Between a rock and a hard place
The debate over how the profession should respond to mortgage lenders' solicitor panel moves, and whether it is time to require separate representation of borrowers and lenders
What is the future for residential property work? Have solicitors struggled through the recession only to have the ground swept from under them by mortgage lenders appointing select groups of firms to their panels, perhaps also offering incentives to borrowers to instruct them in the purchase? Is client choice, the mantra of the consumer lobby through the ABS debate, about to be effectively nullified in this sector by those who control the availability of the necessary funds?
The questions have become more pressing since the announcement in early January by HSBC Bank that it is cutting its panel of legal firms approved to act in mortgage business to 43 for the whole of the UK, only four of whom are believed to be Scottish. Although not currently a significant player in the Scottish market (with about a 1% market share, compared with 10% south of the border), the bank does appear to have the funds at its disposal to make a push for expansion. Moreover, the trend among lenders is certainly to tighten panel membership, often without advance notice and also using less-than-transparent selection criteria.
Looking from the lenders’ perspective, it has to be said that there are pressures to encourage smaller panels. The Financial Services Authority regards the open panel system as a major contributor to mortgage fraud and negligence cases, and has been leaning on lenders to move to proactive panel management, which is more expensive the larger the panel. Hence it is becoming more common for lenders to charge fees, and/or require extensive form-filling, from would-be panel members. (Read more on this online: links at top of page.)
In the case of HSBC, the Law Society of Scotland is looking into possible regulatory issues regarding promotional material which makes it insufficiently clear what outlays a purchaser will incur, and as to whether all the elements of the fee (£160 + VAT) to be charged as the bank’s legal costs if the borrower instructs a non-panel firm, are properly recoverable from the borrower.
Right to choose
Is there anything more that solicitors can do to defend their own interests? The options are more limited than one might think. Some might be tempted to steer clients away from those who impose the greatest restrictions on panel membership. John Scott, secretary to the Society’s Property Law (formerly Conveyancing) Committee, advises: “The difficulty there is that you are effectively giving financial advice to clients. It might be that the best choice for them is from one of these lenders and it’s difficult to see how you could give advice not to choose that product without putting yourself in a conflict position.”
Scott explains the Society’s position regarding panels generally: “The view we’ve taken throughout is that we’ll support the panels where the decision is taken on a basis that genuinely addresses risk, but we will vigorously oppose any culls that appear to be draconian and without any good risk management principles behind them.”
He comments that the Society has seen “no correlation between the size of firm and risk of fraud, and likewise no correlation between volume of transactions that a firm undertakes and level of fraud either. As we’ve argued, the many small firms that provide a bespoke service to clients arguably offer a very good service to lenders and have had no difficulties with claims over the years, and there’s no reason why they should be removed from panels”.
Could there be anti-competitive practices involved? Counsel’s opinion provided to the Society was that lenders are free to choose whom to instruct, and there are no competition issues unless a lender (or a number of lenders acting together) has a market share above 40%. “Even Lloyds Banking Group doesn’t come near to that,” Scott observes.
Firms currently appointed to lender panels will be in a favoured position compared to others so long as the lender/borrower exemption to the conflict of interest rules (now Consolidated Practice Rules, rule 2.1.4(f)) remains in force. Would it effectively counteract lender panel restrictions if this exemption were revoked?
There is a considerable, and it appears growing, body of opinion that it might be time for such a move. Last month (Journal, January, 5) Professor Stewart Brymer questioned whether the status quo still benefits either solicitors or their clients, arguing that the existing exemption to the conflict of interest rule should be removed, with the market determining how lenders are represented.
Brymer concluded by calling on the Society to “be proactive and encourage debate”. In fact, the question has been under examination since last year’s AGM, which approved a motion from the Scottish Law Agents Society calling on the Society to review the conflict of interest rules, and the property exemptions in particular.
Scope for action?
In a briefing paper (online at www.slas.co.uk), SLAS spokesman Ian Ferguson argues that the various exceptions permitted in conveyancing transactions (which also include family members, associated corporate bodies, and established clients among others), drive a “coach and horses” through the general no-conflict principle. In relation to the borrower/lender rule, he points to the greatly increased requirements placed on solicitors since 1986, when the rule was introduced: “it appears commonplace to expect utmost good faith” from the solicitor, who must pass on knowledge to the lender if it would affect the decision to lend.
Having regard to the solicitor’s duty of confidentiality to the borrower, Ferguson argues, “The effect of this exception in practice is to erode client confidentiality and put the [solicitor] in a conflict of interest situation.”
He acknowledges the likely additional delay, and cost, from having two sets of solicitors involved, but among other points he questions why the borrower should be expected to pay the lender’s costs anyway. (More on this below.)
Action on the SLAS motion was delegated to the Professional Practice Committee, which will report back to this year’s AGM, now set for 31 May. Still in progress, the review included an open house forum last summer, the minute of which, John Scott says, indicates that the majority of solicitors present favoured the status quo, again having regard to the delay and cost factors. More exclusions from lender panels might bring about a shift in opinion.
But, Scott warns, it isn’t just a question of taking a majority vote of the Society’s members. “The public interest has to be considered as well, and any change in practice rule has to go through the Regulatory Committee and be approved by the Lord President. There would have to be a convincing public interest case made; an argument simply that solicitors were losing out because of panel restrictions wouldn’t cut much ice, I don’t think. And we have representations from consumer organisations concerned at the possibility of increasing costs because people would be paying two sets of solicitors’ fees.”
Conflict of opinions
What of the views of those now engaging in debate? Some, such as Farah Adams of Blairgowrie, are in favour of change, also citing the onerous terms imposed by lenders. “Having seen the serious problems which have arisen for practitioners recently as a result of acting for both lender and purchaser in relation to breaches of the CML handbook, I am becoming more and more uncomfortable at the prospect of continuing to act for both lender and purchaser at the same time,” she posted to LinkedIn.
Caroline Flanagan of Dunfermline, a court lawyer who has experienced difficulties in transfer of title cases, added: “It is difficult to see how acting for both lender and borrower can now be justified, given the extraordinarily stringent conditions now imposed by lenders.”
Writing to the Editor, David Adie of Glasgow argues that leaving the purchaser’s solicitor on the hook if anything goes wrong will itself “do nothing to help the public and will increase the cost of conveyancing, not to mention delay things even further… we should not be drawn into certifying the title to other solicitors, i.e. the bank’s solicitors, and still carrying the can”.
Others point out that even separate representation will not necessarily avoid such issues – and the Society has felt compelled to issue a warning about HSBC documentation issued to non-panel solicitors for borrowers (see panel below).
Scots lawyers report a range of difficulties, depending on the lender. In the experience of Campbell Read in Campbeltown (who started the LinkedIn discussion), where a lender is separately represented at present, their solicitors either tend simply to rely on the borrower’s agent, apart from preparing the security deed itself, thereby bringing “a pointless layer of bureaucracy, cost and delay”, or at the other extreme, apply rigid rules to the transaction, to the extent that “no commercial or professional view on any matter will be tolerated”.
A practical point made by Read and others is that lenders’ agents are not under the same client pressure to bring a transaction to settlement, and may hold matters up at a critical stage.
And what happens when a purchaser’s solicitor has taken a view on a certain matter in concluding missives, only to find later that the lender’s agents will not accept that position?
John Scott says the Society will be seeking to ensure that there is not undue exposure to risk by a solicitor who is not actually acting for the lender.
He asks: “The various exceptions to the rules are not available where the seller is a developer, due to the imbalance between the power and influence of the respective parties. Should a firm on such a small lender’s panel be allowed to act for the borrower as well?”
Whereas consumer groups may have cost concerns in relation to a rule change, they may be more sympathetic over the obvious restriction on consumer choice if lenders make it harder for purchasers to choose their local solicitor, particularly against that background.
Scott also reveals that the Society is watching an interesting development in the Republic of Ireland, where consumer pressure arising from concern about lenders passing on their costs to borrowers led to legislation effectively prohibiting the practice.
Lenders decided in response that they would not be represented at all, instead relying on a letter of undertaking from the purchaser’s solicitor.
“There have still been claims against solicitors based on breach of letter of undertaking,” Scott reports, “but I suspect it has limited exposure of the profession there in connection with claims, because obviously there isn’t the solicitor-client relationship.”
The undertaking is broadly similar to, though perhaps wider than, a certificate of title, “but clearly it’s a completely different relationship from a solicitor-client relationship”, says Scott.
The implications for solicitors’ liability have still to be worked out, alongside the impact of the property crash in Ireland, but “it’s interesting that the move was consumer led, that it was felt unfair that lenders should recover their costs from borrowers.
It would require legislation to achieve here, but could it be a subject on which the Society can make common cause with consumer interests?
Ian Ferguson thinks it might. The effect of the HSBC announcement, he told the Journal, is that “both SLAS and the Property Law Committee may be able now to argue consumer detriment from this action and revisit my paper”.
He adds: “Some are thinking towards a ‘classic’ report on title, like a classic letter of obligation, covered by the Master Policy beyond which there is no cover. This is a brilliant idea. The lenders will be unhappy at that because they prize the Master Policy cover. If some firms give that extra obligation, it is on their own heads.”
Is it time to enforce separate representation? Where does the balance of consumer interest lie? What is the outlook for the profession with, or without, the present exemption? Write to the Editor: email@example.com or post a comment to Journal Online (quick links to the article are shown above).
Beware HSBC undertakings
The Society has warned non-panel solicitors that documentation issued by HSBC panel firms is based on English law and practice, requiring undertakings of both the purchaser’s and the seller’s solicitor to grant undertakings, some of which may be difficult to honour, as well as considerable additional work by the purchaser’s solicitor, which would not be required if acting directly for a lender under the CML Handbook.
The Society’s advice is that solicitors should decline to engage with the panel firm on the basis of this documentation, as it exposes them to unacceptable risk.
An English solicitor involved in an HSBC case posted to LinkedIn that he has reported to the Law Society of England & Wales a 20 point undertaking received from the bank’s solicitors which, he says, is “essentially an indemnity policy” which puts the borrower’s solicitor “at full risk”.
Asked whether it was open to other firms to apply to join their panel, HSBC Bank responded: “Please could you email your firm's details to CCSPanel@cwpl.com. Countrywide [the firm appointed to manage the panel] will then consider whether there are any current opportunities to join the HSBC panel in your region, and your firm’s eligibility. Our team will endeavour to respond to you within five working days to advise as to whether we will be progressing your application further, providing details of the next steps if applicable.”
In an open letter to members from its chief executive, Des Hudson, the Law Society of England & Wales commented: “Countrywide have informed us that while they are not at liberty to disclose the criteria for admission to the panel, the number of the panel has not been fixed at 43 firms and that other applications will be considered. Given what HSBC and many firms have told us, we are not inclined to place much reliance on the practical effects of that statement.”
The letter takes a strong line: while stating that it is for individual firms to decide whether to apply their own sanctions such as closing accounts held with HSBC, Hudson said that LSEW would ensure that none of its funds were placed with any member of the HSBC group, and would be “taking steps to consider” any trading relationships it had. (John Scott believes that very few Scottish firms will hold such accounts, and confirmed that the Society in Scotland does not.)
LSEW is also attempting to raise the matter with the Government, regulators and consumer groups, as well as taking up matters brought to its notice by practitioners in relation to the practical working of the new arrangements.
Panel policies currently applied by other lenders in Scotland:
Lloyds Banking Group: Attempted a dormancy exercise in 2010 (striking firms from their panel if they fell below a certain threshold level of transactions), without indicating exactly what the threshold was, but eventually relented and allowed firms who had been removed to apply to rejoin, on filling in a very lengthy, and according to John Scott very intrusive form, which may be rolled out to all firms on their panel.
RBS: Still have a relatively open panel.
Santander: Now have an online panel management system operated by a third party provider, with costs covered by a charge to legal firms of £199 + VAT to join the panel if not already on it, and a £99 + VAT “annual compliance charge” to stay on the panel each year. John Scott: “My understanding is that it’s (a) quite a cumbersome exercise and (b) again quite an intrusive level of information that they’re looking for.”
Nationwide: Carried out a dormancy exercise last year but appeared to be using a dataset that was inaccurate, and not intimating decisions to remove a firm. In return for the Society checking their data and advising them of business changes, they agreed to restore all firms who were still active in conveyancing. The dormancy test has just been reintroduced, to exclude firms that have not carried out any new security work within a one year period, but this time with proper intimation and a right of appeal.
Barclays/Woolwich: Operate a panel, but the Society is not aware of many problems as yet.
David R Adie
Sunday February 19, 2012, 22:04
I note with interest that HSBC have now restricted their panel of Scottish solicitors to four. This seems to be a ridiculously low number.
This really begs the question, should solicitors ever act for a lender at all if they are representing the purchaser? Should we not now move to a situation where in every case the lender is separately represented? It will after all give us more work, and it will avoid the situation where the poor purchaser's solicitor is left on the hook to the lender if anything ever goes wrong and the lender has to repossess, even if the repossession is caused by the lender's unwise lending in the first place.
This will do nothing to help the public and will increase the cost of conveyancing, not to mention delay things even further. If that is the way we are going, so be it and the public will just need to suffer once again at the hands of financial institutions.
There is only so much the profession can stomach and we should not be drawn into certifying the title to other solicitors, i.e. the bank's solicitors, and still carrying the can. If the banks want separate representation they should pay for it, or at the very worst pass the cost on to the public.
David R Adie
Sunday February 19, 2012, 22:11
Following my earlier thoughts, I do think that Stewart Brymer is right. We should have separate representation for lenders, but there should be two provisos.
First, the borrower's solicitor should not be forced into certifying the title to the lender's solicitor and thereby still taking the risk. It is up to the lender's solicitor to investigate the title themselves.
Secondly, we should charge more fees as there is more work involved. We are fools if we continue to do work for the same fee. The lenders would have no difficulty in passing on any costs to the client, and no doubt do so in any event.