Why give credit where credit isn't due?
17 December 1996
Every law firm has just received a letter from Law Society president Tony Girling in which he reveals his delight in being "able to write to you with some really good news of a scheme which offers good practical support to solicitors and their clients".
During the past 12 months, solicitors have become accustomed to being told all the things their professional body is not able to do for them. So, good news at last, apparently offering practical help. What can it be?
Well, hold the front page! The Law Society has arranged a scheme through merchant bankers Guinness Mahon for a "new loan facility to fund disbursements".
The scheme is straightforward: disbursements incurred in the course of a case are funded by the bank. All the client has to do is complete a form and the facility is set up.
Remarkably, there is "no requirement for credit vetting of your clients".
All this, of course, sounds too good to be true. Cynical lawyers will be, wisely, looking for the small print. So, is there any to be found? Well, just a little:
The interest rate is 14 per cent APR, which is moderate by the standards of merchant banks and credit card loans, but high compared with the cost of a building society mortgage or bank overdraft.
The interest rate and conditions of the loan are variable at the discretion of the lender on notice.
If any instalment is not paid on the due date, the lender can call in the whole debt.
These are all fairly standard conditions. The only real surprise is that a merchant bank will lend money without any "requirement for credit vetting". Essentially, this means without security? Has the bank gone soft in the head?
Not at all - there is yet more small print. The president's letter tells us that "the loan will be the client's, but the facility will be offered at the solicitor's discretion. For this reason, in the event that the loan is not repaid, the solicitor will be responsible for payment."
Consider the implications of all this:
If the client is a good risk, his bank will fund him and the scheme is superfluous. This means that, in effect, solicitors will be guaranteeing what the bank would consider a bad risk - not the best route to a prosperous old age.
Under the Financial Services Act, the solicitor would be required to advise the client on the merits of the scheme compared with the possible alternatives. Is it likely that most firms will be able to charge for such advice? The client would, of course, be entitled to sue the solicitor if the advice turned out to be wrong or inadequate - as would be only too possible, since solicitors are lawyers, not credit brokers.
Lending institutions can at least run credit checks and other investigations. The solicitor can hardly do this in relation to his own client, despite the fact that he would be underwriting his debt.
It is said that some solicitors have welcomed the Guinness Mahon scheme. Alas, this is only too likely. Short-sightedness is our profession's besetting sin - simply look at the way high street solicitors cut their own throats with discount conveyancing.
But anyone who looks further than next week can see what a wretched precedent the scheme creates - namely, solicitors acting as guarantors for their clients debts. With our indemnity premiums, compensation fund contributions, prac- tising certificate fees, training and continuing education imposts, are we not already sufficiently burdened?
Guinness Mahon describe its scheme as having the Law Society's "powerful endorsement". The company can, no doubt, hardly believe its luck.