On Friday 22 March 2013 the Law Society of Scotland's ("LSS") AGM will discuss the report of the working party on 'separate representation' and will vote on a motion to remove the exemption to the conflict of interest practice rule for Scottish solicitors which currently allows them to act for both a borrower and a mortgage lender in the same mortgage security transaction ('joint representation').
From anecdotal evidence from both the Glasgow Conveyancers' Forum and the Edinburgh equivalent, it is almost a racing certainty that the motion will be passed. Although it will require a further vote later in the year on the actual amendment to the practice rule, the prevailing mood seems to favour a position where mortgage lenders will require to instruct their own solicitor to perfect their mortgage security, rather than relying on the current practice of joint representation.
CML Scotland have expressed a clear view that its members are strongly opposed to the concept of separate representation, other than in exceptional cases (for example, high value loans). Although the Council of Mortgage Lenders has recently introduced a new Lenders' Handbook to provide for separate representation in England and Wales, that was intended to address the exceptional cases within that jurisdiction. There are no current plans to introduce the equivalent in Scotland, though Friday's vote may precipitate that. The Law Society in England and Wales is also reportedly in favour of retaining joint representation. So why is the pressure for change in Scotland?
One of the main arguments for separate representation seems to be as a reaction to mortgage lenders' claims for 'negligence' against solicitors, or at least for some redress from a failure to follow their instructions. In a poor housing market, with house prices under-performing and lenders facing losses on the back of negative equity, the temptation is to look for recourse against the valuers and the solicitors involved in the process. On the legal front, a failure by the solicitor to follow the strict letter of the CML Lenders' Handbook is being met with censure by the relevant Law Society, fines and restrictions being placed on practising certificates. In England and Wales the reaction in similar circumstances has been for their Law Society to introduce the Conveyancing Quality Scheme (CQS), membership of which in their words "establishes a level of credibility for member firms with stakeholders (regulators, lenders, insurers and consumers)". This appears to be working, with all CQS firms being added wholesale to the HSBC conveyancing panel, which had previously been slashed.
There is no equivalent of the CQS in Scotland. The reaction up here appears now to be that rules of the game are too difficult (or are now being more rigourously applied), and we don't want to play any more. The feeling seems to be that if lenders are not happy with the standard of our work, then they can instruct their own solicitor. Well the consequences of amending the current practice rule will be exactly that: lenders will have no option other than to appoint a separate solicitor, presumably from a small select panel of firms (which will be easier for them to manage). The borrower will end up paying for this, either directly by the lender charging a fee, or indirectly where the cost is wrapped up in a product admin fee. There will undoubtedly be delays, with the lender's solicitor having no direct interest in the speed of completion.
Perversely there appears to be a sense that the solicitor acting in a house purchase for a purchasing client will have less work to do, as they will no longer be acting for their client's mortgage lender and no longer have to meet the letter of the CML Lenders' Handbook. The reality will almost certainly be that they will have the same if not more work, assuming their client is getting a mortgage to assist in the purchase. It would be foolish if the solicitor did not pay heed to the likely requirements of his client's mortgage lender when examining title, checking alterations paperwork, in checking the source of the deposit, dealing with any "incentives" and acting in a "back to back" transaction. The solicitor will almost certainly have to respond to the enquiries of the lenders' solicitor as to these and many other matters. The only thing that separate representation would appear to achieve in this context is relieving the purchaser's solicitor of liability to the lender for failing to meet the lender's requirements.
This may well be the tipping point that persuades mortgage lenders into the hands of title insurers. While the solicitor acting for the mortgage lender on a separate representation basis will no doubt be happy to do the mechanical bit of putting the Standard Security (legal charge) in place, their willingness and ability to complete anything like a CML Lenders' Handbook check of the title and ancillary matters will be limited.