Dual representation in short-term lending

Is it today's answer for longer completion times, or tomorrow's problem for funders who put cost and process above security?

Dual representation in short-term lending

Jonathan Newman (pictured) is senior partner at Brightstone Law

After a few years, dual representation has reared its head again as short-term lenders look to reduce loan processing times, cut cost and present a more attractive funding proposition. But is it the right solution for the specialist finance market? In reality, dual representation is a sales versus back office conflict. Let me explain why.

Dual representation has been around in bridging for some time. It’s had some traction in the most vanilla of cases and in a particular sector of the market, which is more about volume, than complexity; more about process than delivery. Certainly, cheaper to transact, but anecdotally, the customer experience has not been painless.

It’s often said and written that the most common reason for delay, by some distance, is the

inexperience of the borrower’s solicitor, but that was not the finding in research recently undertaken by the Brightstone Law Property Finance Team which looked at the true reasons for increased completion times. Yes, there were solicitors who were lacking in responsiveness, but equally there were many occasions where credit teams took too long to make decisions, funding teams took too long to fund. There are several areas which need improving.

Dual representation works in the wider mortgage market, because the terms are standard and the borrowing cheap. The mortgage products are long-term and the mortgage arrangements are well known, understood and embedded in the public experience. In this market, the borrower selectstheir solicitor, someone they often have a long-term connection with and someone they have trust and confidence in. Conceptually, and in reality, that is some distance away, from a lender imposing upon a borrower, their lawyer, or their panel of lawyers, who the borrower has no connection to, or trust or confidence in and who may not even be conveniently located to visit.

Ask yourselves whether you would want to be micro managed and controlled to that extent in a transaction which is high value, may involve your home and that of your family, and where your understanding and independent legal advice is so important? If you are selling your business, would you want to be told, who could advise you, for the sake of small hundreds of pounds saving in a transaction which runs into hundreds of thousands and could be life changing?

Further, it follows that an imposed panel increases the likelihood of solicitors taking on clients they do not know and have never met. Knowing their client, based only on documentation supplied and phone calls may lead to increased potential for imposter fraud, at a time, when in the short-term lending market identity fraud seems to be on the wane.

From a solicitor’s perspective, his or her responsibility is to avoid conflict of interest. A lawyer must not let his independence be compromised. Indeed, a solicitor must not act where there is a significant risk of a client conflict. The conduct rules provide example, as to when acting for lenders and borrowers is permissible, typically centred around standard mortgages concerning private residences.

So I accept there is scope for argument on the regulatory issue, but every solicitor who accepts dual representation instructions, certainly on a volume basis, may one day have to persuade a court, or their regulator, that their independence has not been compromised i.e. When acting for one client, from whom they receive regular volume work , along with another, likely to be the complainant, with whom they act just once and perhaps have never met. And, statistically, the level of default, and areas of dispute, are far higher in short-term lending than the mainstream mortgage market.

So why does independence matter so much? Is it the solicitor’s problem?

After many years spent recovering lender funds in disputed, highly contested situations, the single most influential document has been the ILA certificate (the certificate of independent legal advice). This document evidences that the borrower has been separately represented by a lawyer

of his choosing, who has acted and been paid to act, represent and explain the nature of the transaction, the detail of the documents and what happens if things go wrong. And sometimes they do.

More often than not, once produced, the ILA can even at protocol stage, avoid court action. The borrower’s issue, quickly becomes an issue between the borrower and their solicitor, rather than the lender. That can and does save wasted time and unnecessary costs, accelerating recovery by time periods measured in years.

If not settled early, a court will be heavily influenced by an ILA:

• A lender is entitled to rely upon it, to rebut any suggestion that one borrower is under duress, or the undue influence of the other.

• Unfair Credit Relationships are increasingly the line of attack on fairness and reasonableness. These claims are decided on a number of factors. I suggest that an imposed lawyer in short-term finance, depending on a particular factual matrix, could amount to an adverse factor in the courts’ decision when looking at the credit relationship in the round.

• As mortgage mis-selling remains a claim industry cloud on the horizon, true independent legal advice can also come to the aid of the intermediary, if faced with a parallel claim for poor advice said to be exclusively relied upon

The regulatory trend over the last few years has been to move away from execution-only, to advised sales. Advice is clearly considered to be necessary and proper. Advice which is not truly independent, might be deemed no advice at all.

From the lender’s perspective, the most important critical issue in any loan transaction is the validity of the mortgage, its recoverability and enforceability. Why would lenders choose todilute one of the most key important platforms for enforceability, just to gain a perceived improvement on speed and cost saving for its customers?

From an intermediary’s perspective, if speed or customer experience does not improve, how does that improve the their brand and reputation? Also consider the long-term implications for your business as an arm’s length introducer who is concerned about customer journey and the integrity of the transaction.

This bridging market has spent years building its representation and effectively rebranding itself as the short-term specialist finance market. It’s specialist because often the transactions are difficult, complex and require tenacity to get over the line. They often contain elements of restructuring. That is why often they take extra time to complete.

So, would it not be inconsistent to now characterise the market as standard, for the purpose of

making dual representation acceptable? Is the uncertain property market the right climate to take risks, albeit small, on recoverability? Does dual representation mend a problem that does not really exist? Is there likely to be any true time saving?

Behind it all, is the customer. Is it really in their genuine interest to take risks with their legal

advice, their choice of practitioner, justified by the interests of the funder or intermediary?