A young couple enters the offices of a branch of a large chain of estate agents. They are just an ordinary couple who have worked hard to save the necessary funds to buy a home. The parents are backing the couple with cash gifts to get them off to the best start on their first purchase. Let us call these buyers the ‘First Time Buyers.’
Home Buying Environment
Estate agent’s offices were once a relatively risk-free environment. However, the First Time Buyers face several threats to their best interests because of multiple conflicts of interest. These conflicts of interest have arisen because of the payment of referral fees (RF) to the estate agent from several parties.
Compromised Conveyancing Services
The First Time Buyers are nervous, and so, are navigating this new world of home-buying hesitantly. The estate agent often works for a company, which has close links with a ‘conveyancing factory’. So, the agent pushes the First Time Buyers hard to use the legal services of such a factory. The estate agent will be rewarded by the conveyancing factory by payment of a referral fee for making such a referral.
However, the conveyancing factory, to make such conveyancing profitable because of the payment of an RF, achieves significant cost savings by employing large numbers of badly trained staff to handle the dramatically increased workload. This combination of too much work and lack of training is toxic for the First-Time Buyers’ plans and means that their purchase takes far longer than it should. Moreover, these arrangements will give rise to staff suddenly stopping progress on a chain unexpectedly, while a ‘team leader’ signs the file off. The risk of professional negligence claims against the factory also climbs because of the fragmentation of the control of individual cases.
Second Best Finance
But the risks to the First Time Buyer do not stop with the conveyancing. The First Time Buyers ask the estate agent for guidance on finance, and so the agent refers the First Time Buyers to a mortgage broker who has also paid a referral fee to the estate agent. So, what guarantees do the First Time Buyers have that any mortgage product obtained by the broker is the best obtainable on the open market?
Finally, The First Time Buyers ask the estate agent to recommend a competent surveyor. He has also paid a referral fee to the estate agent. Will all the defects in a property be highlighted to the First Time Buyers notwithstanding the payment of such a fee?
How can the payment of RF ever be reconciled with the duties to act ethically imposed, for instance, by the SRA? There are several objections:
- lawyers should not, in effect, be sharing legal fees with non-lawyers;
- because of payment of a RF, solicitors or their clients might end up in effect, ceding control of a purchase to the beneficiary of those fees;
- estate agents or developers achieve indirectly what they could not achieve directly -control of the conduct of a house, flat or new-build purchase;
- no transparency can compensate for the conflicts of interest generated by the payment of RF;
- are clients sophisticated enough to understand the conflicts of interest which can arise because of the payment of RF;
- the increased imbalance in bargaining power between a client and estate agents because the payment of RF is not in the public interest;
- the pressure to use only professionals nominated by the estate agent reduces choice for the First Time Buyers and is anti-competitive;
- independently of the above factors, lawyers still owe general duties to act in equity, so they must act in good faith when acting for a client and
- the payment of an RF encourages clients to go to the wrong law firms that lack competence in, say, complex leaseholds or new builds.
Although RFs are the most common example, the underlying issue is conveyancers entering into financial or business arrangements with one or more parties whose interests might conflict with that of their own client’s. It should be noted that there is an abundance of evidence that this conflict of interests has led to significant harm even when no RF is involved. Perhaps the clearest example is that of developers offering financial incentives to purchasers if the developer’s chosen firm is instructed. The nominated firm then turns a blind eye to exploitation of purchasers by the developer. This is also common practice in relation to shared ownership leases where financial implications for purchasers can be incredibly complex or obtuse. In those circumstances it is especially important that the buyer receives competent and independent advice; however it is common practice for the conveyancer to be nominated by the developer (seller).
A Contaminated Home-Buying Environment
Buying a new home should not be a lottery in the sense of the impartiality and quality of advice given to first-time buyers and other types of buyers by the various professionals involved in a purchase.
So, in the view of The Property Lawyers Action Group, the Home-Buying Environment has become contaminated by the ethical problems generated by the payment of RF and the other financial or business arrangements described above. Therefore, such an environment must be ‘cleaned up’ in the public interest.