In December 2012, the Legal Services Board (LSB) published its thematic review of conveyancing. The LSB looked at the conveyancing market from the point of view of legal regulation and considered if action by the LSB or the Approved Regulators (ARs) was needed. In particular, the review considered the specific issues relating to mortgage fraud (excluding the functioning of conveyancing panels and referral fee arrangements) as it relates to consumer detriment in the legal services market.

The report focused primarily on solicitors due to their significant market share in the conveyancing market and the consequential impact of any identified consumer detriment on the majority of consumers.

Key Findings

The review recognised the challenge to find wide scale evidence of the extent to which lawyers contribute to mortgage fraud, either through their negligence or through their deliberate actions.

The report acknowledged the risks of fraud including mortgage fraud due to the amount of money being handled. The review found the scale of the problem is difficult to quantify, as there is a lack of information. However, there appear to be relatively few claims on compensation funds in relation to mortgage fraud. The information available about claims on PII is unable to distinguish between mortgage fraud and other conveyancing related issues.

The LSB review concluded that ‘although there are clear risks in conveyancing, there is evidence that the Approved Regulators and others are taking steps to reduce the risks for consumers’.

Furthermore the review found that ‘the evidence that we have to date shows little evidence that there is widespread systemic failure. That is to say that there are issues for the regulators to manage, but the regulators are aware of the risks and are taking steps to respond’

The review recognises the ongoing initiatives by stakeholders to address issues around conveyancing including the following:

  • The SRA’s compliance and enforcement strategy for conveyancing;
  • Developments to the CML Handbook;
  • Mortgage Verification Scheme;
  • Law Society’s Conveyancing Quality Scheme (CQS);
  • Substantial improvement in lenders oversight of panels of solicitors as highlighted by the FSA Thematic review (June 2011).

The review acknowledges that the conveyancing process does provide scope for consumer detriment. However, it concludes that ‘on current evidence, the combination of insurance and compensation arrangements and the actions underway by the regulators and other stakeholders in the market mean that there is no justification for further action by the LSB’.

Key recommendations

The report outlined the following recommendations to help the regulators (and future regulators) shape their regulatory approach:

a)    The costs and benefits of holding client money need to be carefully assessed. The costs should include the costs of compensation arrangements (including contributions to a fund, the cost of maintaining and administering a fund and the opportunity cost of having a fund) and compliance with regulatory arrangements;

b)    Alternatives to legal services providers holding client money should be explored;

c)    Regulators should consider whether their client money rules are proportionate;

d)    Regulators should develop a better understanding of the conveyancing services market(s) using the Oxera framework developed for the LSB and target their regulation accordingly;

e)    Consideration should be given to the current training requirements, particularly ongoing professional development. Regulators should consider whether each provider has an appropriately trained and skilled workforce rather than if particular individuals have done a certain number of hours of training a year;

f)      As new insurance products become available, regulators should keep under review whether the design of their PII arrangements is optimal; and

g)    Regulators should track and respond to new trends in the market and monitor changing risks for consumers and wider systemic risks.

Implications for lenders

In view of the conclusions of the review, a key consideration for lenders is whether they need to alter their approach to the management of panels of legal service providers particularly as the review recognises the improvement of confidence in the conveyancing process arising from the ongoing initiatives by stakeholders as highlighted above.

It seems to me that lenders have two possible responses to the recommendations in the review.

Option 1 – Do nothing

Lenders could choose to adopt the approach of ‘business as usual’ and maintain existing panel management arrangements including current restrictions and await the proposals from the Approved Regulators with regard to those recommendations. This approach can be justified on the basis that the LSB is broadly satisfied that ongoing initiatives are sufficient to address the risk of consumer detriment.

The downside of this approach is that lenders are likely to be reactive to any proposed significant changes to the regulatory approach of the Approved Regulators. The opportunity cost of adopting a passive approach could include missed opportunities to contribute constructively to the shaping of regulatory proposals in the best interests of both institutional and individual consumers as well as the development of the required organisational capacity and capability to respond readily to any significant proposals.

Furthermore adopting a ‘wait and see’ approach with regard to the recommendations of the review may in the meantime constrain the development of appropriate supplier diversity to underpin effective competition in the conveyancing market.

Option 2 – Incremental improvement of oversight of lenders panels

It seems to me that lenders should continue to improve their oversight of their panels of legal services providers particularly as the review seemed more focused on the risks to individual consumers. The report indicated ‘it seems to us that the principal focus for the SRA should be on individual consumers of legal services and ensuring that they are not at risk of suffering detriment’.

Furthermore addressing some of the current risks facing lenders such as vendor lawyer risks, hijacking of firms, distressed property sales, disguised deposits, displacement/re-emergence of high-risk individuals/firms, differential risks arising from the diversity of transactions as well as any emerging mortgage fraud risks arising from changes to lending policies necessitate continuous improvements in existing processes and arrangements.

However, continuous improvement to panel management arrangements needs to be mindful of potential changes in the regulatory landscape arising from the recommendations in the review. Lenders should consider developing arrangements, which are sufficiently flexible to facilitate the possibility of decoupling the handling of client money and the issue of certificate of title by their legal service providers.

Adopting this option will require lenders to engage constructively and proactively with the Approved Regulators in order to help shape the development of appropriate proposals in the best interests of both institutional and individual consumers. In addition, lenders would also need to demonstrate the wider implications to consumers and the public if legal service providers are no longer required to hold client money.

The continued improvement of panel management arrangements is also critical in order to improve the confidence of lenders in the robustness of their own arrangements. This should therefore enable lenders to relax their requirements particularly for new entrants to the conveyancing market and other legitimate (novel) business models through either consolidation and/or leveraging opportunities arising from the Legal Services Act 2007.


Overall, the review is positive for lenders because it reinforces the commonly held view by a diversity of stakeholders that regulation is not the ‘silver bullet’ solution to address the current and emerging supplier risks particularly with regard to mortgage fraud and other solutions underpinned by proactive industry wide collaboration are necessary.

Leave a Reply