Conveyancing….walking the PII tightrope in 2023

The UK is now facing a recession. A recent report from Savills forecasts a 28% drop in residential conveyancing transactions for 2023[1] and a drop in property values ranging from 5 to 15% is also predicted by various analysts[2].

Time will tell whether these predictions come to pass, but PII insurers underwriting law firms engaged in conveyancing are going to be watching this issue closely. You need to be ready for this.

There are two particular issues that will be on your underwriter’s radar:

1. Will the loss of revenue arising as a result of the drop in transactions cause financial stress for firms to a point where some are forced to close, leaving insurers providing 6 years of run-off cover; and
2. Will the drop in property values precipitate an increase in claims against law firms, as we saw following the property market crash in the early 90s and again in 2008?

We encourage firms to start thinking and planning their response to these issues well in advance of their 2023 PII renewal.

What can you do in response to the anticipated reduction in conveyancing work and associated revenue?

Fee forecasts

Review your fee forecasts now based on some reasonable assumptions from the predictions of respected commentators and analysts. The CLC has gone as far as suggesting their members make contingency plans based on a 40% reduction in transaction volumes, which was the decrease their members saw in 2007/8.[3]

You might want to consider a range of scenarios, but the key issue is to understand what those changes in your top line will mean for your bottom line. This will enable you to plan and make timely decisions on what you need to do to ensure that your firm remains in a stable financial position.

Review charging structures

Reducing your charges to attract more work to fill the financial gap is not an answer that your PII insurer will be comforted to hear. Avoid the race to the bottom, and consider reviewing your charging structure to see if profit margins can be improved.

Review expenses

We have no doubt that firms will be closely reviewing their expenses to see where they can make savings. We caution firms to be very wary of cutting costs that will potentially impact on risk. For example, cutting training budgets or disengaging from quality marks such as Lexcel is likely to be of concern to underwriters. You need to take care that the expenses you cut don’t prompt a corresponding increase in your PII premium.

On the issue of expenses, we are aware that firms will be asking whether a reduction in the amount of conveyancing work they undertake will translate to any reduction in their PII premium. In our view it would be unwise to reduce the amount you are budgeting for PII at this time. Given that PII policies are written on a “claims made” basis, underwriters must continue to cover you for all past liabilities and will therefore still need to consider gross fees in the more recent years. However, please be assured that as your broker, Howden will be working hard on behalf of your firm to negotiate the best possible premium.

Staffing

Consider staffing issues. Can any fee earners be redeployed to other areas of the business where resource is required? Take care with this arrangement as underwriters will want to be satisfied that appropriate training and supervision is part of the redeployment arrangement.

Alternatively are there any members of the team who want to take this opportunity for a “Gap Year” or reduced hours. While there are likely to be few fee earners for whom this will be an option in the current economic climate, you won’t know until you ask. Such an arrangement would reduce expenses over coming months. The subsequent return of the fee earner could also help to provide the answer to resourcing challenges when the market improves.

The worst case scenario is that you will need to consider redundancies and while this would not be a preferred alternative, don’t delay the inevitable if this is the reality of the situation.

Growing other works areas within your firm

Are there other areas of your business that you can grow to fill the fees gap? Perhaps it is time to increase activity on your will bank and encourage clients to update their wills. But always ensure that you have fee earners with the appropriate skill and expertise to undertake an increased work load in any areas you decide to grow.

New areas of work

Are there any new work areas the firm could develop? This could involve taking on a new fee earner or a team from another firm that is looking to close.

Again the utmost caution is required from a PII perspective. In hard times underwriters always worry that firms will take on work that is beyond their expertise simply in an effort to fill the gap in gross fees. Be in no doubt that underwriters will look at this very carefully as we move through 2023 and into 2024.

If you are employing an individual or team from another firm that is closing, then also be aware of the potential for successor practice issues. You do not want to find that you have unwittingly become a successor practice, which could also adversely affect your PII. Growing your firm in this way also needs to be discussed with your insurer and there could be an additional premium payable. Always discuss plans with us as early as possible.

If you start to undertake a new area of work then remember this is material information that you must disclose to underwriters. You need to be ready with your story to reassure them that this is a sound decision, including confirmation of the expertise within the firm to undertake and supervise this new work area.

What can you say to reassure underwriters that there is a low risk of claims arising from your historic conveyancing work?

The property crash in the early 1990s and 2008 resulted in an increase in property-related claims against law firms. As soon as a purchaser or lender suffers a loss in these circumstances, you can be certain that many will be calling for the file to see if there are any shortcomings that will justify a claim.

Firms need to be ready to respond to their underwriter’s concerns and we encourage you to start marshalling together information you can use to support an argument that your firm remains an attractive risk during these troubled times.

Below are some of the issues you might want to highlight to underwriters to the extent that they apply to your firm. This information can be included in a covering letter or document that you submit with your proposal form.

Risk management

It would be useful to summarise any risk management initiatives in your conveyancing practice that are above and beyond what underwriters would usually expect. For example, do you have a file audit process that is more detailed and qualitative than the standard? Do you undertake enhanced checking of reports on title before they are made available to clients?

Resist the temptation to deliver up your risk management manual. Insurers expect that this exists and is adhered to, but do briefly highlight anything that is beyond the norm or innovative and will separate you from the rest of the crowd – in a positive way.

Staffing

Some firms carefully structure their conveyancing departments to ensure that work is being done at the right level. For example do you have more junior fee earners focused on chasing information and managing some of the routine communications, leaving the experienced fee earners to concentrate on the more technical and challenging aspects of the transaction? Has your staffing been at a level where fee earners have always had a manageable caseload – particularly during the peak of the SDLT holiday when transaction volumes were high?

Reassuring underwriters that resourcing has been carefully managed in recent years will be another tick in the right box.

Technology

Many firms have been using technology to streamline workflows and control risk for some time. If you do, have you ever told your underwriter about this? Now would be an appropriate time to tell them.

Delays

In the conveyancing process there are often delays in exchange of contracts and completion. However, in the current environment you do not want to find yourself in a situation where it is your firm that has caused the delay. If a client’s mortgage offer expires and can only be replaced at a higher rate (or not at all) then you are likely to find a claim coming your way. It will be useful to reassure underwriters that you have had your eye firmly on this issue.

Buyer-funded developments

You will be very familiar with commentary regarding the fallout from failed buyer-funded developments and the extent of claims that insurers are funding.

While this issue is addressed in proposal forms, if you have not undertaken any transactions of this nature, it would be worth highlighting that again in a covering letter.

If you have undertaken this work then review the additional information you provide in response to insurer’s questions on your PII proposal form. Is there anything you can add to reassure underwriters – for example, confirming if the developments in question have been successfully completed and title transferred to clients.

New build properties

Acting on the purchase of new-build properties, particularly if you are on a developers list as a “preferred conveyancer”, is something of a red flag for underwriters. They are conscious that developers can be awkward when it comes to responding to inquiries and changes to documentation.

If you undertake this work it would be useful if you could explain to underwriters what you do in response to this risk. We are also aware that some firms actively avoid doing new build work. If that is your firm – or you undertake very little, then that is a point you should make.

Buy to let/Investment property market

Underwriters will remember that the downturn in the property market in 2008 was the catalyst for swathes of lender claims arising out of an over-heated buy-to-let market. This followed a period where developers had engaged in a widespread practice of selling off-plan properties with hidden discounts or incentives that conveyancers had failed to report to lenders. This is the reason why underwriters continue to ask questions around this issue on proposal forms.

Make sure you give a comprehensive answer to these questions, including any information you are able to give to reassure underwriters that they will not be caught out with claims against your firm arising from this issue.

Client profile

Experience tells underwriters that there is a greater risk of PII claims being brought by lenders who pick through conveyancing files following a repossession which results in a shortfall on re-sale.

You might want to consider if there is anything relating to the profile of your client base that is relevant here. For example, if your client base for conveyancing work mainly involves purchasers taking a mortgage where the loan to value is below 80% and on a repayment basis, then it would be useful to note this. This profile is likely to provide more of a buffer if house prices drop to the extent that is currently anticipated.

Historic claims activity

If you have no or few conveyancing-related claims historically, then take the opportunity to highlight this. You might even want to go back further than the standard six-year history insurers usually ask for.

If the profile of your practice was the same back in 2007/8 and your approach to work at that time did not result in any increase in the claims made against your firm, then definitely make the point.