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Sep rep: all to play for

19 August 13

As further submissions are published on whether to enforce separate representation of mortgage borrowers and lenders, latest indications are that the SGM vote could be close

by Peter Nicholson, Neil Stevenson

Is separate representation of borrowers and lenders in mortgage transactions set to be confirmed as a change to the practice rules at the Society’s special general meeting on 23 September? The answer could be more in doubt than you think.

To recap, the annual general meeting in March voted to accept the majority recommendation of a working party, set up following a debate at the 2011 AGM, to end the current exemption from the conflict of interest rules, that permits the same solicitor to act both for a house purchaser and for their lender. The vote was on the principle, the Society being mandated to prepare specific amendments to the practice rules, giving effect to the change, to put to the forthcoming SGM for debate.

The AGM vote, by 58 to 27, was on a show of hands only. No call was made for a poll, despite some hundreds of proxy forms having been returned ahead of the meeting, mostly open proxies (enabling the appointee to cast the proxy vote as he or she chose) in favour of members who had declared their support for change.

As noted in our previous feature on “sep rep” (Journal, March 2013, 10), there is quite a widespread feeling that the mood among conveyancing solicitors has changed over the last couple of years, from a majority against the reform to a belief that its time has now come. But it would be quite wrong to regard the outcome of the SGM as a foregone conclusion.

For the opposition

As appears from the adjoining article by Neil Stevenson, the Society’s recent public consultation on the proposed new rules shows a narrow majority against. And some vigorous and detailed views have been presented by those who believe the proposal is the wrong course. At the time of writing, the Journal has not had sight of the various responses to the Society’s consultation, but some have been made available by their authors.

Two in particular are from firms that transact large volumes of conveyancing business. Robert Fraser of Aberdein Considine posted to Journal Online in May (bit.ly/18ZYMXe) that sep rep is “simply the wrong decision for the wrong reasons at the wrong time”. In essence, Fraser argues that nearly all transactions evidence commonality rather than conflict of interest; sep rep will promote mediocre client service in place of excellence, as well as costing more; and it will not affect the bad lending decisions that have led to the current spate of claims against the profession. “Most certainly my views remain the same,” Fraser confirmed this month.

The second submission attempts to move the issue forwards, while opposing the current proposals. Alan Radlow and Jonathan Edwards of Glasgow firm McVey & Murricane posted a detailed paper to their firm’s website www.mmilegal.com, which they have followed up with a shorter submission set out in full below.

“Conveyancing is a highly regulated service and neither the public nor the lenders require any further protection,” their initial paper argues. “Conveyancing processes are a mess because (A) it suits vested interests to make it more difficult than it should be, and (B) the lack of sufficient standardised approaches has been insufficient to deal with modern challenges.”

Standards as the solution

Adding that the profession would “upset the consumer at its peril”, the pair advocate a new, standards-based approach which, they maintain, “can readily cope with acting for both the lender and purchaser. There are so many areas in the world where much greater intrinsic conflicts of interest are dealt with by standards or regulation”.

Standards would deal with protocols and procedures, rather than documents such as the combined missives (which they dismiss as incoherent to the public and as still taking many different forms around the country). They would be embraced by lenders as better protecting their interests and ensuring that the rogue case is far more quickly and easily spotted by solicitors. (To them, the CML Handbook “was an attempt to provide a standards-based process to a system that defied standards”).

Questioned on their approach, Edwards told the Journal: “I think if lenders saw a properly configured standards-based approach, they would be prepared to relent on those aspects of the CML Handbook which cause most problems. The whole point of the standards-based approach is that the CML Handbook would not be necessary in its current form, because the standards would remove many of the grey issues which form fertile ground for aggressive action by lenders. The idea is that there are universal standards which are backed up by Law Society of Scotland rules, making it far easier to make judgment upon and police.”

While Edwards believes the future lies with volume firms and efficient processes, he insists that standards offer the best chance to preserve the opportunity for conveyancing to remain with the current diversity of providers. “The standards-based approach will allow lenders to set their threshold at a much lower level than they would under the current system, where ultimately panels will shrink. That is because lenders are currently relying on the covenant of the panel rather than a belief in the system.”

Standards do indeed feature in the CML’s own lengthy submission opposing sep rep (access via www.cml.org.uk/cml/media/press/3593), in which it repeats the call, noted in the March Journal feature, for a conveyancing accreditation scheme equivalent to that in place in England & Wales. Given the level of negligence disclosed by recent claims, it argues, “We would have expected in light of this that the [Society] would be looking to improve quality standards in the area of conveyancing to prevent this happening, and not simply relying on an additional solicitor to check another’s work.”

Like Radlow and Edwards, the CML puts the community of interest argument, along with efficiencies of time and cost – the latter “likely to be in the hundreds of pounds” extra under sep rep. It also warns of the extent of system changes that would need to be put in place by lenders, who are already working to implement the Mortgage Market Review by April 2014, and that spring of 2015 is “the earliest lenders will be fully ready” for sep rep, though some may need till the end of that year. If the rule is brought in earlier, some may simply withdraw from the Scottish market.

Sep rep as safeguard

Those supporting the initial move in favour of sep rep maintain their position that it remains the way to safeguard the interests of both the profession and the public. “It supports independent legal advice being given to a purchaser,” the response from the Scottish Law Agents Society argues (access via www.scottishlawagents.org/news). “It therefore avoids occasions of acting in a conflict of interest situation.”

SLAS further accuses the CML of imposing contractual duties on solicitors, through the Handbook, to reveal confidential details about clients, which is not in the consumer interest; abuse of bargaining power in imposing the Handbook requirements; and abuse of the Master Policy by founding claims on “technical breaches”.

Further, sep rep “will make it possible for large and small firms alike to compete on an equal footing”; and promote the right to independent legal advice, one of the fundamental professional principles.

It can be noted also that the quality accreditation scheme in England & Wales, favoured by the CML, has not made at least some solicitors there any happier with life. This was seen following a Law Society Gazette report of the Scottish AGM decision, which focused on critical comments by the CML (www.lawgazette.co.uk/news/separate-representation-vote-condemned): comments posted online praised the Scots and called in quite strong terms for similar support from the Law Society of England & Wales.

Despite the review, begun since the AGM decision, of the whole practice of residential conveyancing, the Society’s Property Law Convener Ross MacKay rejects the CML position that that should be completed before any decision is taken to enforce sep rep (see the Property briefing at p 32 of this issue). For MacKay, the key issue, which should not be put off, is conflict of interest – and it is views on the strength of that argument, balanced against the effect on the market of a rule change, that look set to dominate the SGM debate on 23 September.

 

SGM: where and when

The special general meeting when sep rep will be on the agenda takes place at Crown Plaza Hotel, Congress Road, Glasgow, from 4-6pm on Monday 23 September 2013. Members do not require to register for the annual conference, which begins at the same venue that evening, to attend the SGM.

 

                                                                                               

Will you be ready for show of hands?

Neil Stevenson, director of representation and support at the Law Society of Scotland, discusses some of the findings from the recent consultation

“Sep rep”. A phrase which some know nothing about, some feel strongly about, and others feel blasé about. Whichever camp you are in, the debate and decision is in your hands, so now is the time to find out more, take a view and prepare to vote.

Back in March, at the Society’s AGM, members voted in favour of the principle of separate representation of borrowers and lenders in conveyancing transactions, which we call “sep rep” for short because it’s quicker to say and shorter to write!

Following this vote, the Society’s consultation on separate representation ran from 18 June to 21 July 2013. A total of 279 responses were received, from solicitors and a wide range of organisations including Which?, the Council of Mortgage Lenders (CML), and the Scottish Legal Complaints Commission (SLCC), and we really appreciate the time and thought that went in to those responses. This consultation was the second phase of engaging with members and stakeholders, after a working party had reviewed written submissions and held meetings with key stakeholders throughout 2012 and early 2013.

A summary of responses to the consultation, as well as an amended draft of the proposed rule change, is now available on the Society’s website. We have also published all responses, anonymised where requested, allowing everyone access to the information we have. The summary report and responses can be viewed on our website.

In addition to members, we contacted a number of stakeholders, including all mortgage lenders and a number of consumer groups.

Narrow margins

Those responding through the online tool (251 out of 279) were asked whether they were in favour or against the principle of separate representation (not the drafting of the amendment provided, just the principle). On a straight count, the response was 48.9% in favour and 51.1% against. 

Of course, different types of response were contained in that total. Some came from individuals, some from organisations (large and small), some from solicitors and some from other experts, and so on. We therefore moved on to looking at the data in a number of different ways.

If we look at individuals only, it is 47.5% in favour and 52.5% against; and if we consider only individuals who are solicitors and working in residential conveyancing, the response is 47.7% in favour and 52.3% against. Organisational responses showed 59.1% in favour and 40.9% against. A fuller explanation of how these calculations are made, and caveats to them, is given in the summary report on our website.

The report flags certain key stakeholders’ responses in detail. The Council of Mortgage Lenders (CML) explains its views against a move to sep rep, while Which? believes the decision should be down to individual consumers, and bemoans the perceived lack of transparency for consumers in the current arrangements.

Informed debate

Aside from the evenly balanced numbers, the consultation has produced a highly positive response providing an evidence base on either side of the debate. We hope the consultation will inform discussions in the lead-up to the SGM on 23 September, providing thoughtful analysis on how the proposals relate to our regulatory objectives, and allow better discussion around public and consumer interest issues. We also hope to identify potential unintended consequences, and recommend changes to the actual drafting based on a detailed assessment.

A fairly “absolutist” drafting of the rule change was originally presented in the consultation to show a clear prohibition of separate representation. Feedback supports a different approach, and an amended drafting is provided in the summary paper. We believe this demonstrates the Society’s commitment to respond to issues raised in the consultation.

The summary also deals with some areas where really valuable insight was received, such as issues around certificates of title and discharges. These cannot be explained in a short article, but commercial and domestic conveyancers alike will be interested in a pragmatic response being suggested to address these issues.

Ignore at your peril

A range of strong views on both sides appears from the consultation, and no consensus on whether this change is required. However, the Society is mandated by its members who voted to bring a rule change to the September SGM, and it intends to do this following decisions by two regulatory committees in the buildup to the SGM.

The debate is increasingly fast moving, so visit www.lawscot.org.uk/seprep to view the consultation summary report; read the consultation responses in full; and to watch our short video summarising what we mean by “sep rep”. You can also follow the debate on Twitter (@lawscot #SepRep), or join the conversation on our LinkedIn group.

Out and about, speaking to solicitors during the consultation period recently, we heard people saying that they already saw it as a “done deal”, and others saying they didn’t feel the need to respond as it would “never happen”. The fine balance of views shows that the vote could go either way, and nobody can sit back and believe one or other outcome will happen without their input – whether that’s attending to vote in person, or issuing a proxy. The decision on “sep rep” will be made by solicitors on 23 September. Will you be there and ready when we ask for a show of hands?

The team at the Society leading on sep rep are Kaira Massie and Alison Mackay, both solicitors in the Professional Practice team, and Neil Stevenson. You can contact them on SepRep@lawscot.org.uk

                                        

Online extra

After some intense engagement on separate representation, Allan Radlow and Jonathan Edwards of McVey & Murricane muse on a collaborative solution for the profession (with the help of the Fab Four)

We can work it out

Over the last few weeks, we have belatedly been involved in much activity relating to the separate representation issue (SR). Initially we had submitted a lengthy document vigorously opposing the introduction of SR (you can see it on our website www.mmilegal.com).

The submission created interest; valuable meetings followed with the Law Society of Scotland and the Council of Mortgage Lenders. Discussions with other practitioners also took place. Those interactions suggested that, whatever your view, the whole SR juggernaut had rather got out of control and is a slow motion car crash. To us, it has become clear that a resolution can be found that suits the overwhelming majority of conveyancers, preserves the goodwill of the profession with the public and offers lenders all that they require.

Revolution?

It seems pretty clear that the vast majority of volume conveyancers are against SR. Likewise consumer bodies have major reservations, and the lenders are utterly opposed. However, interestingly, it seems that a number of those practitioners who are supporting SR may not just be pining for “Yesterday”, but rather that SR represents a protest vote against a perception that the goalposts have moved. It is the practitioners’ equivalent of voting UKIP!

All day-to-day conveyancers instinctively know that the conflict of interest argument has been hijacked. If we truly felt there was a conflict of interest, those supporting SR would now no longer be accepting instructions from lenders. We would be asking ourselves how many times since the introduction of the CML Handbook had we, or practitioners with whom we were dealing, withdrawn from acting because of a conflict between client and lender. Once, twice…

Come together

If the profession can take a breather for a minute and consider the actual facts, we can move back from the precipice. There are few in this entire saga who are not guilty of promoting vested interests, but both the public and the politicians will not forgive the profession for putting its self-interest ahead of the consumer. There is some value in remembering that Scottish conveyancing cannot survive without the support of lenders. The lenders can survive without Scottish conveyancing.

Given our Beatlesque theme, it seems sensible that we should all start singing from the same hymn sheet or, indeed, Beatles songbook. Have a look at our long playing picture disk, which reflects some of the changes that can be made with minimal investment and vitally takes into account the implications of the new Land Registration Act.

I want to hold your hand

Our discussions with the CML indicate that there is a real desire to communicate and discuss some meaningful compromises. Somehow relations between the profession and CML have become difficult and it is imperative that everybody is working together for the future.

There is a mutuality of interest in seeking a reasonable solution. In truth there is little choice, because SR simply cannot work on anything like the basis that has been suggested. We currently carry out a fair number of SR transactions for lenders, utilising a straightforward and speedy certificate process. That just about manages to work, though often it requires goodwill from all sides in making sure that the money is in the right place at the right time. The consumer is also paying £250-£400 for the benefit of this, and it is not a viable volume strategy.

I am the walrus

Probably the most famous line from arguably the greatest Beatles song stated: “Yellow mother custard, dripping from a dead dog’s eye”. Many great minds spent much time pondering the inner meaning of such a profound statement. When John Lennon was asked what had inspired such immense profundity he replied: “It rhymed.” Similarly, though not quite so famously, much academic opinion has been spent on the issue of separate representation.

As you will be able to see from our paper submitted to LSS, the prosaic facts and reality do not justify a dry academic approach. Conveyancing is a quasi-utility carried out in a regulated fashion for the public. Solicitors enjoy a monopoly in this area, and politicians will quickly provide other options if solicitors spend too much time navel gazing. It was always said that Scottish solicitors were “men of business” (and that properly should be “men and women of business”), and we should proudly maintain our independence and service to the public in a professional but modern manner.

Imagine

We must first put genuine commitment into the review of conveyancing practice and make it fit for the 21st century. Our efforts so far in adding technology and limited standards onto an essentially Victorian process have been woeful. What we have can politely be called a bastardised, anglicised mess. The future can be found in a proper standards-based process based on existing law. The combined missives represent almost everything that a standards-based approach should not be; its incoherence to the public and separate versions round the country immediately come to mind.

Standards are not just about documents. They are about protocols and procedures. We have a large Scotland-wide conveyancing practice, and many of our explanations to clients centre on the myriad different approaches taken by other solicitors combatively sticking to their (often quill pen) methodology.

The reality is that the CML Handbook was an attempt to provide a standards-based process to a system that defied standards. We are clear that lenders, faced with a proper standards-based system in Scotland, will feel far more comfortable in embracing such a system and, with their contribution, accepting that the resulting environment will far better protect their interests and ensure that the rogue case is far more quickly and easily spotted by solicitors.

All things must pass

None of this is pie in the sky and such work is being carried out in many other areas of life. Indeed, with such a relatively small number of practitioners carrying out conveyancing, the introduction of a collaborative model would be relatively straightforward. Famously, when asked about the use of the fax machine, an old conveyancing sage replied that “The second class post has served the profession well for many a year and no doubt will continue to do so.” In 2013 an internet connection represents the practitioner’s most potent tool. Work methodology has changed for many, but we cannot practise conveyancing on the basis of the lowest common denominator of someone who refuses to engage with either technology or a standards-based system.

Indeed, there’s the rub. Somehow, we cling to the notion that all solicitors are equal; that someone who has not worked in an area of the law for many years can somehow properly deal with that type of practice without being retrained. They do not do that in other professions. It is part of the conceit that a conveyancer who deals with five transactions a month is deemed to have an equal or greater say than businesses that deal with hundreds of transactions a month. From the lenders’ point of view the volume solicitor, to survive, requires to invest in systems, people and resources to comply not only with all of the rules but also the quality constraints imposed by introducers of work.

That does not mean that the standards-based approach would be imposed by the lenders. We believe that if lenders saw a properly configured standards-based approach they would be prepared to relent on those aspects of the CML Handbook which cause most problems. The whole point of the standards-based approach is that the CML Handbook would not be necessary in its current form, because the standards would remove many of the grey issues which form fertile ground for aggressive action by lenders. The idea is that there are universal standards which are backed up by LSS rules, making it far easier to make judgment on and police.

Nor does it mean that only volume conveyancers would survive. We actually believe that to preserve the opportunity of conveyancing being provided by many sources, the only hope is a standards-based approach. That would allow lenders to set their threshold at a much lower level than they would under the current system where ultimately panels will shrink. That is because lenders are currently relying on the covenant of the panel rather than a belief in the system.

The more the lenders can rely on the system itself, rather than the covenant of the people who are engaging with the lender, the more comfortable they will become in instructing any size of firm that does regular conveyancing. Their focus would continue its move to those people who are only doing a handful of conveyancing transactions, whatever the size of the firm. It may well be that a number of the larger firms would not qualify for the lenders’ panels on this basis, but domestic conveyancing is not their meat and drink. Such an approach based on regularity of conveyancing makes sense.

Help!

The profession needs to assist lenders to be flexible in collaborating on this standards-based approach. Especially after the experience of the financial crash and the consequent regulatory obligations of lenders to show that they have safe systems of lending, it is just not feasible that practitioners who carry out a small number of transactions will continue to be instructed by lenders. It does not matter if those practitioners are the greatest conveyancers in the world. They choose to work in an environment that is not conducive to instruction by volume providers of loans. However, as part of the standards-based approach, processes can be agreed to deal with separate representation so as to make it both economic and practicable while protecting the lenders’ interest.

On every front within law in the United Kingdom, the certainties of previous years are being attacked. We cannot stand, King Canute-like, defying the laws of gravity. What we can do is show our value as a profession in creating a modern conveyancing system which allows complete competition, enables differential treatment of clients for those who want to pay for a greater level of individual attention, but creates a common approach to the nuts and bolts of everyday practice.

It has been a “Long and Winding Road” – together we now need to put our skates on and deliver the answers that are within our grasp.

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