Thursday, 20 February 2014

Should Free Legals by Lenders be Banned by the FCA?

Treating customers fairly (TCF) is central to the Financial Conduct Authority’s (FCA) expectations of a lender’s conduct. Banks must put the well-being of customers at the heart of how they run their businesses.

After years of licking their mostly self-inflicted wounds, banks are now starting to compete for borrowers with ‘free legals’ reemerging as the preferred incentive to lure borrowers.

How to square the TCF outcomes the FSA wants to see mortgage lenders deliver with the use of free legals? Banks are desperate for us to believe they have turned over a new leaf but are the old ploys returning?

Whilst I am not an advocate for separate representation, my view is that changes over the last few years have made it is increasingly harder to act for a borrower and a lender without there being a conflict. That conflict is brought into sharper focus where free legals are in play because the solicitor is not acting for borrower but acting on behalf of the lender paying for the services.

Outcome-focused regulations dictates that TCF includes the fair treatment of consumers, as well as products and services designed to meet the needs of identified consumer groups.  Individuals
must be kept appropriately informed of the progress of their cases. It is hard to argue that you would find these fundamentals in play with any client recommendation to take the free legals route.

One only needs to look at the forums such as MoneySavingExpert and other online venues to see a picture that clients can find themselves anguishing in the slow lane, with no motivation for their solicitor to progress the matter timeously.

I am fairly confident that the SRA would not tolerate an analogous situation in the legal industry. Consider a scenario where large conveyancing law firms were offering free wills by a separate will-writing company with every conveyancing transaction. The likelihood is that any such company -- for obvious commercial reasons -- would then farm out the work to the cheapest will writer. What sort of quality could be expected from the arrangement? If the SRA would not tolerate this, shouldn't the FCA be taking a closer look at ‘Free Legals’?

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