A U.K. Parliamentary group has filed a complaint to the Solicitors Regulation Authority (SRA) against Herbert Smith Freehills over legal advice it gave Lloyds Bank in a long-running fraud case.

The complaint to the U.K. industry regulator, lodged by the All-Party Parliamentary Group for Fair Business Banking, was filed in the last month and is the group's second against HSF over its Lloyds work, according to its co-chair Kevin Hollinrake, a Conservative MP.

Both allege that HSF mishandled the case, saying the firm attempted to discredit a witness and advised on a "flawed" compensation scheme for victims, according to Hollinrake. 

The first complaint was filed at the start of 2019 and is still under investigation by the regulator, he added. The Parliamentary group for fair business banking consists of 17 members of Parliament and two Lords from across the political spectrum. 

HSF has yet to be notified by the regulator regarding the second complaint, according to a person with knowledge of the situation. They also cast doubt on the group's findings, claiming they were "inaccurate".

The focus of both complaints is on the law firm's role acting for Lloyds Bank, which has been embroiled in a fraud case involving staff at the Reading branch of HBOS, which was acquired by Lloyds in 2009 during the financial crisis. 

The fraud scammed the bank and small businesses out of upwards of £245 million. In 2017, six people were jailed for their role in the scam.

Whistleblower complaint

The Parliamentary group alleges that HSF was complicit in what it describes as Lloyds' erroneous handling of the fraud charges, including attempting to discredit a whistleblower who was pushed out of the bank after writing an internal report criticising the handling of a scandal at HBOS, Hollinrake said.

The MP for Thirsk and Malton said: "Herbert Smith in our view were complicit in the discrediting of the witness."

"Lloyds denied it for five years and Herbert Smith were the lawyers acting for Lloyds at the time, and we've got letters where they themselves discredited the whistleblower."

Compensation scheme complaint

The second complaint claims that HSF intentionally advised on the establishment of an inadequate compensation scheme for those affected by the fraud. 

A person with knowledge of scheme said that HSF was not responsible for conducting or running the compensation scheme set up following the fraud, adding that the firm was just one of multiple stakeholders involved in a process run by the bank.

They also added that individuals claiming fraud compensation had access to independent legal advice and had their legal fees for participating in the customer review paid for by Lloyds.

A sample agreement document published by Lloyds Banking Group notes that agreements between Lloyds and those claiming fraud compensation were executed by Lloyds, "acting by its agent Herbert Smith Freehills LLP".

This was never signed by HSF as part of the customer review process, a person with knowledge of the agreement letter said, and a subsequent version does not name the firm, however both versions remain live on the Lloyds website.

An independent review of the scheme undertaken by Lord Ross Cranston stated that the "redress scheme was structured and implemented, minimised the likelihood of D&C [direct and consequential] losses being paid out."

Cranston's report found that the bank's compensation scheme had failed to acknowledge that the fraud had caused a single instance of direct or consequential loss. Instead the bank had said the failure of every single company was inevitable, and was not caused by the fraud.

Cranston's report found that the bank's compensation scheme sent a message that "all of those failures and all of that suffering were of the customers' own making. This is an unacceptable denial of responsibility."

Hollinrake claims that in the view of the Parliamentary group, the flaws in the scheme were deliberate and HSF had a role in ensuring that.

In the House of Commons in February, Hollinrake added: "[HSF] advised Lloyds on the establishment of the Griggs review, on its operation and on some legal points incorrectly, according to Sir Ross Cranston. It is unthinkable that Herbert Smith Freehills should have any influence on the future redress scheme."

However, another person with knowledge of Cranston's review pointed out that it noted the structure of the scheme was in line with case law.

Post Office allegations

In addition to the Lloyds complaints, Hollinrake has criticised HSF for its involvement in a compensation scheme run by the Post Office for victims of the Horizon tech scandal.

The scandal saw scores of Post Office employees prosecuted for fraud using information provided by the Post Office's Horizon system which turned out to be unreliable.

HSF acted for the Post Office, the U.K. mail supplies provider, in a court battle against affected workers, and helped secure it a settlement. It is now advising the Post Office on its historic shortfall scheme to pay victims.

In Parliament, Hollirake said that HSF's involvement could create similar problems in the Post Office compensation scheme to what occurred at Lloyds Bank and that victims would be unable to secure the compensation they deserved.

More recently, Hollinrake said: "It is precisely that inability and refusal to be objective and see what is staring them in the face – despite the mountain of available evidence – and their determination to stop at nothing, however absurd and immoral, to help and protect an important client that proves they are inappropriate to advise on the PO Review and are must be the subject of a robust investigation by the SRA.

"After all, this behaviour is exactly what the SRA Principles say they must not do."

Another person familiar with the matter said that there is no connection between HSF's work for Lloyds and its work for the Post Office, and that the Post Office was resolving past issues in good faith.

They added that eligible applications will be reviewed and assessed by an independent advisory panel and there is also a dispute resolution process that includes independent mediation.

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