HL Deb 04 July 1940 vol 116 cc785-800

4.38 p.m.

Order of the Day for the Second Reading read.

LORD WRIGHT

My Lords, I beg to move that this Bill be read a second time. It involves a great change from the atmosphere of war in which we have been living for the last half hour, and it has been a matter of some consideration whether it was desirable to proceed with this Bill at this crisis of affairs. The Bill is intended to effect two very important and, I imagine everyone will agree, most beneficial changes in the position of solicitors. The object of these proposals is to reduce the chance of defalcations by dishonest solicitors. Solicitors as a body are people of the very highest honour but every now and then—perhaps one in a thousand cases—dishonesty occurs and the result is serious loss, serious suffering to innocent people and a great discredit to a profession which ranks its reputation for honour and honesty very high.

The two most important proposals in this Bill are, first, that there should be established a Compensation Fund obtained by a compulsory levy on solicitors, and, secondly, that every practising solicitor should be required once in every twelve months to produce a certificate from an accountant to say that his books and accounts have been kept in proper order, and have fulfilled the provisions which the Law Society have laid down for the keeping of accounts, and in particular for the keeping apart of clients' moneys and their own personal moneys. I ought to say at once that one of these provisions—the provision for compulsory accounts—was proposed and recommended by a Special Joint Select Committee of both Houses which sat last year. The other provision, for a compulsory levy and a compulsory Compensation Fund, was also discussed by the same Committee; and, though they did not make any definite proposals, they did indicate that in their view it was a desirable course to adopt. I ought to say that at the end of last year, when the matter was considered by a general meeting of the Law Society, it was felt at first that nothing should be done until the end of the war, but it appeared from the number of questions put to the Attorney-General in the House of Commons that there was a strong feeling that the matter should be proceeded with at once. The Council of the Law Society also thought that if the matter were proceeded with and the Bill became law, its operation should be suspended until the end of the war. That again was objected to at the general meeting, and the proposals were carried by a practically unanimous vote.

These are the two main provisions of the Bill. I may point out at once that the fund which it is intended to provide is purely a solicitors' fund. They provide the money, and it is therefore proper that, if Parliament approves of the general purpose of the scheme, its working-out should be left to the Law Society; and the Bill so provides. The Bill, in Clause 1, contains on this point quite a number of definite provisions which determine the main features of the scheme, and in a Schedule there are still further definite provisions dealing with the administration of the Fund; but the working out of the whole system is left to the Law Society, who are authorised and empowered to make rules. In connection with the Fund I ought to say that there is in the Bill as it now stands a clause—Clause 2—the object of which was to secure a reduction in the Stamp Duties to ease the situation for the solicitors who will now, if this Bill becomes law, have to provide the fund by annual contributions. It was hoped that the Treasury might see their way to reduce the Stamp Duties which they charge on practising certificates, but the Treasury do not feel themselves able, in this state of things, to grant that concession. The Law Society are therefore prepared to drop Clause 2, and they or someone else will move an Amendment accordingly. Clause 3 deals with the accountant's certificate, which again is to be governed by rules made by the Law Society. Ever since 1931 there has been an agitation for something of this sort. In 1933 an Act was passed enabling the Law Society to make rules for the keeping of accounts by solicitors and for inspection in certain circumstances. Those provisions have worked very well, but they have been found insufficient, and therefore a strong feeling has grown up for many years that nothing will do but a compulsory annual certificate.

In addition to the two main features of the Bill, there is, in Clause 19, a provision for the making of rules for the keeping of accounts by solicitors who act as trustees, in respect of their trust funds. That would not come under the com- pulsory accountant's certificate; it is a separate matter. It is not a matter of compulsion, because there are already in the Trustee Acts provisions which require trustees to keep their accounts in a certain way and to render them available for inspection by beneficiaries. These are three provisions which dovetail together and to which I think I must particularly refer. The other provisions of the Bill, which are somewhat voluminous, deal almost entirely with mere matters of administrative detail. As your Lordships know, the solicitor's profession is governed at almost every point by Parliamentary regulation, by Acts of Parliament, by the provisions of the various Solicitors Acts, and the result is that when the profession want to change their administration or amend what they are doing, it is in almost every case necessary to come to Parliament to get some alteration of the existing provisions. It is for that reason that so many of these minor administrative details, very important in the conduct of the affairs and duties of the Law Society, have to be put into Bills and brought before the House. I do not think it necessary to go in detail through these various provisions. The real matter of principle depends on the two provisions for a compulsory levy and a compulsory audit with a view to compensating sufferers from defalcation. They are the vital provisions of the Bill. With the remainder, which is more or less a matter of detail, I shall not think it necessary—at least at this stage—to trouble your Lordships. I beg to move that the Bill be read a second time.

Moved, That the Bill be now read 2a.—(Lord Wright.)

4.50 p.m.

LORD MANCROFT

My Lords, I hope, and indeed I think, that your Lordships will give a sympathetic welcome to this Bill. My noble and learned friend Lord Wright has explained the object of this Bill; it is an effort on the part of a body of honourable and upright men, who have suffered very unjustly a slur upon their good name owing to some deplorable acts by a small number of members of their profession, to remove that slur. At the same time by this Bill the Law Society seek, with public spirit, to protect the public against loss at the hands of dishonest solicitors. I will say at once, as my noble and learned friend has just said, that we all recognise that solicitors are devoted to the interests of their clients who entrust their private affairs to them, and we wish to help them to disperse a locus of mischief which has done their good name so much harm.

As far back as 1929, when I was in the other House, I remember a good deal of feeling being shown about the continual defalcations by, and convictions of, solicitors, with the result that public opinion moved members of that House to take action. Consequently a Bill called the Agents' Bill was introduced by Mr. Annesley Somerville, now Sir Annesley Somerville, That Bill was introduced in 1929 to deal with the problem, and the present Bill is the latest of many efforts to deal with it. I do not say that it is the last, because I do not think that it can be the last; I do not think that it will do all that it sets out to do. I support its principles, but not some of its methods. There have been various Bills and there have been various Acts during the past eleven years, but none of them has succeeded in finding the remedy. A Bill, upon which f ventured to address your Lordships, was brought in as recently as fourteen or fifteen months ago. It passed its Second Reading here and then went to a Joint Committee of the two Houses. But the implications drawn by the Law Society from the Report of the Joint Committee were of such a kind that the Law Society withdrew the Bill; and now we have this, the latest, Bill. All the other Bills or Acts have failed.

This Bill is recommended to your Lordships by my noble and learned friend Lord Wright, who is also one of His Majesty's Judges. That, of course, carries great weight with me, and I feel a little diffidence—I feel that I may be wanting in pietas—in venturing to offer critical observations upon the clauses which he has now recommended. As he says, the majority of the clauses, except Clauses 1, 2 and 3, and perhaps 14 and 19, deal with the internal machinery of the profession, and therefore I do not intend to touch upon them at all. In fact, I intend to speak only on Clauses 1, 2 and 3. But in passing I would say this about Clause 4 and Clause 19: I think Clause 4 is an admirable clause, and I congratulate the Law Society on trying to obtain legislative sanction for bringing every solicitor under the Law Society. Clause 19 deals with cases where a solicitor may also be a trustee for his client. I think that the aim of that clause is also very much to be supported.

Clause 2 deals with a request that the Treasury should find the money to help solicitors to set up a Compensation Fund. I think that whoever drafted that clause must have done so with his tongue in his cheek. Why should the public be asked to pay, out of the Treasury, money to help to provide solicitors with a fund to compensate clients who have been robbed? Why should the general taxpayer be called upon to find this money out of the Treasury, even in piping times of peace? The great majority of taxpayers never use a solicitor; they are not concerned with the defalcations of solicitors and why should they, out of the taxes, find for solicitors any portion of the compensation money that is required? The inclusion of Clause 2 in this Bill, indeed, brings into question their judgment of public opinion by those who control the Law Society. It is a clause to attract ridicule.

With regard to Clause 1, which deals with what is called the Compensation Fund, I do not like the idea of the fund in the form of a Compensation Fund. I do not like the word "Compensation." It is not a guarantee fund; it is merely a Samaritan Fund. I wish that the Law Society had not included this clause to set up a fund in the form in which it now appears in the Bill. It is a fund to be administered at the discretion of the Law Society. If there is going to be a fund, I think that it should be a guarantee fund, with a cash deposit or a fidelity bond put in by every solicitor. A skeleton idea is to be found in Lloyd's Underwriters' Fund, which is not designed—and I want to make this particularly clear—to meet fraud. The fund which Lloyd's underwriters have to put up is intended not to meet fraud but to meet unforeseen misfortunes, so that every obligation can be fulfilled—as it is—should an unforeseen risk turn out to be larger than the underwriter can bear. If we are going to have a protecting fund, then I think that this clause ought to provide a regular guarantee fund. Whether there will be any discussion in the other House, or whether Amendments will be put down here to deal with that point of view about the Compensation Fund, I do not know. I do not like the word "Compensation" at all, for reasons which I will give, and I think that the operation of that clause in its present form ought to be dropped.

The clause does nothing less than warn the public that if they step into a solicitor's office they run the risk of being robbed, because a Compensation Fund is provided to compensate them when they are robbed. It simply tells the public that the Law Society expect that there may be some thieves among their members. You do not go into a stable yard when you see a board put up: "Be careful of the dog, it may bite you." You do not go to a solicitor if you are warned that there is some risk of your being defrauded. It is a foolish thing on the part of the Law Society, I think, to put this down as a Compensation Fund and thereby announce that they expect that there may be some dishonest men among their members. That is inviting the public to take its business elsewhere. The public will say: "Well, we are warned by the Law Society that we may be defrauded; we have seen a good many prosecutions of late years. Let us go to the Public Trustee. The Public Trustee deals with millions of money without losing a penny of our property. There are also the banks, who act as trustees and never let us down, and the insurance companies, who will look after us honestly. The Public Trustee, the banks and the insurance companies have their own solicitors, they can do the whole legal work for us and we run no risk of losing any money. There is no need for us to employ our own solicitor to act with these other institutions."

I think that the question of the Compensation Fund was given considerable thought by the Joint Committee, for they said in 1939 that they felt themselves unable to draft Amendments for the creation of a Compensation Fund. They themselves looked into the matter and found great difficulties—the same difficulties, I suppose, that I found when I considered Clause 1 of this Bill, and saw that this clause, in the form now proposed, warns the public to expect fraud. Again, it has another effect, a psychological effect upon a small solicitor who may not be in a very prosperous way. It may affect the mind of such a solicitor as an invitation to commit fraud. It may in fact be an inducement for him to do what he ought not to do, because he may say to himself: "My client is a simple old lady, and if I do muddle her business so as to rob her of two or three hundred pounds she will not suffer, because there is always the Compensation Fund for her to fall back upon." I think this is a bad clause, psychologically, for that reason.

And what is the Fund going to be used for? Is it going to be used—and only at the discretion of the Law Society—merely to compensate for frauds which have been proved, as they stand in the indictment on the conviction of the solicitor? it does not follow, because a solicitor unfortunately lands himself in the dock and has been convicted of robbing one person of so many hundred pounds, that there are not additional cases of alleged fraud by him which have not been disclosed to the Court. Are the Law Society going to look into the whole of his practice, and have it proved, not by a jury, but to their own satisfaction, that there are not other clients' cases which ought to be compensated? Is the Act going to leave it to the discretion, the kind-heartedness, of the Law Society to say what and whose losses shall be compensated in a convicted solicitor's case, or do you only expect the Law Society to compensate in cases where the specific defalcations have been proved in Court?

And is the Compensation Fund which—I want to make that point quite clear—is entirely at the discretion of the Law Society, going to be used in the following way? Suppose a small solicitor finds himself in deep water. He goes to the Law Society and says: "I am in difficulty. I cannot make my accounts square, I am so much behind. I have been using as my trading capital to run my business funds which have come in to me for or from my clients and now I find I cannot repay. My wife is ill and I am so many hundred pounds behind." Short of compounding a felony are the Law Society going to subsidise this man to get him over his defalcations? That is a question which will have to be answered. The Law Society are the sole judges of the use of their discretion.

Then again the Law Society, acting only at their discretion, might say to a business man who had been robbed: "You ought to have known the risks you ran. You knew there was our Compensation Fund; consequently you knew there was danger—the red flag was up. Why did you not go to your solicitor at intervals and see that he had all his accounts properly arranged—not only respecting your money, but your deeds of property, bonds to bearer, securities of all kinds? You are a prudent business man; you must have known it was your duty to take your own precautions. And that being so, we shall not give you any benefit out of our Compensation Fund. You went into this risk with your eyes open; you were warned and you took the risk. We act upon our discretion in administering the fund." The answer to that is quite plain. Many of us, myself included, are trustees for dead friends. We do not go and badger the solicitor to know what he has done with securities and title deeds which have been handed over to him to deal with, or to see whether the moneys are properly accounted for in his books and duly certified under Clause 3. That is; an insulting thing to do to a solicitor. You cannot expect people to go to a solicitor and say by implication, "I do not trust you." If you do ask for all these precautions you cannot blame the solicitor if he throws the papers in your face and says, "Take your business elsewhere."

I therefore think that you put a prudent business man into a very difficult place if you expect Mm under this clause, which is operative at the discretion only of the Law Society, to take crude precautions to see that he is not taken advantage of. It is difficult for a busy man to watch that Clause 3 is complied with in relation to his affairs. Very often family trusts, or executorships, run over long periods: I myself have been a trustee for thirty-five years. You leave the thing to run on with the trust's solicitor. You do not bother very much about it. You cannot go to him every year and say "I want to see the trust's books and the Law Society's certification." It cannot be done.

The fact of the matter is that this clause operates in the wrong way. It deals with the difficulty upside down. It deals with cases of defalcations after they have happened. The clause ought to deal with these cases in such a way as to prevent frauds before they occur, not to give compensation afterwards. I do not know why the Law Society do not realise that a preventive method is the proper approach to the problem, instead of approaching it after the frauds have occurred. When the last Bill was before your Lordships' House in the summer of 1939 I suggested two methods, which I thought were precautions to prevent or reduce frauds. I saw the difficulty in one method; I will repeat it if I may. I said that single partnership firms, sole partnerships, should not be allowed, for reasons which I gave. I will now say this. If as a matter of justice, as a matter of not inflicting hardships upon professional men, it is decided that single partnership firms should be allowed, then I say there should be in this Bill some clause to insist upon single partnership firms being subjected to extra and more severe audits. Such firms have unfortunately come under suspicion, and the suspicions have unfortunately turned out to be correct. Therefore the precautions against them should be more severe. Of course, I exclude single solicitors who act for banks or municipal authorities or insurance companies—I mean those who take private business.

The other remedy, I think, was that the clause requiring an accountant's certificate should be made more rigorous. I took down some words which my noble and learned friend used—"books and accounts kept in proper order." Well, I would like to deal with those words. Clause 3 does not specify what books should be required. Why not? Various trades need special forms of books. There are dozens of different trades which need dozens of different types of books. There is no difficulty in designing a suitable type of book for solicitors handling the property of clients. And I noticed that my noble and learned friend Lord Wright did not mention securities, instruments of value, deeds, documents, bonds; he seemed to confine himself only to money in relation to the solicitor's accounts. We have in dealing with this problem to realise that solicitors hold not only money on behalf of clients, but also hold for long or short periods documents of value which are negotiable, sometimes negotiable easily or by bearer action, and sometimes made negotiable by fraud. Still, they do hold documents, and these do not seem to be referred to in any precaution covered by the words "books and accounts."

I think that certification under Clause 3 is useless; for not only should the money be checked, but these instruments which I have mentioned should be recorded and checked. They should be confirmed and verified. The certificate should not merely fall back on the terms "as shown by the books." There should be a visual proof, a checking, a physical handling and a confirming that what the books show is evidence of proved facts, and existence. Only a few days ago I saw a certificate of an auditor or accountant for one of the great insurance companies, and therein it was stated that the securities held by this insurance company had been checked. In fact, I insist in my own small way where I am a trustee that from time to time my solicitors and the accountants go to our bank and check the securities by sight and handling. My solicitors send me a certificate by their accountants who have checked the securities at the trustee bank to see that they are there. There is no provision in this Bill for checking the existence of securities. Clause 3 therefore has shirked the issue, and manipulations will be possible unless what is "shown by the books," as it is called, has had previous audit, personal visual audit, and has been proved to be in accord with facts. My noble and learned friend, as he showed in the famous case in which he gave judgment, knows better than anyone else in Britain the meaning and usefulness of an auditor's certificate. I therefore draw my noble friend's attention to the efficacy of Clause 3.

A fruitful cause of defalcations is that there are too many solicitors. Especially as some of them—I do not want to be unkind—are incompetent. You go to a small solicitor, or even sometimes to a big solicitor, and ask him a question. He looks wise, rings a bell and asks the managing clerk or office boy to come in and tell you the answer. Or he will say, "I must send the matter to counsel." I am given to understand that there is a beggar-my-neighbour result in the search for business among small solicitors. I am told that the average income of the 17,000 solicitors who are practising with solicitors' certificates is not more than £1 a day, or less than £400 a year. That is less than some artisans' wages. It shows there is not work enough for so many solicitors. It does not give the profession a chance to set up good organisation for individual practices. Of the 100 solicitors who have been convicted in the criminal courts during the past ten years, a large number were sole partnership firms, and I understand that these cases involved losses disclosed in the neighbourhood of £1,000,000. I do not think that figure has been confirmed.

If one is in commerce, one sees time after time a trading firm becoming bankrupt because it has not sufficient capital to trade with. A solicitor can no more run his business without capital than a cabinetmaker can carry on his craft without tools. Lack of capital among solicitors is the frequent cause of bankruptcy and of temptation to fraud at the expense of their clients. Such a solicitor wants money because he has not enough of his own to run his business; he runs it on the money of his clients and so falls into crime. If there are so many solicitors and they are so impecunious that they cannot find the few pounds for subscription towards this Fund, whether it comes out of the Treasury or out of their own pocket, they are hardly the men to embark on a profession where capital is needed to serve as their working tools. These men without capital have often to handle wealth without any control by trustee or executor. Solicitors ought not to be men of straw. In trade it is a well-known axiom that if you pay your cashier badly you have no one else to blame but yourself if he is tempted to pocket money that passes through his hands. There should be some effort on the part of the Law Society, before admitting men to practise, to see that they are financially so placed that there is no likelihood of their being unable to carry on for lack of working capital.

In my view, this Bill is not likely to prevent fraud—it may compensate for fraud. It is too timid; it does not grasp the problem. I would sum the whole thing up in this way. It deals with fraud after fraud has been committed instead of preventing it. Unless the Law Society are prepared to see a large amount of the family will and trust business go to the Public Trustee in cases where money and securities are dealt with, they will have to move on different lines. First, they have at least to exercise greater control over, if not to abolish, single partnership firms. Secondly, any accountant's certificates must be proved by visual observation of all securities and instruments of value held by solicitors for clients before the entries are made in solicitors' books and certified by the accountant. "As shown by the books" is not sufficient. Nor is certification of money sufficient. The existence and disposal of securities must have been verified.

The third thing I would say is that no solicitor should be allowed to practise unless it is shown that he has sufficient capital to render him unlikely to use clients' money for running his business. A Lloyd's Underwriters' Fund scheme should replace the discretionary fund mentioned in Clause I. Books should be specially designed to record the receipt, custody and disposal of securities as well as money. It may be said that it is difficult to design such books. I do not believe it. There is no difficulty. Books have been constructed by accountants to deal with the business of a man who buys at auctions mixed bundles of secondhand books, some of which he later sells for a penny, threepence or a shilling, and some for pounds, and these books show what the result of these transactions has been. Books have been constructed by accountants to deal with very difficult, technically-involved accounts relating to the hire-purchase transactions in household furniture. I do not think, therefore, there can be any doubt that effective books can be constructed for solicitors. Moreover, if you go to any branch bank in any town or in any branch bank in the streets of London, you will find, from time to time, travelling inspectors confirming the accounts there. When securities, bonds, documents, title deeds, and the like are handed to a bank, they are entered in the books, and the receipt, custody and disposal of them, and if necessary their sale, are recorded in the books and checked by the inspectors. If the banks are able to do that, there is no difficulty in getting a suitable type of book produced for the use of solicitors as a safeguard for preventing the mishandling of money and securities entrusted to them.

I do not propose to obstruct the quick passage of this Bill. I hope it will pass, and therefore I shall put down no Amendments. As I noted what my noble and learned friend said about Amendments so my observations may possibly be taken into consideration in the later stages of the Bill. I must remind him of this, that Clause 30 of the Bill adheres to the Solicitors' Accounts Rules, 1935, under the Act of 1933. These Rules have failed, quite evidently, otherwise there would be no need for this Bill. It is now eleven years since the attention of the Law Society was drawn by the House of Commons to defalcations by solicitors, and it was intimated to the Law Society, by the attention given to the matter in the House of Commons at that time, that they should put their house in order. Eleven years is too long for this problem to have drifted unsolved. If the Bill which is now introduced by the Law Society does not provide the remedy, public opinion, will eventually compel Parliament to remove certain classes of monetary work from the solicitors, such as business connected with wills and trusts where money and securities are concerned, and make it compulsory for executors and trustees to hand over this particular type of work to the Public Trustee. If the Law Society are not prepared to take means strong enough for the purpose, then they must blame themselves if they see much more of their work pass from them. I wish to support the principles of the Bill and I hope I have given no offence to my noble and learned friend in the observations I have made.

5.22 p.m.

THE LORD CHANCELLOR (VISCOUNT SIMON)

My Lords, I should be very unwilling to detain your Lordships more than a moment or two or to prolong this debate, but in view of the special relations that exist between the office I hold and the Law Society and the solicitors' profession, I feel it my duty to inform your Lordships that, in my view and in the view of the Government, it would be well to give a Second Reading to this Bill. It is, of course, a Bill prepared by the Council of the Law Society for which the Government take no responsibility, and it appears from the speech which has just been made by my noble friend Lord Mancroft, that there may be matters of structure and detail which at a later stage may call for consideration. But on the.Second Reading of the Bill I do not doubt that the House would do well to allow the Bill to go forward.

It comes before us under very distinguished auspices. My noble and learned friend who introduced it did not tell your Lordships but it is the fact that he was himself the Chairman of the Select Committee of both Houses which considered this subject, I think last year, and upon the Report of which the present Bill is largely framed. Moreover, my noble and learned friend was for some time Master of the Rolls, and the Master of the Rolls has special duties and special jurisdiction in connection with solicitors. May I take this opportunity of saying how entirely I agree in the proposal mentioned by the noble and learned Lord, and also by the noble Lord who has just spoken, that Clause 2 should not be left in the Bill? There is no justification for seeking to reduce the public revenue and to diminish the fees which are paid by a solicitor to the Crown as the condition of his practising, in order to contribute to a fund to protect those who suffer from the defalcations of a black sheep. But the main object of the Bill—I leave its precise method to be considered later—is one which every honest man must support. Here is a great and honourable profession, containing many men of the highest integrity and skill, but none the less from time to time it is found to contain in its ranks some despicable creature who cheats his clients of their money. This is an effort by the Law Society to bring about a better state of things.

I imagine that special importance is attached by the society to the clause in the Bill which will require that there is to be an annual certificate by a qualified accountant that he has examined the solicitor's books of account and bank books. Whether the provisions are adequate or need to be more stringent will be considered hereafter, but this is a proposal of very great importance, and I think the public will widely appreciate and welcome its passage into law. The other proposal which creates a Fund out of which those who suffer from defalcations may get relief raises, as the noble Lord has just said, difficult questions as to the best form that proposal should take, but the general principle that a numerous and honourable body of men practising a useful and highly-trained profession should endeavour to secure the public against the lapse of some black sheep is surely a principle which we ought to welcome. It is a principle which is contained in this Bill, and is one which the Law Society are anxious to develop in this legislation in the best possible way. Subject, therefore, to an inquiry upon the points raised by the noble Lord (Lord Mancroft), and provided that Clause 2 is removed from the Bill, I hope we may see the principle of the Bill generally approved in order that its precise form may be settled hereafter.

On Question, Bill read 2a, and committed to a Committee of the Whole House.