The Council of Mortgage Lenders (CML) has warned that cutting the minimum indemnity limit for law firms could force lenders into taking “fast and potentially drastic action”.
The CML’s letter to the Legal Services Board (LSB) opposing the application by the Solicitors Regulation Authority (SRA) for a rule change, was joined by others arguing equally strongly against the move, including 26 conveyancing firms, the Building Societies Association and the Nationwide building society.
Paul Smee, director general of the CML, warned that lenders would “revise their view of those firms with which they are prepared to work”, in the light of firms’ ability to secure indemnity cover to an appropriate level.
“Our expectation is that smaller firms and sole practitioners may be disproportionately affected by this review,” Mr Smee said.
“This would potentially represent a significant shift in conveyancing market dynamics, given one of our large lender members has estimated that sole practitioners and two partner firms make up just under half of their panel, which itself consists of thousands of firms.
“The extremely short timeframe for which to implement the rule changes compounds the likelihood that lenders are forced into taking fast and potentially drastic action to protect their current pipeline of work and transition to the proposed new minimum from October.”
A group of 26 conveyancing firms, whose responses were summarised by the LSB, said they were very concerned that the cut in the minimum cover would “impact negatively on us, thousands of firms like ours and the general public”.
They said the time allowed to respond to the SRA’s consultation was too short, the possible savings in premiums would be minimal, and many lenders would not allow firms to stay on their panels with only £500,000 of cover.
In his letter, Robin Fieth, chief executive of the Building Societies Association, said: “We believe that the current PII limits have serviced the profession and its clients well, and see no reasonable argument for a blanket reduction for all firms.
“However, we do acknowledge that different levels of legal work carry differing levels of risk. It could, therefore, be appropriate to allow a reduction in PII limits for firms undertaking low risk activities.
“That said, it is our firm belief that any firms undertaking conveyancing should continue to be subject to the minimum requirement of £2m cover (or £3m for incorporated firms).”
Andrew Baddeley-Chappell, head of policy and governance at the Nationwide, said the proposed changes would result in the need for the building society to regularly review panel membership, imposing a significant administrative burden.
“The likely knock-on effect would be a need to operate a considerably more restricted panel, moving work to a smaller number of firms.”
The LSB has until Monday to make a decision on the SRA’s application, or postpone its decision for another 90 days.