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Sometimes it takes a big shock to give us the wake up call we need to adjust our behaviours. We can often see where our actions are heading but no-one wants to be the first to shout “stop”. Why? Probably because the commercial imperative is to follow the sheep down a path which will lead to more business even if that business is more risky and potentially less profitable. So for example, once enough mainstream lenders decided they would offer sub prime products with “free legals” then it wasn’t long before others followed.
We have seen the impact in the City and on the financial institutions (and ultimately the taxpayer) in general of risky lending. We have heard the politicians telling us that everyone has behaved recklessly and that we are all going to learn the lessons. And for a while everything stops. The City withdraws its bonuses and lenders stop lending to all those who present even the lowest of risks. But now we are starting to hear that ”bonuses are back”. Have we really learned anything? Are we prepared to make changes? And what are some of the real risks for lenders now that the climate has changed?
Risk 1
Lenders fail to get back to more “commercial” levels of lending. Of course, lending is not without risk, but lenders need to be risk aware rather than risk averse. If lenders understand the risks better then they can lend more appropriately.
Risk 2
We assume that the customers’ best interests are served by offering “free legals” or “free conveyancing”. Don’t we all know that you don’t get anything for nothing? Someone, somewhere is paying. The question is are they paying the right price for the right job? Because if they are paying too little then cuts are being made somewhere and it can be an expensive mistake to make.
Risk 3
We assume that lenders and borrowers are best served by solicitors chosen by just one of them. And this is where it gets interesting and potentially controversial.
Once upon a time everyone knew that lenders and borrowers might have interests which conflict so they used separate solicitors to achieve what everyone wanted. However, whilst everyone was “safe” it was also the case that deals were slowed down by the post, that there was a certain amount of re-inventing the wheel in the process and that it was expensive. If you were a homeowner or a business owner wanting to re-finance and you had two sets of solicitors involved, it soon became cumbersome and expensive.
So, residential lenders agreed that the borrowers solicitors could act for them too. A pricing structure was agreed so the fees were transparent and everyone was paid properly and one highly trained solicitor was able to recognise when a conflict arose and remove himself from the situation. Up to a certain level, many commercial lenders decided to go along with this too.
Then came the pressure on solicitors to “commoditise” the work and, ultimately to reduce the price of the job. In order to reduce the price the work had to be “dumbed down”. In other words, the work was done at the cheapest possible level by people with the bare minimum of training. Inevitably the price reduced but so did the ability of the solicitors’ team to spot problems, let alone solve them.
So, where are we now?
1. Lenders are not yet back in the market sufficiently to revive it. The current activity is for those with cash. So now is the time for lenders to sort out understand what the risks really are and manage them.
2. Commoditisation of legal services is here to stay. That is not a bad thing but like everything it requires balance and even lawyers need to make a profit! Commoditisation won’t work for everything and everyone and in times of recession we realise that it is quality which proves to be the most important factor, not price. So, commoditise by all means but ensure the price enables quality advice. “Best Value” should not mean “cheapest”.
3. Lenders (for the most part) continue to use borrowers solicitors to act for them too, even where they are at their most vulnerable – in getting their charge secured at the Land Registry and/or Companies House – relying on solicitors’ professional indemnity insurance if things go wrong. It is time for lenders to re-think this:-
- the number of law firms going out of business has increased by 36% in the last year. When a firm goes under it undoubtedly leaves unfinished business – much of which leaves lenders vulnerable.
- there has been a 40% increase in the number of frauds through people being impersonated. Fraud is not necessarily covered through a professional indemnity policy.
- In 2008 the difficulties for some solicitors in obtaining Professional Indemnity Insurance were so grave that some firms failed to do so at all. The most badly affected firms were those with fewer than 5 partners - 86% of the profession has fewer than five partners.
A modern law firm with a sufficient number of partners in diverse areas of law will not have a problem getting professional indemnity insurance, will be able to weather the recession and will have systems, processes and training which will mean that they can provide a good quality commoditised legal service.
For further information about this article please contact Rebecca Ashling-Yates, Lester Aldridge, Bournemouth, UK
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