Solicitors no longer feel happy with the current rules which allow them to represent both lender and home-buyer, says Ross MacKay
Scotland’s property market has experienced something of a rollercoaster ride in recent years and is only now showing tentative signs of improvement.
The downturn has brought changes not only for house-buyers looking for a new home in a much reduced marketplace, but for their solicitors and, of course, banks and building societies which have dramatically restricted their lending criteria and altered their mortgage lending practices.
In particular, we live in a different world from the time in when it was accepted without concern that lenders and home-buyers could share a solicitor, an exception to normal rules which remain in place to avoid any conflict of interest between solicitors and their clients.
Acting for both borrower and lender was expressly permitted in 1986 by the creation of an exception to the Law Society’s conflict of interest rules for conveyancing transactions.
It has long been accepted that a degree of conflict in transactions of this type exists, but the risk was regarded to be within acceptable levels as, historically, it was perceived that the parties’ interests were more aligned than opposed, so the risk of conflict was minimised.
Moreover, solicitors were instructed on behalf of lenders on an “execution only” basis, meaning that the solicitor was not providing any specific legal advice to the lender.
However, this is often no longer the case as transactions become increasingly complex.Many solicitors wish the current exception to be abolished for several reasons, principally, in recognition of the new commercial reality that the interests of the lender and the purchaser are not as aligned as they were in years gone by.
Clients should receive the best independent advice
The fundamental position has to be that all clients receive the best independent advice from their lawyer and such advice is not tainted by the concerns of another client to the transaction.
Such a wide-ranging obligation creates pitfalls for a solicitor and his or her clients. For example, should the solicitor be aware of something told to them in confidence by their purchaser which could be of interest to the lender, they are obliged to disclose this to the lender, or cease to act for one party, or both.
By doing either of these, the solicitor could jeopardise the whole transaction. By doing neither, solicitors could find themselves on the receiving end of a complaint or a claim.
In these circumstances, many solicitors feel that they cannot do right by either client and also uphold the high standards expressed by the profession and demanded by the public.
A recent study carried out by Ipsos MORI, on behalf of the Law Society of Scotland in 2011, shows that solicitors are very much trusted by the public, and the public deserves to demand their trust.
Conflict of interest
The society is consulting on the technical rule change that would bring about what is termed separate representation.
This is soon due to close (21 July). We are keen for all those with an interest in the issue – solicitors, lenders, consumer groups and others – to contribute, to ensure a wide range of views are gathered before solicitors vote on the rule change in the autumn.
The consultation sets out detailed proposals for amending the society’s practice rules on conflict of interest.
Once the responses have been analysed, redrafted conflict of interest rules will be drawn up and put to the Law Society’s special general meeting in September.
Solicitors will vote on the amended rules, which will also be subject to approval by the lord president before they could come into effect.
The rule change, we believe, would also bring benefits for lenders. By having another solicitor involved, separate representation will mean better detection and prevention of mortgage fraud, which has been on the rise throughout the UK and costs lenders more than £1 billion a year.
Supporters of separate representation acknowledge that along with the pros, there are cons which may include the possibility of increased costs for buyers and additional paperwork for solicitors.
However, we would hope that these would be minimal as efforts are made to streamline the processes involved.
The current consultation, launched last month, follows a vote at the Law Society’s AGM in March at which solicitors voted to say they felt they could no longer continue to represent both a purchaser and a lender in a transaction.
• Ross MacKay is convener of the Law Society of Scotland’s property law committee. To respond to the consultation on separate representation, go to www.lawscot.org.uk