Grasping the nettle of conveyancing claims
Undertaking a small number of additional checks could help conveyancers reduce risk and avoid tying their fortunes to the property market, advises John Kunzler
Property recessions can have a significant impact on solicitors’ professional indemnity insurance costs, largely due to conveyancing claims. At some point in the future, another property recession could occur. Close analysis of these claims and challenging perceptions of what drives them may help to prevent future losses.
As past losses begin to fade from the experience, PII premiums have generally fallen. However, when the property market falls solicitors are often held to account for negligently performing conveyancing and, more recently, in particular failing to follow the instructions set out in the Council of Mortgage Lenders’ (CML) Handbook. For those who have worked in professional indemnity for decades, it may feel like solicitors are perpetually doomed to repeat this cycle.
Having heard and seen comments from the profession, Marsh has spent some time analysing the claims and the lenders’ requirements. From this research it seems that some misunderstandings across the profession and the insurance market remain. Happily, there are opportunities to reduce risk, and reasons to hope that the cycle of significant claims following a property recession can be broken. Some of the key misunderstandings are set out in this article.
CML Handbook requirements
Some solicitors criticise the length and complexity of the instructions contained in the CML Handbook part 1 and 2. There are over a hundred points to check on every transaction, at no charge to the lender; it has been suggested that this is virtually impossible to do, so in practice things can get missed.
Reviewing the CML Handbook part 1 reveals requirements to investigate, establish, and report various matters relating to features that could impair the value of the premises, and these are broadly what any buyer would want checked. If a solicitor looks at the handbook and asks themselves if they would want to know the result of any of the requisite enquiries, it is difficult to say no, as they are all relevant.
Conveyancing is not a simple task, although there is great variation in the risk between conducting a straightforward sale and completing a complex purchase. The handbook requirements are a reality, and many firms practise safely without having claims, so suggesting that the volume of requirements is the source of the problem does not seem accurate. Also, the claims experience, as we will see later, shows that claims tend to arise from a small group of the large number of requisite enquiries.
Greatest area of risk
The claims data does not appear to show that there are so many checks that solicitors are randomly missing issues or making occasional one-off errors. If that was happening, we would expect to see more claims about the adequacy of insurance, failure to carry out contaminated land searches, or ensuring that a company search of a management company is undertaken. Whether or not other CML requirements are missed, it is clear that the six requirements outlined here account for almost all the payments, representing the greatest area of risk.
A review of Marsh statistics on lender claims in England and Wales from 2011 to 2014 showed that around 40 per cent of the cost of conveyancing claims arises from breaching one of six CML Handbook part 1 requirements, failing to notify lenders that particular situations have arisen, and not paying over a mortgage advance where this occurs (in Northern Ireland the proportion was 36 per cent). The handbook states that solicitors must report:
1. If the owner or registered proprietor has been registered for less than six months;
2. If the person selling to the borrower is not the owner or registered proprietor;
3. If you become aware that the borrower is not providing the balance of the purchase price from their own funds;
4. If you will not have control over the payment of all of the purchase money (for example, if it is proposed that the borrower pays money to the seller direct) other than a deposit held by an estate agent, or a reservation fee of not more than £1,000 paid to a builder or developer;
5. If there is a change in the purchase price from loan documents; or
6. If incentives or cashbacks are part of the arrangements.
Ultimately, the allegations that are, or are not, pursued are up to the lenders, and it may be that there are other CML Handbook breaches that do not come to light. No doubt the lenders choose the breaches that are easiest to prove, and support the lenders’ position that they would not have proceeded with the loan had they known the information that was not provided by the law firm. However, it appears that missing a relatively small number of crucial checks is the main driver of the loss experience.
Some suggest that the obligations outlined here, which have been accepted, are unreasonable, but the six particular requirements arise from fraud prevention measures which the profession itself has driven. In 1991 the Law Society issued a green card warning on mortgage fraud, which contained warnings about suspicious activity. Then in 2002 firms were cautioned by the Law Society in the ‘Warning: Property Fraud 2’ guidance about being involved in mortgage fraud and to watch out for a deposit or part of the purchase price being paid direct, or a client reselling property at a substantial profit, for which no explanation has been provided.
This was followed by a stark warning: 'Any failure to observe these signs and to take the appropriate steps may be used in court as evidence against you if you and your client are prosecuted, or if you are sued for negligence.'
Unfortunately, specific best practice on particular issues is also a contractual obligation leading to significant exposure.
Can anything be done?
The Solicitors Regulation Authority’s analysis of claims, ‘Reflecting on solicitors’ professional indemnity insurance: Market trends and analysis of historic claims data’, suggested that residential conveyancing claims in England and Wales cost around £40m a year for the period from 2004 to 2014. Over the last ten years, our analysis is that CML breaches on their own were accounting for 20 per cent of all paid losses. Unless practice in this area improves across the profession, it seems that the losses will continue into the next property market fall.
The greatest risk relates to completing the certificate of title and report to lender; Marsh believes risk management can be focused here with good effect. The standard certificate of title agreed by the Law Society and the CML is a lengthy document setting out the solicitor’s obligations, with one signature at the end. This document (or the lender’s version) will normally be completed without specific reference to the six requirements driving claims.
Given past experience, we suggest a very small number of additional checks are needed, and if applied diligently these should have a significant impact in reducing the risk of claims. We have developed the additional checklist for solicitors, and do not consider that these checks are too costly or difficult to implement.
Hopefully, understanding the true underlying causes of claims, and taking positive action to prevent them, will help firms undertaking conveyancing work to avoid the past repeating itself, and so be less affected by PII rates and availability being connected to the property market.
John Kunzler is a senior vice president in the financial and professional practice at Marsh, and specialises in risk management