Mortgages: raising the stakes

The Law Society of Scotland seems to have embarked on a public showdown with mortgage lender HSBC, following the bank's decision last month to operate a drastically reduced solicitor panel and to charge borrowers who prefer to take their business elsewhere.

Advice to solicitors earlier this week to "decline to engage" with the bank on documentation the Society says is based on English law and practice, and makes excessive demands of the borrower's solicitor in a Scottish context, has been followed by today's call on HSBC to suspend its new system before it causes "chaos" for clients. As I write, the story occupies the no 2 spot on the BBC news Scotland page.

HSBC naturally insists that its paperwork is fit for purpose, and with both sides calling for engagement, we can hope that this takes place as soon as possible to hammer out the points of contention.

If that fails to reach agreement, who will prevail? Putting it another way, what would a client do if faced with a solicitor who thinks their lender's requirements of them as solicitor are unacceptable? The obvious alternatives are find another lender, or find another solicitor.

HSBC are in a competitive market, and will not want to place too many obstacles in the way of potential customers. But they also offer inducements to would-be borrowers in the form of fixed fees, no sale no fee, and more. And a customer who opts to instruct a non-panel solicitor already does so in the knowledge that they will be paying an additional £160 + VAT to HSBC to cover the lender's costs. So the temptation on the client will be considerable simply to take the line of least resistance (and outlay) and choose the panel firm. What will other solicitors then have gained by taking the stand proposed by the Society?

When I last wrote on this subject a couple of weeks ago, I thought it worth asking whether the competition authorities should be taking an interest in restrictive panel practices by lenders. It seems it may be more difficult to establish this than I had thought, in the absence of a market share that even the biggest players in the market can currently only aspire to.

It was also apparent then, and remains so, that the profession is very much split on the move, currently gaining some support, to end the exemption to the conflict of interest rule that permits the same solicitor to act for both lender and borrower, if the terms of the loan have previously been agreed directly between the parties. Personally I doubt that it would in itself reverse or halt the trend towards smaller panels, especially if lenders respond with practices similar to HSBC's.

What we have is lenders making moves prompted by the desire to protect themselves from fraud, but going to questionable lengths and using their position of strength in relation to the client to effectively dictate to the market. In that situation I believe the whole regulatory aspect needs to be looked at, in order to determine where to draw the lilne between what is a legitimate approach and what an abuse of a position of strength.

The lead article in this month's Journal canvasses the various legislative and regulatory options in more detail. One suggestion that emerged at a late stage before press day has begun to attract some interest: devising a "classic" report on title, in the manner of the classic letter of obligation – that is, one that will attract cover under the Master Policy for professional indemnity insurance, provided it is confined to certain matters, but if the lender asks and the solicitor gives any warranties to the lender going beyond its terms, they are on their own.

I doubt that any single measure will in itself level the playing field that is now being dominated by the lenders, which is why I suggest a full review to come up with a package that will hopefully safeguard all interests, but this idea among others could prove to be a valuable building block.

I would be delighted to hear other views: please add in the box below.