The clarion call for increased transparency and certainty of legal fees is getting louder as highlighted in the recent article in the November edition of Management Today; (Luke Johnson: Trade Unions are stifling New York). Furthermore, a number of speakers particularly Riverview Law at the recent Legal Futures conference (LEGAL FUTURES The expectation game » LEGAL FUTURES) highlighted the increasing expectation from consumers for certainty and transparency in the fees paid to legal services providers. Whilst the growing demand for fixed fees in the corporate market is rightly receiving due attention, it is helpful to remember that fixed fees is an established practice in some aspects of retail legal services particularly conveyancing.

However, although fixed fees has been in operation in the conveyancing market for quite some time. Consistently achieving the twin outcomes of transparency and certainty for consumers remains an ongoing challenging. This is in part due to the highly competitive nature of the market whereby providers are seeking to influence the buying behavior of consumers through relatively low headline prices within the context of the home buying/selling value chain.

Whilst in theory this appears to be good for consumers with regard to low conveyancing prices, the feedback from a range of sources including some of the complaints handled by the Legal Ombudsman suggests that confusion and disappointment about the actual total fees paid following conveyancing transactions remains an issue of concern.

In addition, the attempts to sometimes reclassify certain expenditure as disbursements in the hope that the headline price for the conveyancing service remains competitive is misleading and runs contrary to the achievement of better consumer outcomes, which outcomes focused regulation is designed to facilitate.

The reputational risks of adopting a low cost model to service delivery underpinned by an increasing list of ‘extras’ are evident from other sectors particularly the airline industry (Airlines to scrap debit card surcharges following OFT enforcement action  – The Office of Fair Trading). Therefore, it seems that if the benefits of increased certainty and transparency are to be truly realised across the conveyancing market, then some existing practices have to be challenged and improved.

For example if a lay consumer cannot easily understand the classification of any expenditure as a disbursement in a conveyancing transaction, then it is likely that such classification is questionable. The Solicitors Regulation Authority (SRA) defines a disbursement as follows:

‘means, in respect of those activities for which the practice is regulated by the SRA, any sum spent or to be spent on behalf of the client or trust (including any VAT element)’ .

Whilst the Council for Licensed Conveyancers (CLC) defines a disbursement as follows:

‘any payment made, or for which a liability to pay has been incurred, by a CLC regulated individual or body to a third party on behalf of a Client; disbursements are deemed to include: stamp duty land tax; Land Registry fees; Local Authority and any other applicable search fees’

In both cases, it is clear that the conveyancing provider is incurring expenditure with a third party as an agent of the client.  It means that the client in each transaction must accept such liability and the liability must properly belong to the client.

In the recent past the issue of ‘secret profits’ was highlighted following a judgment by the Solicitors Disciplinary Tribunal (SDT) and subsequent guidance provided to solicitors with regard to the proper treatment of the ‘added value/profit’ element on disbursements such as telegraphic transfer fees, searches etc. The general view is that a profit element above the actual cost of such expenditure should be treated as a professional fee rather than the total amount being classified as a disbursement.

Whilst this approach provides needed guidance to providers, it raises the question whether the role of acting as agent with third parties should be sliced and diced as suggested. It does not appear unreasonable to assume that acting as an agent for the consumer is implicit in the conveyancing service and therefore should be inclusive in the headline price.

It is also possible to argue that an additional premium for acting as an agent with regard to disbursements should only be necessary where something novel happens during a transaction. An alternative view is that providing the consumer with choice on some disbursements enables them to manage costs more effectively during the transaction.

Either way, it highlights the challenge of providing consumers with fees that deliver both certainty and transparency. In addition, it also highlights that the pricing strategies of legal services providers in the conveyancing market perhaps requires a rethink. A likely threat from new entrants in the conveyancing market may be the adoption of business models with sophisticated pricing strategies underpinned by better consumer segmentation.

It seems to me that the current difficulty in the conveyancing market is the constant drive to the lowest common denominator with regard to pricing. It is uncommon to find providers providing differentiated conveyancing services to consumers. Providing the same standard conveyancing services to all consumers is a recipe for relatively low profit margins. In other sectors, if low prices are the determinant driver of consumer behavior, it is unlikely and unreasonable to simultaneously receive excellent service. However, many conveyancing providers are attempting to offer ridiculously low prices and outstanding service, which is extremely challenging and regrettably leads to mismatch of consumer expectations.

Conveyancing providers should be able to offer a range of services to consumers including a standard and premium service. With such an approach, it is more likely that the fixed fee is more meaningful as the service offered and associated benefits are clearly outlined. Rather than having to ask the client about charging the uplift on some disbursements as a professional fee, this could be pre packaged for example as a premium service. Rather than categorising fees for risk management of certain aspects of the process as disbursements, the associated benefits can be outlined in the relevant service package. The need to have endless disputes about what are legitimate (seen through the lens of the average consumer) disbursements are eliminated because usually the driver for such discussions by providers is the fear of adopting uncompetitive headline prices.

I recognise that adopting different pricing strategies in the conveyancing market is challenging particularly in a subdued housing market. I understand that the hands of many providers are tied based on increasing reliance on introducers of work who are able to extract referrals fees of up to 60% of the headline price. However, the situation is unlikely to change unless existing providers refuse to accept work through introducers at excessive referral fees. In my view, any referral fee above 30% of the headline price should be of concern.  For the avoidance of doubt, I am not suggesting that referral fees should be banned in conveyancing. However, the levels of referral fees demanded by some introducers is tantamount to extortion and highlights the difficulty of seeking to work in partnership with those who do not share the same values particularly the best interests of consumers.

The predominantly pricing strategy in the conveyancing market is based on matching competitor pricing, which is why many conveyancing firms feel trapped in the prevailing market prices with genuine concern about their perceived inability to pass the rising cost of production to consumers including the cost of inflation. The sad reality is that many firms accept that they are caught in a price trap and the only obvious route of escape is to either exit the market or continue to sacrifice profit margin for transaction volumes.

The current pricing strategy adopted (assuming that such a strategic approach is adopted) by many conveyancing firms is frankly unsustainable. The continued downward pressure on prices in the conveyancing market amidst rising costs particularly with regard to referral fees is likely to continue to condition consumers to unreasonably low prices and engender lack of transparency on the true total cost of the service. As Harvard’s Michael Porter says, ‘cutting prices is usually insanity if the competition can go as low as you can’.

I believe there is a way out of the trap that many firms find themselves with regard to their pricing in the conveyancing market. However, for such firms it is going to require courage to adopt a strategy of price leadership underpinned by deeper insight of the price sensitivity of their diverse consumers, better micro segmentation, enhancement of their pricing capability and more transparent fees. In due course, the competition would eventually be forced to follow in order to share in the better profit margins. Sounds like a dream but who five years ago would have imagined the emergence of a thriving ‘tablet’ market.

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