What are the pros and cons of requiring separate representation of mortgage borrowers and lenders? We ask leading voices on both sides of the argument

Could we be about to see an end to one of the longest established practices of the Scottish conveyancing system, the rule that permits the same solicitor to act for both the mortgage borrower and the lender in a house purchase transaction? The answer is yes, if a proposal to be put to this year’s Law Society of Scotland AGM passes on to the rule book.

Solicitors will have received with their papers for the now imminent meeting (Friday 22 March, at 10 am in Edinburgh’s George Hotel) the report of the Separate Representation Working Party. This body was appointed to examine the issue following a debate at the 2011 AGM, as the movement for reform was beginning to gather strength. Until then, most high street solicitors would not readily have countenanced a move that it is usually assumed will mean additional cost, delay and uncertainty in the average transaction. What has changed?

The working party’s report lists the principal drivers. First, there are lenders’ hardening attitudes to breaches of the Council of Mortgage Lenders Handbook, as increasing instances of negative equity on a forced sale lead them to look for ways of recovering losses from available targets – in effect, the professional indemnity Master Policy. “This has brought into focus the divergent interests of lender and borrower and the risk of a conflict of interest arising when the same solicitor acts for both,” the paper comments.

Then there are the restrictions increasingly being applied by lenders to their conveyancing panels, making separate representation (“sep rep” is the catchy shorthand now in use) more common in any event. And further, as part of the general drive to combat mortgage fraud – which is also pushing lenders towards panel controls – the Society has come under pressure from Government to play its part, and having two firms in each transaction might well prove beneficial.

Sep rep in practice

It can be overlooked that the rule that permits joint representation at present – stated as an exception to the general conflict of interest rule – is intended to be “execution only”: it requires that “the terms of the loan have been agreed between the parties before the regulated person [solicitor] has been instructed to act for the lender and the granting of the security is only to give effect to such agreement”. That was fairly straightforward when the conflict of interest rule was passed in 1986, but as Ross MacKay, convener of the working party, comments, “it was a much simpler world then, and securities and loan agreements were much simpler”. Especially since the banking crisis, the world has moved on.

Consumers would be surprised, he adds, to hear that strictly speaking a solicitor can’t give advice on the security at all at present. It would be in the public interest for them to have independent advice with no risk of conflict of interest.

The report accepts the risk of cost and delay. The best available yardstick of cost at present is the practice of HSBC bank, which drastically cut its panel early last year and now charges an additional £150 or so (plus VAT) to borrowers who prefer to instruct their own solicitor. However MacKay argues that lenders should benefit from “major cost savings” in relation to panel management if they have much smaller panels, and hopes that these would be passed on.

As for practical aspects, he suggests that the HSBC experience has been “salutary”. Their solicitors make a thorough examination of title, and ask for things that the purchaser’s solicitor may have taken a view on. But if sep rep became general practice, other lenders would evolve their own standardised procedures, and borrowers’ agents would know what to expect.

Dissenting voice

The seven-strong working party (which included non-solicitor representation) was not quite unanimous. Inverurie based solicitor and Council member Graham Matthews found himself in a minority of one in arguing that the system isn’t broken, and the push for change is premature.
In particular, Matthews contends, it isn’t very logical to base the change on lenders bringing claims out of transactions dating back some years – what’s done can’t be changed.

“But my real fear,” he adds, “is we don’t know what we are going to get. It may be something we never intended. The property market is such a huge part not of only our profession, but also of Scottish business, that we mess with it at our peril. And there’s every possibility for example that if we do this, the CML might just impose the English sep rep handbook on us. It’s basically what HSBC tried to impose on us a year ago, and the Society said we can’t work with that set of instructions. Now we might have a situation where you’re told, that’s all you’ve got.”

From the client’s point of view also, Matthews fears there will be serious difficulties. “It’s all very well to say, it won’t make that much difference to the market, we don’t conclude missives anyway until we have the loan instructions. Well, nobody in future will conclude missives until lenders’ solicitors have okayed the title deeds. That’s all right when people aren’t too busy. But what happens when the market picks up? We’re seeing this in Aberdeen already. I have personally bounced two transactions in the past year because we got tired of waiting for the purchaser to get their loan instructions. We just sold to somebody else.

“That way lies absolute chaos. We’ve always prided ourselves in our system that if you had a deal, by and large you knew fairly quickly that the deal would go through. You plan your move, your schools. Currently we’re saying we can’t confirm anything until your loan instructions come through. All of a sudden we’ll be saying to folk we can’t confirm anything until (a) you get your loan instructions, (b) your lender’s solicitor has had time to look at the title. This is like turkeys voting for Christmas but not knowing when Christmas is.”

The CML Handbook, he observes, is nothing new. “Where your problems have been is your buy-to-let mortgages, and people not reporting back-to-back transactions, incentives, deposits being paid, third parties providing deposits. None of those things are difficult to report. I accept the lenders have been pretty awful at not responding when people have reported these things. I have every sympathy with the profession saying the lenders have brought this on themselves. But my worry is that we don’t know what the alternative is. You don’t jump off a cliff without knowing how far you are going to fall.”

Matthews wants to see what the lenders would insist on by way of procedures before the profession makes that leap. “If we had had fruitful discussions with the lenders where they had said, this is what we will do, that’s fine. My concern is we haven’t had those discussions; we’re rushing into sep rep without any knowledge whatsoever of what it’s going to look like. I understand the lenders are saying, for example, that they will send the loan cheque to the seller’s agents. Not so long ago we didn’t like that. So do we like that now? Sep rep I think could be made to work. But I’d rather have the model before we vote for it.”

Lender resistance

Lenders have yet to be convinced of the need for change. “We believe there are obvious benefits to both borrower and lender from joint representation continuing,” CML’s Scottish spokesman Kennedy Foster says. “Particularly around time efficiencies and also cost savings as well.”
In response to the conflict of interest point, Foster argues that borrower and lender have a common interest in achieving a good and marketable title to the property, and the proportion of mortgages that end in repossession and sale is extremely small (about 0.3% on figures recently released for 2012). He accepts there are increasing concerns about fraud, but “remains to be entirely convinced” of the argument that enforcing sep rep will reduce fraud, “because if people choose not to disclose things…”.

Nor does he accept that the lenders have brought sep rep on themselves. “The situation hasn’t changed since 1999 when we introduced the handbook. I know there’s a concern among solicitors at the moment around the level of claims against the Master Policy. A lot of it is around back-to-back transactions where a sale takes place very soon after another, and also around the non-mortgage element of the purchase price. These are the two main areas, and these are things that solicitors are required to disclose.”

Foster believes the Society has “missed a trick” in not devising an accreditation scheme equivalent to the Conveyancing Quality Scheme in England & Wales. “It would pull up standards on the solicitor side and reduce the risk of claims. The proof of the pudding with the CQS will be in years to come, but certainly there is a great deal of store being placed on it south of the border.

“The other thing from my members’ perspective is that 90% of the business they undertake in the mortgage arena is south of the border, and they see a contrasting position from the Law Society of England & Wales who have come out publicly and said they want joint representation to happen in as many transactions as possible [see below]. My members find it hard to see why there should be this difference.”

Foster concedes there might be cost savings to lenders, though has not discussed the point with them. Nor can he put a figure on likely costs to borrowers, beyond pointing to current HSBC charges.

Information conflict

The AGM debate that led to the working party was instigated by Glasgow solicitor Ian Ferguson on behalf of the Scottish Law Agents Society. SLAS members, he maintains, are now solidly behind a rule change.

Ferguson is also involved in the recently formed Glasgow Conveyancers Forum, which held a debate last month on whether to enforce sep rep. A show of hands, from the nearly 80 solicitors and paralegals present, saw about three to one in favour.

To Ferguson, the argument that the present rule produces little real conflict of interest “fails to take account of the fact that CML requirements kept getting heaped on, and you as a lawyer have got to cut across client confidentiality to tell the lender of anything that might influence their decision to lend. When you get into that kind of territory there is immediately room for conflict of interest”.

An example being batted back and forwards is that of the intending borrower who is made redundant shortly before settlement, but has independent means, supportive parents and good employment prospects. Foster maintains that the lender’s loan agreement would contain an obligation to disclose a material change of circumstances between the loan being approved and it being drawn down; and would it not be potentially committing a fraud against the lender to fail to disclose in this case? Ferguson however suggests that the borrower might well not be bound to disclose, and the solicitor only comes under the obligation because of the CML Handbook.

“There’s a big issue on client confidentiality here,” he says. “There are only disclosures required if you owe the lender any duty, and at the moment the reason you owe a duty to the lender is under CML. If there was a lender’s lawyer and I’m only acting for the borrower, it’s up to the lender’s lawyer to ask me questions. If they ask me about things that are not in the loan agreement, I am within my rights to say you’re not entitled to that information. I accept that in fact it might be in the person’s best interests to tell the lender in certain situations, but I deliberately chose an example where that might not be the case.

“Don’t forget the borrower could be sued for breach of contract because they haven’t concluded their purchase. If they are saying I’m prepared to go ahead with the loan, and if it doesn’t work I’ll sell again but at least I won’t be sued for breach of contract and make my position even worse, that’s up to the client.

“Under CML you have to tell the lender of anything that might affect the decision to lend. That means that with every single piece of information you get from the client, you must think, he has just volunteered that information, and I might have to disclose that to the other side. That’s conflict of interest: you’re right in the middle of it. And it’s then very difficult to weigh up the interests; you have to disclose, and if the client says don’t disclose, you have to stop acting. It’s a mess.”

Adapting to change

He accuses lenders of using any excuse to bring a claim against solicitors under the handbook, even if they have “made a huge mistake” in lending. “It’s very easy to say in hindsight, ‘We wouldn’t have lent if we had known this information.’ Lenders get an unequal right to claim for contractual breaches which isn’t available to the individual clients, and they are abusing the Master Policy and that in effect is increasing the costs of our insurance and the cost to the consumer.”

Ferguson appreciates Graham Matthews’ fears of delay to transactions, but responds: “Nobody at the moment is able to conclude a contract, because they’re waiting for loan instructions, and what he’s describing isn’t far away from where we are now. Waiting for the lender to get their bit done won’t add very much more, and also there will be a very much shorter list of lawyers acting for lenders so you’ll get into a way of dealing with them, you’ll know what they are likely to be asking, so you can anticipate what they are going to raise as observations and you adjust to the market position. You can get a working relationship with them.

“I think the difficulties are overblown. I’m not trying to say there won’t be any, but like everything it will bed down as people get familiar with it.”

Outside the box

Whether the CML likes it or not, a rule change may well be on the cards. But, says MacKay, that needn’t be the end of the story. “There would be an opportunity to look at our whole practice and perhaps do something different. We would start just by kicking ideas around. Should an offer be conditional on loan funding? Should people buy an option to purchase for two months? We have to accept that Anglicisation is here. Various factors are impacting on that. We need to review Scottish practice for the 21st century.”

But while the others interviewed respond to the idea with reasonable enthusiasm, you would have to think that any such outcome would be a good deal further down the track.


Don’t favour the competition: LSEW

Why has the Law Society of England & Wales set its face against sep rep, even if our Society might be moving in favour? The reasons reflect the differences in the respective legal services markets and their regulation.

LSEW, of course, is no longer itself a regulator, that function now being performed (for solicitors) by the Solicitors Regulation Authority, itself only one of a number of regulators under the Legal Services Act 2007. With a greater diversity of conveyancing businesses south of the border, LSEW’s concern is that if the SRA were to enforce sep rep, it would not apply to non-solicitors, or professionals regulated by another body. So, as LSEW chief executive Des Hudson has said, “lenders not wishing to go down the separate representation route – and our view is that there are likely to be many of these – would turn to other sectors to do their conveyancing. Does the profession really want to hand residential conveyancing work on a plate to their competitors?”

Even if licensed conveyancers and their regulator followed suit, there would still be a threat from others who were regulated by neither body. “This is the reality of the Legal Services Act”, Hudson says. “It has created competition and we, the Society, are looking at how to meet that challenge, not make it harder for our members” – even if, pre-legal services reform, sep rep “looked like the most appealing option”.

LSEW also believes the additional cost and delay from sep rep “would be a detriment to the consumer, which was a powerful argument in the Society’s recent discussions with HSBC”.


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A third way?

Is there any room for a third alternative? Right at the end, the working party’s paper identifies an option, explored with CML, involving the introduction of a standardised form of certificate of title along similar lines to one published by the SRA for England & Wales, coupled with an extensive revisal of the existing CML Handbook for Scotland. Dual representation would be permitted only on the basis that both were adopted.

Such an idea was emerging when the Journal covered this topic a year ago (February 2012, 11), and Ian Ferguson was attracted to it then. Has his position changed?

“I’m not sure now”, he admits. “I did think that was a way of doing it, but I have some doubts that the lenders will accept it in any way. I’m not ruling it out altogether, but the root of the problem is that trying to wear two hats is difficult. If a certificate of title could be accepted, and if you could ensure that every lender will accept it, then it will work. But as CML itself demonstrates, its handbook is really describing a broken system, where they try to agree common standards but the reality is that every single lender has huge amounts of changes that they want, so to try to impose that certificate of title on them, I don’t think will work because of the nature of lenders. I think it has to be either you have sep rep or you don’t.”

Graham Matthews believes it would be the way forward – “if the CML would play ball and stop relying on us quite so much”. Ross MacKay states: “I don’t myself think it is feasible, but it’s worth exploring.” It could be viable, he adds, if the CML is willing to revise its handbook, “which at the moment is an English document with a kilt and is full of inconsistencies and lack of specification” – but the CML is only an umbrella body and cannot bind its members.

“CML matters can take a long time and we don’t want to put off a decision on a rule change to see if agreement can be reached.”

For his part, Kennedy Foster says the CML is “not ruling out” such a way forward, but when asked about the prospects for a revision of the handbook, responds: “What the Society needs to understand is that it is unlikely that lenders would want anything taken out of the handbook which would in any way prejudice the lender’s position. A handbook has been introduced in England & Wales for sep rep; it’s not fundamentally different from the handbook we know at present.”

He also questions the apparent haste with which the Society is moving, with the prospect of a rule change coming before this September’s SGM. “That seems very quick, and we’re in the middle of the mortgage market review at the moment where there are new rules that will be brought in by the FSA in April next year. They will involve changes to lenders’ systems, certain of their processes, so it’s a big concern to lenders having to cope with that as well.”

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