restore confidence in the market, but banks have no appetite for that. It already seems inevitable that they will argue that a return to those ways would freeze the market in its most vulnerable moment for years. Instead, the argument may well be made to take responsibility for regulating solicitors away from the society altogether. In that case, the society's abject failure to prevent Lynn and Byrne losing the run of themselves will only weaken its defences.

None of that is to absolve the enthusiasm of the banking community to extend huge loans to Lynn and Byrne over and over again simply on the strength of their own undertakings. Call it greed, avarice or an unthinking culture of pursuing growth at all costs, such cases show that unchecked risk always carries its own particular dangers. These chieftains of the boom, the supposed exemplars of prudence, now look foolhardy and gullible.

After all, we know from Businesspro.ie that Lynn had a judgment registered against him in May 2002 for €7,061.58 and didn't pay up until September 2006. How could he borrow millions if he took more than four years to pay a debt of a few thousand euros?

The same can be asked of Byrne, who has paid only £3,290 (€4,177.44) to the collector general in Limerick on a judgment for £7,950 which was registered 10 years ago.

Determining who foots the bill will take time, but it is already likely that solicitors at large will have to top up their annual contribution to the society's compensation fund. This will drive up legal costs for consumers. For the Law Society, the trouble has only begun.