SMI could be a wasted chance

The failure to implement a set of Standard Mortgage Instructions could spell disaster for high street solicitors, warns Chris Jowett. Chris Jowett is Halifax group solicitor and chairman of the Mortgage Lenders Legal Advisory Panel.

More than a decade ago, the Farrand committee set up in the mid-1980s by then Lord Chancellor, Lord Hailsham to investigate how to simplify conveyancing practices acknowledged the scope for lenders to achieve uniformity in their dealings with solicitors.

While some lenders had their own guidelines, a lack of uniformity caused problems. The guidance among lenders was different and some lenders imposed obligations which the legal profession considered too onerous.

A number of major lenders got together to produce a Lenders' Handbook. Shortly after they started, they found that the Law Society was also looking at standardisation. A joint working party was formed to produce Standard Mortgage Instructions (SMI). The SMI sets out in a single document the contractual relationship between solicitor (or licensed conveyancer), and lender.

Each set of mortgage instructions contains the relevant information for each individual mortgage transaction.

The SMI includes information on the mortgage advice to be given to the borrower; a standard form report on title and the obligation the conveyancer undertakes when he signs it; the documents which are owned jointly by the lender and borrower; how long the file is to be kept; stale searches and search insurance.

The Law Society wanted to introduce into the SMI the concept of lenders paying conveyancers. This was rejected by lenders for two reasons. Firstly, conveyancers should already be charging borrowers. Secondly, lenders could not operate a scheme for payment of legal costs without having their own scales of charges.

It would be totally impractical for lenders to vet individual bills. Scale fees would take away an essential element in fee competition within the market. In addition, the Office of Fair Trading does not like scale fees, even if only issued as guidance, and an attempt to adopt them would result in a reference to the Monopolies and Mergers Commission.

Nevertheless, by mid 1997, agreement had almost been reached between the lenders and the Law Society on the text of the SMI. As far as the lenders were concerned, the Law Society team had authority to approve the SMI on behalf of the Law Society.

However, the Solicitors' Indemnity Fund then raised objections. This coincided with the revelation that the fund was in difficulty because of a high number of claims pushing up premiums.

The Law Society council then issued a consultation paper on the relationship between lenders and solicitors. Out of 13,000 mailings, there were only about 2,000 responses, which brought into question whether those who replied were representative of the profession.

Nevertheless, the Law Society decided to go ahead with a change to the Practice Rules to prevent solicitors acting for lenders unless the lender's form of instructions had been approved by the Law Society.

But if lenders cannot have the right to work with the Law Society in deciding how solicitors are to be instructed, it is clear that many lenders will opt out and instruct their own solicitors or do the legal work themselves.

A detailed analysis by the Halifax shows that separate representation costs £120 extra. Given this additional cost and inevitable associated delay in completing the paperwork, lenders will look at re-engineering the legal work by utilising their experience of 'factory conveyancing' for sales in possession by large specialised firms and by using title insurance (something the Halifax has already piloted for re-mortgages).

The 'factory conveyancing' solicitors will, in turn, aggressively market their services directly to borrowers, which would further undermine high street practitioners.

It is astounding that the Law Society is prepared to risk a significant part of residential conveyancing work being lost to high street practitioners in this way. The Law Society's views on the need for change were in part based on conflict of interest. The fact is that conflicts between lenders and their borrowers rarely arise and, when they do, can be managed (if necessary by the solicitor stopping acting for both).

The real cause of the Law Society's opposition to the SMI is the problem with SIF. The Appleby proposal that conveyancing work should attract higher premiums goes some way to dealing with the fundamental problem cost.