Regulation is not meant for today’s world

IT IS no more than common sense that the same adviser cannot advise both parties to a business transaction.

Common sense applies in ditching the rule that lets solicitors act for borrower and lender, says Michael Sheridan. Picture: Complimentary
Common sense applies in ditching the rule that lets solicitors act for borrower and lender, says Michael Sheridan. Picture: Complimentary

Many years ago, however, the legal profession looked at the special circumstances of clients borrowing from building societies to purchase their homes. In those days, the client was usually a member of the building society, the society was a non-profit-making institution, there was only one rate of interest available and it was difficult to see any potential conflict of interest between borrower and the lending society. The rule, therefore, emerged that the same solicitor could act for both the borrower and the lender at the same time even although, technically, they were on opposite sides of the same loan transaction.

I remember clearly when things started to change. It was when a retired lady client came to see me about getting a building society loan to build a conservatory at her home. At that time, I had confidence in a particular building society to whom I regularly sent clients with this sort of enquiry. On this occasion, the society had newly reformed itself as a bank. We were reassured that this was a change in name only. I realised the weakness of that claim when my client returned to my office, ashen-faced and shocked. She had not got as far as discussing a mortgage with the nascent bank but had been made to feel obliged to take out an insurance policy that she did not want and which she now wished to cancel.

Sign up to our Opinion newsletter

The borrowing member of the building society became the raw material of the shareholder owned, target driven, profit-seeking bank. Moreover, instead of one, fixed rate of interest for mortgage business, there were, at one point, about 5,000 different mortgage deals in the market. There was now a clear potential for the smarter borrowers, homo economicus, by switching mortgages, to profit from the mortgage inertia of other borrowers, but with the lender, like the casino banker in the middle, always winning out, or so they thought. The interests of the borrower and lender were now separated by that very profit incentive which, by some accounts, led to the toxic lending that brought the lending banks to destruction.

In this brave new world, the idea that the lender should accept the services of the borrower’s solicitor came to be overtaken and the lending banks were the first to depart from it. Major lenders frequently decline to engage purchasers’ solicitors in preference for appointees from their own panels.

It is likely, therefore, that the legal profession, at a special general meeting next Monday, will vote formally to abandon the previous relaxation and will no longer ask solicitors to act on both sides.

The danger of doing so is seen in the 250 per cent increase over the past five years in the percentage of mortgage business claims against the legal profession made by mortgage lenders – an increase which coincidentally reflects the losses suffered by the same lenders in the adverse housing market.

One person who may be seen as likely to suffer from these developments is the borrower who now stands to have to pay for two lawyers instead of one. That, however, is perhaps less of a danger than some may assert. The borrower’s own solicitor, with only one client to represent, has less work to do and should reasonably be able to reduce costs, leaving spare funding for the costs of the lender’s solicitor – for which costs the borrower is usually responsible. Both solicitors use the same external searches and reports so there are no extra costs there.

The lender’s solicitor is likely to charge a relatively modest fee. If he does anything else, the scandal will be exposed and blown away, as well it should. That particular provision might have been defensible in the days of the altruistic, non-profit making building society movement but seems to be entirely out of joint with the modern era of profit-seeking, shareholder owned, commercial-style lending.

Additional costs to the borrower are likely to be minimal, if any, and well worth the prize of receiving truly independent legal advice. The end result should be separate representation for separate parties and each party paying their own costs – common sense.

• Michael Sheridan is secretary of the Scottish Law Agents Society,