Joint or Separate Representation of borrowers and lenders?

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1 Joint or Separate Representation of borrowers and lenders? Submission by the Council of Mortgage Lenders to the Law Society of Northern Ireland consultation Introduction 1. The Council of Mortgage Lenders (CML) is the representative trade association for mortgage lenders. Our 121 members comprise banks, building societies, insurance companies and other specialist mortgage lenders who, together, lend around 95% of the residential mortgages in the UK. 2. The CML welcomes the opportunity to respond to the consultation by the Law Society of Northern Ireland (LSNI) on separate representation of borrowers and lenders in conveyancing. Executive summary 3. We believe the information paper, though clearly seeking to address all of the relevant factors for and against separate representation, which we welcome, makes a number of assertions regarding lenders panels and the various pros and cons of joint and separate representation which we feel need further explanation as we set out in more detail below. 4. The main reasons for reviewing the continuation of joint representation are put down to changing requirements of lenders and increasing negligence claims against solicitors by lenders. We do not believe that either lenders requirements or the expected level of compliance have changed markedly since the CML Lenders Handbook was introduced in What has increasingly come to light is an awareness by lenders of a level of non-compliance by some members of the profession, through the investigation of losses made by lenders. 5. We therefore expect that in light of this that the LSNI will 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, and we therefore welcome the intent to review the Home Charter Scheme. 6. The majority of the CML members have expressed a clear wish for joint representation to continue to be the norm in residential conveyancing transactions. There are obvious benefits to lender and borrower in sharing representation in a residential conveyancing transaction, particularly around efficiencies in time and cost and these have been rightly highlighted by LSNI in the first three bullets of the pros of the joint representation section of the information paper. We believe that in residential conveyancing transactions the interests of borrower and lender are almost always closely aligned in that both parties want the same result a swift conclusion to the transaction with the outcome being to obtain a good and marketable title. We do not see the need for mandatory separate representation, and we do not believe that this was the intention of the lending industry in its reviewing of conveyancing panels, which the information paper suggests has been a driver for the review of joint representation. 7. As the information paper notes, the Law Society of England and Wales have considered the issue of separate representation of borrower and lender and have made clear that they want to see the same solicitor acting for borrower and lender in most domestic transactions. We are also concerned that the borrower will be faced with additional legal costs as the result of a move to separate representation, likely to be in the hundreds of pounds. 8. We do see the value of separate representation, but only where particular risk factors are identified in individual transactions and in cases where the borrower and lender client s choice of solicitor differs. address North West Wing Bush House Aldwych London WC2B 4PJ telephone fax website

2 9. If, notwithstanding our concerns, the LSNI Council vote in favour of a change to the Solicitors Practice Regulations we would urge the LSNI to take on board the views of the CML and its members regarding a reasonable implementation of any changes. An implementation timetable which is too short, would have the potential to impact adversely on the housing and mortgage markets in Northern Ireland and also consequently on many member firms of the LSNI. Changing requirements of lenders 10. In the information paper, LSNI refer to major changes in requirements of lenders of firms who act for them, particularly with regard to enforcing the CML Handbook requirements and in relation to firms admission and retention on a lender s panel of conveyancers. The CML Lenders Handbook 11. As the information paper notes, the CML Handbook has existed in Northern Ireland since 2004 and in the 10 years in which it has existed it has not changed substantially, but in the current economic environment, lenders have been enforcing the terms of the Handbook, where they have suffered losses and believe that it is either attributable or partly attributable to the solicitor who acted for them in taking their security. 12. We do not believe that there has been a change in attitude of lenders in terms of compliance with the requirements in the Handbook. The fact that lenders have suffered losses has led them to investigate potential causes of those losses and this in turn has shown in that many instances, there has been a disregard for compliance with the Handbook by solicitors acting for lenders. This will have undoubtedly resulted in increased negligence claims against solicitors and consequently claims against the LSNI Master Policy. These have not, in the main been because of identified conflict of interest issues, but rather failures on the part of solicitors to disclose matters which they have been instructed to report on. This is simply a matter of a minority of solicitors who have not followed instructions properly and performed at a reasonable level of skill and competence. 13. No evidence such as the success or otherwise of claims against the LSNI Master Policy has been produced. In the absence of this, it is hard not to conclude that the proposed move to separate representation is not about conflicts of interest but rather about reducing claims against the Master Policy. 14. We believe that there are alternative ways other than introducing compulsory separate representation of reducing claims by lenders under the LSNI Master Policy and these would impose less cost on the consumer. For example, the review of Home Charter Scheme with a view to improving standards in this area amongst solicitors in Northern Ireland, increasing awareness of the CML handbook requirements and the learning of lessons from claims under the LSNI Master Policy. Lenders Panels 15. The information paper makes much of the changes made by lenders to their panels, and the requirements to be on these panels. It is important to put the changes in context. 16. As we note above, in recent years, lenders have faced considerable financial loss as a result of fraud. Some of this has arisen from significant fraud, professional negligence and poor professional practice on the part of certain legal firms. This in turn led the Financial Services Authority (at the time) and now the Financial Conduct Authority requiring lenders to exercise much greater control over the third parties, including solicitors, with whom they do business. As a consequence, lenders have been reviewing those firms with whom they are prepared to do business and to include on their conveyancing panels. Some have removed particular solicitors firms from their panels. Where solicitor negligence or fraud does occur, lenders often face difficulties in recovering losses under existing compensation arrangements for the profession s clients. A combination of greater control requirements and experience in recovering losses means lenders no longer feel able to rely on the fact that a solicitor is authorised to practise by their regulator as sufficient assurance of probity and competence.

3 17. As mentioned in the previous paragraph, the Financial Conduct Authority (FCA), has made it clear that it expects lenders to be more active in mitigating the risks arising from conveyancing panel arrangements to help prevent financial crime. This means that the very light touch panel management arrangements referred to in the information paper have had to be reviewed and are very unlikely to return. The days of open panels where applications by firms to join leading to virtually automatic acceptance, without detailed checks of the firm, are gone. 18. Instead, there is an increased focus by lenders on actively managing those who are admitted to their panels. This requires lenders to have access to information about law firms which is accurate, regularly updated, and verified by other sources where possible. Many lenders already require law firms to provide them with a host of information about their firm and the firm s employees in order to make an assessment as to whether they can act for the lender. 19. This has led to the Lender Exchange initiative, which is mentioned in the information paper. This is an online platform which allows law firms to provide the information and updates required by individual lenders either to continue to meet the terms of panel membership with that lender, or, in the case of a firm which is not a participating lenders panel, to apply to be on that panel. The information is provided to the particular lenders using the service, in order for the lender to make their own independent decision regarding whether a law firm can remain or come onto their panel. It is not in any way mandatory for lenders to use Lender Exchange. But it can help legal firms meet information requests without having to supply identical data to multiple lenders. 20. The lenders using Lender Exchange, as with every other lender, will remain in control of their own panel criteria. They will continue to keep these criteria confidential, based on their own assessment of risk and other considerations. While we recognise the concerns of the profession with regard to panel entry and retention criteria, we are firmly of the view that it is the prerogative of each lender, regardless of how they manage their panels and with what tools, to decide on their own entry and retention criteria. We believe the majority of our members are conscious of the need to take into consideration particular geographical or regional factors as highlighted in the information paper, and flex criteria such as firm size and required volumes accordingly. Many lenders also have appeals processes in place to allow firms who feel they have been unfairly excluded from panels to appeal such decisions. Conflicts of interest 21. While the information paper contemplates a change to the Regulations around conflict of interest to require the separate representation of borrower and lender, it also acknowledges that there is no history of significant numbers of claims resulting from conflict of interest in Northern Ireland. The chief concern appears to be the unprecedented number of claims to the Master Policy from lenders. In this way, the concerns of the LSNI mirror those of the Law Society of Scotland, who considered a very similar proposal with their members last year. As we stated in our response to the consultation of the Law Society of Scotland, we do not believe that it is conflicts of interest which are resulting in increasing negligence claims against solicitors, but rather the failure of the solicitor to report matters which they have been instructed to report on. 22. The introduction of separate representation will not reduce the requirements on the solicitor acting for the borrower to disclose matters which they are required currently to do directly to the lender. They will in future have to do so to the solicitor acting for the lender. For example, we anticipate that the lender s solicitor will have a list of enquiries which are presented to the buyer/borrower s solicitor to answer, such as seeking confirmation that the deposit has been paid to the solicitor by the borrower from their own funds. If the borrower s solicitor refuses to answer that question, then the lender will have to decide whether to proceed, and in reality may be unlikely to do so. The borrower will not therefore, be in a better position, in our view. Advantages of separate representation 23. While accepting that conflicts of interest can arise from time to time both the current LSNI regulations and the CML Handbook provide that separate representation should apply in transactions

4 where this arises. We consider that the instances of actual conflicts of interest leading to a solicitor having to ease to act for the clients is extremely rare. Indeed, as a proportion of the transactions dealt with by solicitors in Northern Ireland since the Solicitor s Practice Regulations 1987 came into force we could expect the number to be less than 1%. It is, therefore, our view that it is extremely questionable whether a move to compulsory separate representation in all transactions is a proportionate response to the issues highlighted in the information paper. In the vast majority of mortgage transactions no issues arise. The LSNI should in our view be working with lenders to examine those transactions where issues have arisen, understanding the reasons for this and bringing forward improved standards which will prevent these issues happening in the future. 24. The assumptions about the reduction in panel management costs for lenders and panel compliance costs for solicitors are extremely simplistic in our view. Lenders will still need to have panels of solicitors act for them and the size of an individual lender s panel is likely to depend upon a number of factors including business volumes and service standards but whether small or large there will still be management costs in managing the Panel. In addition process costs are likely to be greater given the complexities of separate representation and there will also be the one off costs of the move to separate representation. It is also extremely difficult to know how this area will develop going forward if separate representation is introduced. 25. It may be the case that in separate representation there is a clear set of duties to the borrower client but we disagree that there will be less duplication of work. Different lenders are likely to have different separate representation requirements which borrowers solicitors will need to meet. Also, as we refer to above, there will not necessarily be a reduction in the requirements of the borrower s solicitor to disclose various matters that they would have previously done directly to the lender, now to the lender s solicitor. 26. Further, unless there is evidence that the existence of joint representation is the leading cause of claims on the compensation fund, we would disagree that an advantage of separate representation is to mitigate the risk of claims on the Master Policy and compensation fund. Disadvantages of separate representation 27. The information paper highlights the potential for there to be an increase in purchaser/borrower costs as a result of the involvement of another firm of solicitors. It suggests that these are the costs of the lender in satisfying themselves as to their own lending risk in terms of duplicated work. Clearly if lenders did not lend these are costs which they would not incur and in our view they are perfectly entitled to pass them on to borrowers. The paper is silent on whether the borrower can expect to see reduced costs from their own solicitor given that they will no longer be acting for the lender. 28. The LSNI suggest that it is possible that having a separate solicitor acting for the lender could lead to delay. The paper also suggests that lenders solicitors may use less experienced staff who may be unable or unwilling to exercise professional judgment, but such a risk is not highlighted for either the borrower s or the vendor s solicitors. There is no evidence that we are aware of to justify this statement. However, any matters relating to competency must surely be of particular interest of LSNI as the regulator, and need to be addressed by the regulator. 29. Ultimately, it is our view that separate representation will lead to considerable and unnecessary duplication of work and communications which will inevitably lengthen the transaction no matter how quickly the separate solicitors act. Rule changes 30. If approved by LSNI Council, we would favour any regulation changes being kept as straightforward as possible so that in any transaction relating to the mortgage a separate solicitor would look after the interest of the lender, although this will clearly be detrimental to consumers who will face additional costs. This would include events during the life of the mortgage such as transfers of title on for example divorce, and the eventual discharge of the lender s charge. but will only do so.

5 Timetable for implementation 31. We note that there are no firm plans for a timetable of implementation should the LSNI council choose to amend the regulations to require mandatory separate representation of borrower and lender. The move to separate representation represents a major project for our members and will certainly involve them in considerable one-off costs. 32. Our members have already advised us previously that a move to separate representation will involve the following: A review of advertising literature it is likely that existing literature will advise customers that lenders will instruct their solicitor, provided they are on the lender s panel. Scripts which are used in the sales process through differing distribution channels, Branch, Intermediary, telephone and internet will require to be amended. In many lenders these scripts are automated so that for compliance reasons the necessary level of information is captured. As a consequence IT development time will be required to undertake this work. A Key Features Illustration has to be provided with mortgage product enquiries. This will require to be amended. As these illustrations are system generated this will require IT development. Mortgage offers which are in the main system generated will require amendment. System generated letters to customers will also require amendment. System workflow will require to be developed to ensure that all mortgage applications relating to Northern Ireland go down the route of separate representation. A procurement exercise being gone through to appoint solicitors to their panel to act for them in Northern Ireland. Exercises of this type necessarily take time as invitations to tenders are issued, tenders are received and contracts are negotiated. The scope and extent of the work to be undertaken by the solicitor acting for the lender will also have to be agreed. In addition it will be necessary for lenders to ensure that as all transactions are going down this route that their appointed solicitors are able to cope with the likely volumes of business being received by them. Application forms would need updating (some are paper and others are online and so involve systems changes). A number of lenders rely heavily on mortgage intermediaries and a full explanation of the changes in process and policy would need to be conveyed to those intermediaries. 33. We would also have thought that solicitors acting for borrowers would have to prepare for separate representation. They will need to understand the requirements of solicitors acting for lenders the information which they will require, the checks which they will be undertaking and the dividing lines in respect of areas of responsibility. We do not believe that the process has been defined and as matters presently stand is likely to result in lenders having differing requirements. 34. The introduction of compulsory separate representation may lead to a major change in practice by lenders in purchase transactions regarding to whom they release loan monies. Lenders may choose to release the loan monies to the solicitor acting for them who will then be directed to forward them to solicitor acting for the seller thus bypassing the solicitor acting for the borrower. This would be consistent with the practice which lenders have adopted under Part 3 of the Handbook for the limited number of separate representation transactions taking place in England and Wales where joint representation very much remains the norm. This will be a matter for individual lenders to decide upon. 35. The information paper is silent on what transitional arrangements, if any will apply in the event of compulsory separate representation being introduced. If it is introduced on a specific date lenders will have a pipe line of mortgage offers where they will already have instructed the solicitor acting for the borrower to act for them. These offers are normally available for acceptance for a period of up to six months. If there are no transition arrangements these mortgage offers will have to be withdrawn both from the borrower and the solicitor acting for the borrower and this may occur after conclusion of missives. Lenders will then have to prepare fresh mortgage offers and instruct their own solicitors. This will be disruptive for all the parties involved.

6 36. The feedback we had from the majority of our members at the time of the contemplated changes in Scotland, is that they would need at least twelve months to implement changes to deal with compulsory separate representation although some have indicated they may need a longer period. Further contact 37. This response has been prepared by the CML in conjunction with its members. Any comments or enquiries should, in the first place, be directed to [email protected], DDI