You want certified?

Back in March 2002, the risk management page urged: “Be clear about what you are certifying”, and went on to address risk management associated with situations where solicitors are asked to provide various types of certificate. The article mentioned a variety of scenarios – from certifying a person’s identity for a passport application through to certifying complex titles in the context of major corporate transactions. Whatever form of certificate is involved, the article suggested, the principles should be the same as you would apply to any set of instructions. Consider carefully what you are being asked to do and assess whether you are capable of doing it: “Don’t certify facts that are not within your own knowledge or which cannot be vouched.”

The article illustrated the issues with a case study:

Solicitors were asked by clients to sign a certificate in which they were (a) to state that they had advised their clients of the terms and conditions of a particular form of investment arrangement being contemplated by the clients, and (b) to confirm the clients’ agreement that the plan was suitable for the clients’ purposes.

The solicitors chose not to provide the certificate on the basis that they considered that their clients should only be confirming the suitability of the investment arrangement for them after receiving proper independent financial advice taking into account the clients’ overall personal and financial circumstances. Those giving independent financial advice could then have provided the appropriate certificate.

The solicitors concerned were not qualified to give independent financial advice. In adopting their particular stance, the solicitors concerned refused to bow to pressure to provide the required certificate. In part, their position could be justified on self-defence grounds on the basis that had they provided the certificate without the clients first receiving independent financial advice, the clients might have levelled criticisms at the firm if the investment proved unsatisfactory in the long run.

Equity release

What has happened in the period since March 2002? Happily, and all credit to the profession, there appear to have been no claims arising out of involvement in providing certificates of the type mentioned in the case study or advising clients on these types of investment – certainly none that have involved the Master Policy insurers.

Compared with 2002, equity release schemes appear to be no less popular or prevalent, perhaps more so. There are understood to be different names for different types of scheme, including rolled-up interest loan, home reversion scheme, home income plan and reverse mortgage, and these are understood to involve variations on two models – reversion schemes and lifetime mortgages. The term “equity release scheme” is used throughout this article to refer to all of these variants.

This article is not intended as a commentary on this type of product from any kind of technical perspective.  It is aimed at addressing risk and risk management issues that arise or may arise if, irrespective of the features of the particular scheme, solicitors are engaged to provide certification required by lenders/providers.

The potential risks involved in providing certificates in relation to equity release schemes are many and varied. They may include:

•     client regards the solicitor’s role as merely a matter of witnessing their signature and instructs solicitor on that basis, whereas an onerous certificate is involved;
•     client holds the solicitor responsible for what proves to have been an unwise financial decision;
•     solicitor is deemed to have given, unintentionally, financial advice on suitability;
•     family members seek to hold the solicitor responsible for the depletion of the client’s estate;
•     client holds the solicitor responsible for adverse impact on social security benefits.
  

Critical terms

This takes us back to where we started – to the potential risks involved for solicitors in providing certificates in relation to mortgage and financial transactions. Certifying the following matters may be one thing:

•     that the general nature and effect of the mortgage or agreement have been explained to the client;
•     that the client appeared to understand;
•     that the client’s signature of the mortgage or agreement has been effectively witnessed.
• However this is all quite different from certifying:
•     that you have given the client financial advice;
•     that the arrangement is suitable for the client;
•     that the client understood (the explanation of) the mortgage or agreement.

To be satisfied that a borrower client is making an informed decision about entering into this sort of arrangement, you would need to understand fully the nature and effect of the specific product

Risk management points

Naturally, you need to be clear with the client about the scope of the engagement – what you are/are not advising on and doing for the client. Are you giving advice on taxation implications of entering into the arrangement? Are you or are you not giving advice on the suitability of the product? That is advice that you should only be giving if you are authorised to do so.

Beware situations where you are being asked to assume a duty to the lender/provider for the advice of financial advisers – for instance, by endorsing the advice given by a financial adviser on the suitability of the product.

Whatever you decide and agree you are able to advise on, your advice needs to be clearly recorded in writing. If, for whatever reasons, you advise the client against signing the documents but the client goes ahead anyway, then you will want the client to have acknowledged your advice.

There is a strong argument for devising a detailed checklist of all the issues to be considered when advising a borrower client. These could usefully range from client identification through conflict checking to scoping the engagement, and questions to be addressed and implications to be explained to the client in giving advice.

Certificates of title

On the subject of certificates, from time to time questions are raised about cover under the Master Policy for the granting of certificates of title and it is clear that one of the underlying concerns is the fact that any claim will be at the instance of someone who is not the firm’s client.  

The position is that there is no proviso qualifying the Master Policy cover to the effect that there is cover only for claims by clients. It is now well established that circumstances can arise in which third parties have rights of action against solicitors and the Master Policy responds in those situations.

Certificates of title raise a number of risk management issues and one of them is the extent to which the benefit of the certificate may be assignable/ assigned to other parties or available to the addressee’s successors. Consider whether this is acceptable to you and whether it may be desirable and feasible to limit the extent to which the benefit of the certificate is available to parties beyond the original addressee.

Overlooked securities

Case study: Prior to settlement of their client’s house purchase, a firm overlooked one of two outstanding securities disclosed in the interim search report. Settlement took place on the basis that only one security required to be discharged. The purchaser became aware of the fact when the previous owners defaulted on the loan payments and repossession was threatened.

How had the purchaser’s solicitor overlooked the security? It was definitely mentioned on the search report he had seen before settlement. How had the sellers’ solicitor failed to notice the entry in the report before granting the firm’s undertaking at settlement? A case of looking at the search report and seeing what you expected or wanted to see? Could the design of the reports be a contributory factor?

A freakish situation unlikely to be repeated? Apparently not. Currently, the Master Policy insurers are dealing with a number of intimations arising out of similar circumstances. Claims arising out of failure properly to check a search report and, as a consequence, dealing only with the “expected” loan/ security while ignoring an unexpected second security have continued to be intimated on a regular basis.

These claims may arise against both purchasers’ and sellers’ agents. Where claims are made against sellers’ agents, they may be treated as “failed classic” letters of obligation and in those circumstances, the self-insured amount (excess) will apply to the claim and the amount paid or reserved by insurers will go on the practice’s Master Policy record and may impact on future premiums.

These claims may not be the most costly Master Policy claims in terms of the sums involved in paying off the outstanding loan and clearing the security – in fact, in some of these cases, the firm concerned will be responsible for this cost as the amount involved falls within the firm’s self-insured amount. At the same time, they are capable of being awkward claims because the position is often not discovered until the lender is on the point of taking enforcement proceedings against the new owner, i.e. not the debtor. This may add urgency and introduce additional stress factors to the claim situation.

Risk management point

It has been suggested that this is a category of claim which ought to be readily avoidable. So how to prevent these claims? Without going to elaborate lengths, perhaps a simple procedure requiring that each entry in search reports is initialled to show that it has been checked off.

ALISTAIR SIM AND MARSH

Alistair Sim is a Director in the FinPro (Financial and Professional Risks) Practice at Marsh, the world’s number one risk specialist. To contact Alistair, email: alistair.j.sim@marsh.com .

The information contained in this article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insureds should consult their insurance and legal advisers regarding specific coverage issues.

Marsh Ltd is authorised and regulated by the Financial Services Authority.