HSBC: a question of ethics

There is a natural and perhaps essential tension between the needs of our clients and the necessity to make sufficient profit to continue in business. If all legal work was publicly funded, or, in another paradigm, if money grew on trees, our ethics would never be questioned. However, the temerity we solicitors show in charging clients, and needing to have income to pay our overheads, gives our detractors a stick with which to beat us.

Take the legal aid debate, for instance. Despite all evidence to the contrary the government (of whichever hue) implies, or sometimes outwardly states, that solicitors are fat cats interested only in the size of the cheque arriving from the Legal Services Commission. We know that it isn’t true – and so do they – so our strongest ground is continuing to argue for the rights of our clients, for their best interests. It is, after all, embedded into our rule book: to act in the best interests of our client is part of who we are, not just what we do.

Thus, when HSBC took the extraordinary decision to cut the panel whom they would instruct on residential mortgages from virtually all regulated firms to just 43 members, the profession was very cross indeed. But why? Was it in fear for our practices? Perhaps, but more pertinently we know that the best interests of our buyer and seller clients is not served by their being pushed to instruct a firm chosen by the bank or face the adverse financial consequences and delay which will follow with separate representation.

While a loss of joint representation instructions from a major bank would undoubtedly have a negative effect on some practices, what HSBC did not expect was the rage and fury, coupled with straightforward logical argument, that the profession threw at it.

With what might be described as naivety, the bank seemed to have concluded that the complex and highly competitive conveyancing market would be best served by effectively limiting consumer choice. What it failed to understand is that not all firms or fee earners within them are the same. Conveyancing done well is not a standard tick-box exercise. While every transaction may have some standard parts – for example due diligence for money laundering purposes – the needs of individual buyers and sellers will all differ. Indeed the needs and requirements of lender clients will as well. You only need to look at the CML handbook part 2 for evidence ?of that.

Dynamic market

Different firms will serve different markets – some will try and serve several – perhaps geographical or by specialism in types of property or clients. Some firms have seen a market in first-time buyers, others look only for high network owners. Each is running its own business and may excel or not. That freedom creates a dynamic market where all can be served and give excellence and opportunities to thrive.

Then along comes a bank that decides to throw a spanner in the works. Interruption to the normal flow of business, with all its attendant difficulties, is not initially noticed by the general public. So good are we at making the complicated and risky business of transferring land and moving house look easy, that a sophisticated bank mistakes this for simplicity. It assumes that its wishes will be accepted, perhaps with a little local difficulty, frowned upon by those who suppose we are only in it for the money.

But the profession revolted. It knew that its clients would be disadvantaged. Even if they were not borrowing from HSBC but were in a chain where somebody was, the delay suffered where the buying client has exercised their wish to be represented by the solicitor of their choice is now understood by others in the market.

Solicitors informed estate agents to be aware that any purchaser having an HSBC mortgage was more likely to be delayed. I received a letter from a firm acting for a seller telling me that their client had a related purchase and applied to HSBC, so I should warn my client, and others behind me in the chain, that they would need to take a deep breath, sit back and chill out.

HSBC and those on its panel argued that there would be no delay if applicants went for the joint representation option. To make this more attractive it used its immense bargaining power to demand exceptionally low fees from the panel firms. The motivation of those who chose to join the panel was a matter for them, but for HSBC to have imagined that excellent client service would follow is fanciful. It is perhaps akin to the Ryan Air model. The safety of the planes is paramount, everything else is extra (not perhaps the best parallel, I admit, but the principle is the same). HSBC said this was a customer benefit; some may disagree, asking in what other professional market is the cheapest the best, perhaps dentistry or accountancy?

As for that ethical position, the lenders’ regulator, the FSA, requires that lenders treat their customers fairly. We must act in their best interests; that sounds to be like one and the same!

Elephant in the room

Fraud is the elephant in the room. We try not talk of it, but it is always there. Claims that solicitors are careless or ignore due diligence are met with counter claims of poor lending decisions by the banks. Figures running into the billions are often quoted but there seems to be little real analysis of actual loss or what causes it, rather a rush for all the players to proclaim that it is not their fault.

The vast majority of fraud is at the applicant stage. For years some lenders seemed to have encouraged this. The ‘non-status’ loans bear witness. Those frauds take years to work through the system, some never being discovered, as borrowers continue to pay month by month. Lenders contend that the risk in their mortgage book is adversely affected but nevertheless appear to lump those loans together with the rare occasions that solicitors steal money, or perhaps more often fraudsters pretending to be solicitors infiltrate the system. That is often referred to as ‘solicitor fraud’, but is nothing of the sort. The recent review of mortgage lending by the FSA made it clear that lenders must clean up their act, thus the spotlight began to shine on panel management. Some lenders have used exceptionally blunt instruments to cull their list, including sole practitioners and firms with few partners, regardless of the size of their operation. Others have factored in the number of transactions with that particular lender, ignoring the fact that their presence in the market may dramatically affect the ability of any practitioner to act for them. I don’t think I have had any clients from the Brown family for the last year, but it doesn’t affect my ability to advise anyone from that clan!

HSBC took panel management to a whole new level. Using (or perhaps hiding behind) the FSA recommendations, having an extremely small panel was championed as a method of fraud prevention. No real study of risk appeared to have taken place.

Change of mind

Selection criteria of the 43 were unknown. Apparently geography played a part, but that was hardly a criterion for fraud prevention. Perhaps a more pertinent question was whether the action was proportionate to the risk, bearing in mind the cost and inconvenience suffered by the house-buying public, not just those borrowing but anybody selling to or ?being included in a chain with an HSBC borrower. The bank may have argued that it was – if so then it should have stated its case, put it in the spotlight and have it scrutinised. As solicitors, we are used to dealing with evidence, hard facts. The fury I mentioned above was only fuelled by this lack of transparency.

What if HSBC hadn’t changed its mind? The bank could have set its face against the bad publicity and reputational damage; the status quo could have remained. If that had been the case, mortgage work would have gently flowed away from the bank. Continuing negative press coverage, of which there has been much recently, would have formed opinion down this route. HSBC lending would have been associated with slow, expensive and difficult.

In a static market where any buyer will be welcomed this may be less of a problem but as things improve the HSBC borrower would be less welcome, certainly in any competitive environment. Reputations once made can take years to alter. The behaviour of some banks during the recession in the early ‘90s is still well remembered by many.

There was, of course, a ‘third way’, which HSBC eventually accepted. An exit route proffered freely to the bank, and a route readily accepted by other lenders. The Conveyancing Quality Scheme (CQS) has gained such momentum that the naysayers have been taken aback. With well over 2,000 outlets across the country, each subject to considerable scrutiny, more than sufficient to pass muster for the lenders and their regulators.

The scheme is only just over one year old. Improving standards, an essential part of the scheme, design and ethos, will take some time but the fraud prevention criteria, embedded into the protocol, standard conditions of sale and the code for completion by post, are mandatory for member firms.

Credit and CRB checks on partners and employees alike are complete before members are admitted. Lenders have ?been consulted and are an essential part of the design so can have no complaints ?about its robustness.

So there it is, we have led the HSBC horse to water and it has started drinking. On 16 May the bank said it would include all CQS firms in its panel from August this year (subject to some limitations on sole practitioners).

Panel management discussion

Enlargement of the panel will bring some welcome relief to hard-pressed practitioners already fed up with separate representation, which added cost and created delay to transactions.

The pressure applied by the profession to inform the public about the real effect of the bank’s policy was the decisive factor. Taking the high ground in the debate was, and continues to be, vital in our standing on the matter.

Tribute must be paid to Des Hudson, chief executive of the Law Society, and ?his colleagues, who have worked tirelessly to persuade HSBC of the necessity to change course.

The discussions on panel management between the Law Society and lenders will go on – this is very much a work in progress. Solicitors, however, can now be in no doubt that the Law Society will continue to champion their interests and, more importantly, the interests of their clients.