There is no doubt that advisers will want to know that their reputation is in good hands and that their clients’ property sale and/or purchase is progressed efficiently, safely and with a level of customer service that they are proud to refer.
As we all know, success in this respect depends on the solicitors who are recommended to undertake the conveyancing work.
So, what are the changes in the conveyancing market and how could they significantly impede the advisors requirements for good client service?
To fully appreciate the dangers these changes bring, it is essential for advisers to understand the background to the problem.
Even before the onset of the banking crisis, lenders were in fierce competition for market share, which in turn drove down margins that they sought to pass on to other suppliers, such as conveyancers.
Likewise, the home mover, faced with inflationary prices, Stamp Duty Land Tax and other costs, also sought downward pressure on legal fees.
Add to this the unquestionable oversupply of conveyancing firms and the problem starts to emerge.
Consequently, conveyancers were faced with doing more and more for less and less, with the inevitable result of a poor and often negligent service.
If that wasn’t enough, the banking crisis has reduced the number of home moving transactions to about 40% of peak levels. Even now that percentage cannot be much different to 55%.
It’s clear to see that the fight for conveyancers to survive in this market is not easy.
In the face of such fierce competition and in order to remain competitive, many conveyancers have cut corners. This has lead to an increased risk of negligence, poor service and fraud.
Even with today’s reduced activity, mortgage fraud is still running at more than £1bn and shows no sign of abating. Solicitors’ negligence and fraud are often interwoven.
Negligence, fraud and the PII debacle
To give some idea of the incidence of conveyancing negligence, 50% of all claims made on solicitors’ Professional Indemnity Insurance (PII) policies are related to conveyancing and 50% of those (ie 25% of all claims) are raised by lenders.
The PII market is therefore changing rapidly.
Whilst some PII insurers will remain in the market and new entrants (on strict terms) may enter it, many insurers are likely to withdraw from the market permanently or at least until the Solicitors Regulation Authority (SRA) satisfactorily resolves the deep-seated problems created by the escalating admission of firms with PII problems to the Assigned Risk Pool (ARP).
The ARP is the insurance body of last resort provided by the SRA, but funded by the insurers and firms within it. The SRA say the ARP is to last until 2013, but has, so far, done nothing to show there will be a meaningful change thereafter.
To compound the issue, there is an increasing number of firms in the ARP that don’t pay their insurance premiums.
In the ten years to 2010, of the £19.5m of premiums due, only £9m has been paid.
Worse still, of the compulsory six years “run off cover” for firms ceasing business, only £6.1m of the £15m premiums due were paid. The problem is not just a historical build up – it gets worse.
In 2010 alone, of £12m total premiums due, only £2.4m was paid.
Significant uncovered claims, actual and expected, shows that the balance required to meet them can no longer be sustained by the good “payers” in the solicitor profession, on whom the current deficit ultimately falls.
Why it will get worse
The approach taken by the SRA could mean that at the next round of PII renewal, in October 2011, firms that see no way forward will join the increasing number of practices going out of business.
Needless to say, there is little chance the profession can continue to underwrite the shortcoming of many of its poorer performing colleagues.
There is an increasing chance that this situation is set to implode.
What outcome is needed
Advisers need to ensure that the conveyancers they recommend are likely to meet the challenge of an industry whose regulator (SRA) believes that consumer protection is best serviced by firms that can manage risk effectively and have financial stability to meet market challenges on an ongoing basis.
Having a good knowledge of a conveyancer (as required by the FSA) is increasingly something which an adviser cannot acquire on its own.
Lenders, trade bodies and large support services providers, such as Sesame Bankhall Group, are often well placed to assist an adviser in that respect.
More so than ever before, an adviser who values a hard won reputation needs to take care in recommending a conveyancer to its client.
David Duckworth is partner at Optima Legal
