Conveyancing Association - All Members meeting

Location: 3 Priory Court, Pilgrim Street

SRA Executive Director of Policy Crispin Passmore addressed an all members meeting of the Conveyancing Association.  

Conveyancing Association Conference - Passmore, C

Thank you for this invitation to speak with you.

The current buzzword in legal services is liberalisation, but the conveyancing market is actually part of a market that has been liberalised for some time.

The introduction of licensed conveyancers into the market had a huge liberalising effect and we have a relatively mature liberalised market in this area. It is already very competitive and consumers of course shop around on price.

So unlike many other aspects of legal services, we’re not dealing with a major transformation in the regulation of conveyancing flowing from the liberalisation of Legal Services Regulation that’s come about as result of the 2007 Act.

But that doesn't mean that there are no changes that might take place. ABS brings the potential for not only non lawyer ownership but external investment that can ramp up investment in technology. ABS, and particularly so as we increase the viability of multi disciplinary practices, might have the potential to bring conveyancing services together with other professional and customer facing services. My Board yesterday agreed new rules to facilitate MDPs and once we have LSB approval I expect to see new models arise that bring together legal and other professional or quasi professional services.

The potential for change is always enormous - whether that be through technology, consumer facing innovation, consolidation or just changing consumer behaviour. The growth of comparison websites and other 'choice tools' for consumers might drive that as might the innovations as to what is offered to consumers. The SRA has recently committed to better use of its public register of those it regulates to support these developments.

I am sure that you are all very conscious of the potential for more change and will know more examples of such things already happening than I do. Change is a given in many markets; but actually some of the issues that we are all dealing with are also constant.

From our perspective, the issues that we’re trying to address at the moment in the conveyancing market flow not so much from liberalisation but from other things.

The first is that we’ve had to deal with a number of issues that are historical and have been with us for quite some time.

What we’ve seen is insurance arrangements for solicitors come under massive strain from claims arising from property transactions.

If you look back, pretty much all of the mechanisms that the Law Society originally, and then the SRA, have used to provide Professional Indemnity Insurance for the solicitors profession have come under pressure as a result of property claims.

The level of claims being generated from residential conveyancing and, also, to some extent commercial conveyancing and property transactions, has been a significant issue for the profession because, whilst not all solicitors undertake conveyancing work, the whole profession pays through the Compensation Fund and also takes the impact on the general level of indemnity insurance fees.

So this has been a big focus for us and some significant changes have been made, with further changes afoot.

The second is that we all know that the conveyancing market can be very volatile. But there are risks to consumers when the market is both buoyant and flat and working with firms to manage these is a huge priority for us.

The third is making sure we manage these risks effectively whilst at the same time making our regulation more proportionate, removing unnecessary burdens and reducing costs so conveyancing solicitors can remain as competitive as possible - thus offering consumers trusted legal services at competitive prices.

Growth in the housing market

The downturn in the housing market in 2007 left many firms heavily reliant on conveyancing work struggling to survive. Our research on conveyancing which we carried out in 2012, showed that 40% of firms questioned said they had to make redundancies or implement cost cutting measures as a direct result of reduced conveyancing work. 80% said that they had fewer clients as a result of the economic downturn. By far the biggest risk for us was firms collapsing in a disorderly way and the impact that this would have on their clients. We have no view on firms leaving the market - that is a common feature of any competitive market - but we are concerned if that is done in a way that does not protect consumers.

Confidence is now of course returning. More people are buying and selling houses - the number of residential property transactions is nearly 30 percent higher than a year ago.

But while this is clearly good news for those undertaking these transactions, the sustainability of this is uncertain and growth is extremely variable from region to region. Risks of financial instability and firms collapsing in a disorderly way do still concern us.

The conveyancing market will always be hugely important to us given it’s one of the most frequent legal transactions, and failure to protect consumers in this market has the potential to undermine confidence across the entire legal services sector.

With the increased number of property transactions, there are risks that firms need to manage and no-one can be complacent. In July we published our 2014 Risk Outlook which saw some of these risks rise up the register.

So I’m going to say a few words about where firms need to be particularly vigilant, some of the risks that we see as significant.


Mortgage fraud

First, mortgage fraud. With more houses being bought and sold, there is greater potential for increased cases of mortgage fraud and we are encouraging firms to look for warning signs of this in transactions in which they are involved. I often listen to calls to our ethics guidance helpline - it is one part of my responsibilities at the SRA - and I am often struck by how seriously callers are trying to balance their responsibilities in these areas with their duties of confidentiality and the like. It is an important issue and helping you to comply seems to me to be something that we can help even though the core responsibility is yours.

Money laundering

Law firms can of course also be attractive targets for those wishing to launder the proceeds of crime. We have received more reports of suspected money laundering through law firms, and we are investigating some really serious cases. When speaking to 100 randomly selected conveyancing firms in 2012, we found one in four had experienced cases of attempted money laundering. The majority of these were identified through attempts to avoid or cheat identity checks. A client failing to provide valid identity documents is one of the key money laundering flags.

Solicitors have obligations under the Money Laundering Regulations 2007 and the Proceeds of Crime Act 2002 to prevent money laundering and report any suspicious activity and we have robust systems in place to deal with this activity.

However, we are concerned about the increase in money laundering reports within solicitors firms, the quality of these reports and the reduction in the number of reports submitted over recent years to the central reporting body - the UK Financial Investigation Unit.

In 2016, the UK will be scrutinised by the Financial Action Task Force to ensure robust anti-money laundering systems are in place, with the legal sector high on the agenda.

We’ve responded to this by launching our own anti-money laundering campaign. This is to ensure that solicitors have the correct systems in place to guard against money laundering, including their duty to report suspicious transactions, and that we deal with those solicitors who are caught up in money laundering and those solicitors deliberately involving in money laundering.

We will be providing support and guidance to firms to ensure firms have the appropriate systems in place. We’ll be working particularly closely with high-impact firms as they could be at greatest risk of being targeted. We will take action against those that breach the anti-money laundering regulations and we’ll flush any instances of money laundering if firms have become involved. More information about this is available on our website and I’d urge you all to take this very seriously.

Bogus firms

We’re also seeing more and more bogus firms, particularly those involving identity thefts of an existing firm or individual. This is a huge risk to consumers losing money or confidential information, and to the reputations of your law firms. It’s therefore in all of our interests to safeguard against this.

Our recent risk outlook highlighted the example of Mr and Mrs Black who were scammed by a bogus firm – (all names have been changed to protect identities).

Mr and Mrs Black instructed JKL Solicitors to help them buy a house. Soon JKL received a phone call about the sale from the sellers’ solicitor Mr Red. JKL checked the Law Society’s website, which appeared to confirm that Mr Red was a qualified solicitor at a genuine law firm called MNO Solicitors.

The house purchase proceeded normally. Mr and Mrs Black signed the contracts and arranged with their bank for the £200,000 mortgage loan to be sent to JKL, who then transferred it to MNO Solicitors on completion. A few days later, JKL attempted to register Mr and Mrs Black as the new owners of the house.

However, it then came to light that the house already had an owner – the seller who Mr Red had claimed to represent. This individual had not sold his house to Mr and Mrs Black; he was still living in it, was still making mortgage payments, and in fact had never heard of Mr Red.

Our investigations revealed that a fraudster had used Mr Red’s identity to set up a fake branch office of MNO Solicitors using forged notepaper. He had stolen the mortgage advance and then disappeared, leaving no traceable records.

Although the name of a real law firm was used, some key information had been changed, such as the telephone contact number and details of MNO Solicitors’ client account. Mr and Mrs Black’s lender was left to bear the financial loss of the mortgage advance, and Mr and Mrs Black were left out of pocket and without a house.

Court proceedings followed and JKL were not found to be at fault as they had taken proper steps to check Mr Red’s identity, and the fraud had been sophisticated. However, the case had a bad impact on the firm’s reputation when the case was reported in the local paper.

So the risks are very real.

We can’t remove the risk of bogus firms by ourselves, but we can raise awareness through issuing urgent alerts on our website when these matters are brought to our attention. We’ve also encouraged firms to take steps to protect their identities.

There are a number of good practices we encourage law firms to carry out to manage this risk. These include things like:

  • regular internet searches of your firm name to check for identity theft
  • checking your firm on the Law Society’ s ‘Find a Solicitor’ to ensure details are correct
  • being alert to suspicious incidents, such as when others seem to think your firm is dealing with a transaction you are not aware of
  • regularly checking our website for scam alerts, or follow us on twitter
  • and contacting our ‘Red Alert’ hotline if you believe someone has stolen the identity of your firm or anyone working within it.

Misuse of client money

But the biggest risk continues to be misuse of client money. Some of these cases are caused by poor systems and controls or incompetence, whilst other cases come down to downright dishonesty.

Misuse of money and assets is not only a risk to clients. It is also the biggest threat to public confidence in legal services. A loss of public confidence in law firms would impact on access to justice not to mention the overall standing of the provision of legal services in England and Wales.

In 2013 we reported an increase in the number of cases of misuse of money or assets that we were dealing with and this trend remains a concern.

This issue can be found across a wide range of firms. In larger firms, it usually arises as a result of systems and controls failing to detect a rogue individual or group of individuals misusing money. We have found that for small and medium firms, this risk is more common if a firm is in financial difficulty, when money is sometimes misused to try and prevent the firm from failing.

The whole issue of solicitors holding client money is an interesting one. One very experienced commentator said to me that we had to question the layering of all risk within the residential conveyance on to the solicitor and their insurer. That leads me to ask what alternatives there might be? Could we for example find alternatives to the solicitor holding client money? The Bar uses an escrow account model - what can we learn from that? How do other jurisdictions manage these issues and risks? What might the Law Society's portal offer as alternative to firms holding client money? How might we transfer the costs of and risks of holding client money squarely on to those that do so rather than spread it across the whole profession?

Understanding these risks and how we might respond to them is what drives our approach to reform of regulation.

Regulatory reform

The big challenge for us is to work with firms to reduce these risks, but do so in a way where we don’t just add ever more regulation to combat the problem or pick up the pieces.

At the end of August we published our updated supervision and enforcement strategy for conveyancing which sets out how we will engage with firms who undertake conveyancing work. It also provides guidance on the main risks firms face. We will test the effectiveness of a firm's systems and controls but we will also engage with firms to help them manage and mitigate risks. This is available on our website.

What we don’t believe is that detailed rules make people behave ethically so we really need to question why we have them. Our future reforms are about moving to a much simpler Handbook which relies much more clearly on the professional principles and do away with rules. We need to help small firms comply with rather than swamp them with detailed rules.

What we know is that the less time and money you spend on compliance, the more you can spend on meeting your clients needs and growing your own business; we need to encourage this. So we are focusing on reducing costs for firms and letting them get on with running their business and helping consumers.

On costs we’ve made good progress on this. In 2015 our operating budget will be £47.7m, down from £52.8m, a reduction of £5.1m, or 10%. Practising fees for individuals and entities will reduce this year, for the former by 17% on average by around 13% for the latter. We have also been able to reduce contributions to the compensation fund by £5m, or 37%.

And we’ve made early progress to reduce regulatory burdens. Examples include the abolition of student enrolment, the abolition of the annual keeping of the roll exercise and our recent consultation on residual client balances.

Our recent proposals on professional indemnity insurance are perhaps a more significant example of this. The purpose is to reduce any unnecessary burdens on firms for whom the current required levels of cover are unnecessarily high, whilst ensuring that consumers have adequate protection in higher value transactions. In this case, where firms felt that cover of less than £2 million was still appropriate, they could take out such a policy and potentially pay less of a premium. That issue is with the LSB for approval and we await their decision with interest.

These changes form part of a wider review of the minimum terms and conditions for professional indemnity insurance. A subject we will be looking at later this year with as view to introducing more changes in 2015.  There is currently a call for evidence on financial protection - we want to hear from you before we reach clear views and develop proposals.

And there are rules in the Handbook which we think aren’t at all necessary which we’re getting rid of. The accountants report, for instance. At the moment we receive about 9,000 a year. The reports are retrospective, so they play a pretty limited role in ensuring compliance. And they cost firms a minimum of £800 to produce, while it costs us £100,000 to store them. Add to the mix the time involved for firms to submit them and for us to collate and scan them we have a requirement that takes a lot of resource for all involved for very little benefit. We want to reform this so that we deal only with the real issues. Yesterday my Board agreed changes that will see simplification of the form accountants complete and a removal of the requirement to send unqualified reports to us.

Complexity of the accounts rules may well drive the volume of qualified accountants reports. of the more than 4,000 reports that are qualified it is only a few hundred, perhaps only 200, that really raise issues for us to be concerned about. Over the next 18 months we will also be undertaking a full review of the solicitors accounts rules to make them more proportionate, targeted and effective.

And we’re focusing on what we can do to reduce burdens to small firms, with a view to ensuring that the burden of regulation does not unduly fetter their ability to compete and thrive. This will include a review of the COLP and COFA arrangements for this sector, looking at whether this framework is really required for such businesses, or whether it's overkill. And in the Autumn we will also be publishing a package of ideas aimed at supporting small firms - but the key for me is that small firms tells us what we do that doesn't work and help us to get our regulation to a state where we can all agree it is proportionate and targeted.


So to wrap up, there continues to be big risks in the conveyancing market that have the potential to damage the reputation of your firm as well as the market as a whole.

But rather than add extra layers of regulation, our future reforms are about keeping costs down wherever possible so firms can remain competitive and meet consumer expectations, helping small firms comply and being clear about targeting our regulation so it is proportionate.

I think our emerging regulatory reform process will go a long way to achieving this.

Thank you….