Should the same solicitor act for both Borrower and Lender?

Introduction

For many years it has been common practice for the same solicitor to act for both the borrower and the lender in a residential property transaction in circumstances where “the terms of the loan have been agreed between the parties before the solicitor has been instructed to act for the lender, and the granting of the security is only to give effect to such agreement.” See sub-clause 5(1)(f) of the Solicitors (Scotland) Practice Rules 1986. This rule, which is an exception to the principle against conflict of interest, has worked well over the years and has helped keep costs down for the borrower/purchaser. It has also allowed transactions to operate smoothly and, in general terms, has been beneficial for both borrower and lender. It is suggested however that times have changed or, at least are changing, and that it is now perhaps time to consider whether there is not an underlying conflict of interest that merits the respective parties having separate legal representation. It is acknowledged that such a suggestion may not be popular in certain quarters but that is not a valid reason for preserving the status quo. The introduction of separate representation in commercial conveyancing provoked initial protest but is now accepted. Indeed, it is argued that the legal profession and their clients benefited overall.

Why change?

The traditional criticism of separate representation in security transactions in residential property conveyancing is that it will result in delay and increased cost to the borrower. In turn, this is likely to delay conclusion of missives and thus threaten the traditional attraction of the Scottish system. In reality, however, do we not already experience considerable delays – some caused by lenders – but on many occasions caused by our clients, or dare I say, by us as solicitors? Indeed, how different is our conveyancing system from that in England and Wales? See “House Buying and Selling – Do we have the English System?” Prop L.B. 70-4 and “The Future of the Scottish Missive” Prop L.B. 75-1. 

There will undoubtedly be increased costs for buyers as a result of any change which would be difficult at a time when economic conditions are tight.  Is it not the case however that the true cost of security transactions are not passed on to the borrower at present thus creating a false impression? The classic defence of the present system is that the buyer’s solicitor has examined the title and undertaken the necessary searches already so to assume the role of representing the lender is not onerous and represents good practice and thus good value for the buyer. That argument sounds persuasive but does it withstand critical analysis in times of increasing fraud and an alleged drop in conveyancing quality?

The fact of the matter is that there are increasing claims on the Master Policy for losses sustained by lenders as a result of poor conveyancing, or at worst, dishonesty or fraud on the part of the solicitors representing them. In such cases, it has often been questioned whether or not the solicitor concerned considered that the lender was also his/her client. A review of correspondence files in cases involving claims for professional negligence often discloses what at best might be described as naivity on the part of the solicitor complained against. The fact of the matter is that the solicitor often does not appear to have considered the full extent of the obligations assumed by him/her under the CML Handbook – obligations the extent of which often result in the solicitor owing a greater duty of care to his/her lender client that he/she owes to the borrower client. As has ben said recently, it is important that you take care to ensure that you do not make what might be your client’s problem, your problem.

The primary benefit of the Handbook is perceived to be  that a practitioner would have a comprehensive set of 'standard' instructions to which most lenders would adhere but in cases where a particular lender had a particular policy, the matter would be disclosed in that lender's Part 2, and thus would avoid the need  to cope with different sets of instructions from every lender. Lenders were to be encouraged to minimise their Parts 2 and Part 1 was only to be amended as necessary  (and not more regularly than annually).  The Handbook is only available online and individual lenders’ terms do change from time to time. It can often be the case therefore that solicitors are unaware of a particular variation in an individual lender’s terms and, as a result, omits to advise the lender of a particular fact or circumstance which ought to have been disclosed. There is technology available which can help mitigate that risk  - see http://www.completionmonitor.com but is that sufficient reason why the present position should continue? Indeed, it can be argued that technology itself could allow lenders to amend terms almost on a whim. Could that therefore result in the position being worse?  In my opinion, a solicitor representing the interests of a lender should receive a proper fee commensurate with  the work undertaken in creating the security and certifying that the title is valid and marketable and suitable for security purposes. Do solicitors receive such a fee at present? Would there possibly not be more business if separate representation was the norm?

Lenders’ Panels

This has been an emotive subject in recent months and many firms were rightly concerned by what amounted to unilateral decisions to restrict the size of panels. It is worthwhile considering however why some lenders were considering change in the first place. The traditional approach was for there to be so- called “open” panels. Many lenders are moving away from this however – largely due to the increase in mortgage fraud. That is not to say that every lender is in favour of separate representation. Nevertheless, there has been an increasing drive to improve risk control. In addition, the Financial Services Authority now expects lenders to do much more vetting of solicitor firms on their panels than was traditionally the case.  As a result, firms are being removed from panels where there are issues of competency or even limited conveyancing activity in a particular legal practice. Why shouldn’t lenders seek to ensure that their interests are so protected? It is understood that there is an increasing debate around the use of central panel management as a tool to assist better risk control. This may avoid the necessity of individual lenders undertaking checks and may also decrease the scrutiny that solicitors receive from lenders but is it not likely that this will result in so-called “super” or specialist lending panels? If such panels, rather than “open” panels are to become the norm, should we not recognise the direction of travel and promote (rather than resist) separate representation of borrower/lender, even in residential property transactions?

Developments in Practice

Conveyancing case management systems are now much more efficient and their use ought to assist in mitigating the risk of negligence. This has to be a positive development. In England and Wales, the Conveyancing Quality Scheme (“CQS”) was introduced by the Law Society in an attempt to drive up standards among its members and thereby improve lender and consumer confidence in the legal profession generally. Firms wishing to achieve accreditation must be able to demonstrate that they comply with a number of enhanced standards covering the competence and probity of staff; the financial standing of the firm; and the existence of appropriate supervision, safeguards and processes. In addition, accreditation under the scheme will entail the Law Society of England and Wales undertaking extensive identity and other checks on all individuals employed by legal firms. Firms will be monitored to ensure that standards are maintained. This will be done by way of audit on both a random as well as on a risk–based basis. The scheme has been well received by lenders who will, of course, remain free to choose their own panel entry requirements. It is anticipated however that it is likely that lenders  will require accreditation under the CQS as a prerequisite for an application before they apply their own additional criteria. 

The principle underlying the CQS is sound but that does not mean that it should be considered in Scotland. While the accreditation of residential property conveyancing practice as a specialism is worthy of consideration (given the range of specialisms already the subject of Law Society accreditation) there are a number of arguments against the introduction of CQS in Scotland. These include:

• the profession north of the border is not the same as in England and Wales; that, as a result of the Master Policy and Guarantee Fund, lenders in Scotland are not exposed to the same level of risks as in England and Wales; and, thanks to the LSS risk management strategies, the claims record in Scotland is not nearly as bad as in England and Wales. CQS was the LSEW reaction to driving up its members standards (thereby improving lender confidence in the legal profession south ofthe border). If LSS joined CQS, would that not be an admission that the existing situation was failing and that we are just as bad as England & Wales?
• the CQS is not popular. After one year, it has only received just over 1,300 applications (out of a possible 11,500), and accredited only 589 to date.
• the CQS is expensive. The initial joining cost for a sole practitioner is £350. Thereafter, there will be an annual re-accreditation fee.
• membership of CQS does not guarantee access to lenders' panels nor obviate the need to pay to be on a lender’s panel.
• increasingly, there will be tension between the representative role of LSS to promote the Profession (e.g. through initiatives such as CQS) and its regulatory role. For example, would a (remediable) breach of the Accounts Rules which came to the Society's attention during a routine Guarantee Fund inspection nevertheless be a matter which "in the reasonable opinion of the Law Society, could be detrimental to the reputation and integrity of the CQS and its brand" thus entitling LSS to terminate or suspend membership of CQS which, in turn, could directly jeopardise the livelihood of solicitors (particularly those in rural areas) if CQS membership is hailed as being (only one) pre-requisite of panel membership?
• CQS is more likely to result in the creation of “super” or specialist lending panels rather than a return to “open” panels.

Is it change for the sake of change?

It is argued by many that the current system works and that there would undoubtedly be an increase in costs for consumers if two firms were to examine title thus leading to delay. Does that argument not fly in the face of the statistics from the National Fraud Authority and anecdotal evidence generally as to mortgage fraud etc? In short, are we not defending a system that has outlived its usefulness? Why should solicitors and through them the Master Policy and ultimately the Guarantee Fund underwrite a system which is essentially flawed? In my opinion, the interests of both the consumer and the solicitor would benefit from the same solicitor not acting for both borrower and lender. Claims are on the increase and lenders are increasingly looking to their solicitors to make good losses incurred on the occasion of borrower default. From their perspective, that is effective risk management. Is that a risk that solicitors should assume when, as a general rule, they have not received suitable remuneration for undertaking the work in the first place? Lenders would argue that that is not a matter that need concern them – and they are quite correct. The fact of the matter is, however, that solicitors do not, as a general rule, receive a fee that is commensurate with the risk that they are assuming. This can change of course but consumer reaction is hardly likely to be positive. As a result, it is argued that the existing exception to the conflict of interest rule should be removed and separate representation be the norm. Whether that be through bespoke lender panels is a matter for the market to decide. There are differing views among lenders as to separate representation and any change would require the solicitors acting for the borrower and the lender respectively to have a clear understanding of the division of responsibilities between them. That is likely to result in a specific version of the CML Handbook which would apply in the case of separate representation. It is understood that there are plans to introduce such a Handbook in England and Wales in Quarter 1 of 2012. See draft on CML website.  If this, in turn, leads to specialist lender panels, is that really such a bad thing?

In Scotland, we can, of course, point out that the Master Policy and Guarantee Fund have created a much better background  than the English experience of inter alia  fraudulent sole practitioners running off with the cash. It is interesting to note however that mortgage fraud can usually be found more in process failings at the brokerage stage or within the lending institutions themselves. There are therefore many who would argue that no change is required. Can that delay what appears to the author to be an inevitable change in practice? In my opinion, we are experiencing what has been described as “liability creep” – usually as  a result of more onerous obligations being imposed on solicitors under the CML Handbook. As a result, many solicitors wonder if they are not now being viewed as an “easy target” when a lender suffers loss. In many cases, this claim is completely unfounded.  For an interesting recently reported case, see Blemain Finance Limited v Balfour & Manson (www.scotcourts.gov.uk and Scottish Legal News 28 September 2011). On occasion, however, it is unfortunately the case that the solicitor complained against has simply not acknowledged the contractual obligations assumed under the CML Handbook and that his/her failure to adhere to these obligations may result in a claim for breach of contract – a claim that does not require negligence to be proved.

Conclusion

It is acknowledged that this is an emotive topic and that there are strongly-held differing views on the matter – especially with regard to access to solicitors in remote areas. This is precisely why the subject should be debated. If we do nothing, the incidence of claims will rise and change will be introduced anyway. Change is coming and it is suggested that the Law Society should be proactive and encourage debate. If it does not, who else will – and who else cares?


An Article by Professor Stewart Brymer WS, Brymer Legal Limited.
Published in Greens PLB Issue 115 (December 2011)