Consultation on conflict of interest rule change in property lending
The Law Society of Scotland is to consult with solicitors, lenders and consumer interest groups on proposals to change its rules on conflict of interest in property transactions.
Currently, a single solicitor can carry out work for a client wishing to buy a residential property and their lender, however, solicitors voted in March to remove an exception to its conflict of interest rules which allows them to act for both parties, as solicitors felt that they could no longer represent successfully the interests of the purchaser and the lender. They will be invited to vote on the proposed rule change at a special general meeting (SGM) in September this year following the consultation launched today, Tuesday, 18 June.
Ross MacKay, Convener of the Law Society's Property Law Committee, said: "Solicitors voted in principle for change at the Law Society's annual general meeting in March. We now want to ensure that we gather as many views as possible from solicitors and others, including the lenders and consumer interest groups. The consultation findings will be made available to all members to consider before they are invited to vote at the SGM in September."
The rule change would affect all lending transactions where a standard security (commonly referred to as a 'mortgage') is granted over property.
MacKay said: "The vast majority of commercial transactions already involve separate solicitors advising the buyer and lender so it will have scarcely any impact on transactions of this nature, however, a rule change, if voted for in September, would make this compulsory across the board.
"There has been huge change in the property sector in recent years, which accelerated during the downturn, particularly in relation to bank and building societies' willingness to lend and to the demands that they now make on solicitors who act for both them and the buyer.
"The current exception, which allows one solicitor to act for both the buyer and lender, was introduced in 1986 when it was felt that the interests of the buyer and of their lender were more aligned than conflicted to help ensure a smooth transaction. However, the world is a very different place now. The severe economic downturn, increasingly complex transactions, increasing risk of mortgage fraud and the additional pressures from lenders mean that it is clearly no longer in the public interest to continue acting for both a lender and a purchaser in a secured lending transaction.
"Removing the exception would ensure both parties would get the truly independent advice they require from the solicitor of their choice."
He added: "We don't believe that a change would automatically lead to increased costs for consumers as it will be for the lenders to decide if they are going to pass on additional costs to their customers on top of the administration fees already charged."
Mackay said a further potential advantage would be mortgage fraud disruption, which costs the lending industry in excess of £1 billion a year.
He said: "Mortgage fraud has been on the rise throughout the UK and having two solicitors acting for lender and buyer would mean that attempts to commit fraud are more likely to be detected and stopped."
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18 June 2013