Within two weeks the Law Society, which regulates how solicitors operate, has closed the legal practices of two of its members and done so in worrying circumstances. Evidence has been presented to the High Court indicating major financial irregularities in the operation of their two firms. The solicitors concerned, Michael Lynn and Thomas Byrne, had both borrowed huge sums of money from a range of banks. And they did so by securing multiple mortgages on the same properties.
Mr Byrne has seemingly vanished. Mr Lynn, so far, has co-operated with the Law Society and the court in facilitating an orderly management and discharge of his liabilities. These liabilities, which have still to be fully identified and tabulated, currently stand at more than €70 million and are expected to exceed this figure.
Many of the banks that are seeking the return of their money have found they have inadequate security for some of the loans made. Ten financial institutions have agreed to exchange information in the case of Mr Lynn to find out how much he owes them and on what properties they provided loans. Mr Byrne's know liabilities stand at €36 million but are expected to be much higher. Eight financial institutions are involved.
A sharp economic downturn very often exposes any lax professional practices that have developed in the preceding boom. In the US, the sub-prime mortgage debacle was a case in point. In that instance, banks - in their eagerness to generate more business - disregarded proper credit risk assessment and engaged in imprudent lending to borrowers with poor credit ratings.
Many financial institutions here appear to have behaved with a similar lack of banking prudence when dealing with solicitors on property transactions. This was facilitated by a system whereby mortgages are granted on foot of solicitors' undertakings. These allow solicitors to close a property deal without producing title records to the lender and to draw down loans without immediately registering a bank's security. The practice, which was intended to fast-track transactions, is dependent on the honesty of solicitors and is open to exploitation.
In the face of significant financial loss and public embarrassment, banks across the board are engaged in a review of their loan books to assess the scale of their difficulties. However, neither they nor the Law Society, confronted by some discredit of the legal profession, deserve public sympathy in their plight.
The effectiveness of the Law Society's regulatory processes are in question. And the inadequacy of the banks' lending practices have been exposed. In the case of the Law Society, it is hard to understand how such large scale difficulties were not detected sooner, given the close monitoring of solicitors' annual accounts by the society. And in the case of the banks, prudence and caution have taken second place to winning more business, but, at the cost of banking standards, reputation and loan losses.