JN: At the outset, I think it’s worth saying that as I am a lawyer and Christopher is an insurer, we both have an early vantage point of trends that are going to hit lenders and we are very much aligned in protecting lenders interests and bringing awareness to the market . So, it’s really good to discuss the latest challenges that are facing the lending industry. One major trend we have identified is the sizeable increase in claims against lenders and the rise in the number of fraud cases. Sometimes, what on first view, is presented as fraud, may not ultimately turn out to be so. But the character of fraud in the market currently can be somewhat different to the traditional one dimensional imposter fraud, and it’s taking place more frequently.

CT: Yes, I would say that claims have risen by at least 100% in the last six months and they largely fall into two categories – fraud and solicitor negligence. At the moment we are seeing a lot of incidences of failed undertakings. These can be put down to lack of care, but sometimes arise from dishonesty too. As an example, a borrower’s solicitor failing to register the lender’s charge at Land Registry is a common occurrence. I agree, fraud cases often come in masquerading as something else, but once you scratch beneath the surface you can identify that there’s been a deception somewhere along the line, and this deception can come in many different guises.

JN: Historically fraud was mainly imposter fraud, but this reduced for a while, perhaps as a result of lenders taking a more sophisticated approach and improved processes. However, ID fraud has increased by at least 300% in the last twelve months. This indicates one of three things. Either the fraudsters are getting better, or lender processes are softening, or perhaps a combination of both.

CT: In the short-term lending space in particular, which often focuses on traditional underwriting rather than tech-based decisioning, the lenders can be more exposed to these risks, especially in an environment where there is increased competition for less business, they naturally take greater risks to win business without the safeguards provided by a strong tech platform that would give them a better chance of seeing the risks that lie ahead.

The type of fraud we are seeing more regularly isn’t actually the traditional imposter fraud where someone runs off with the money. Instead, what we are seeing is unscrupulous borrowers telling, what they think are, white lies to lenders, which they don’t believe will ever surface, often because they are in a desperate situation, that too is fraud. Whether or not they consider themselves to be a fraudster, they or their brokers will target lenders that they deem to have less robust processes and a greater chance of success of getting a loan approved and completed.

JN: It’s not just lenders whose processes are sometimes lacking. We’re seeing this with firms of solicitors as well. I’ve written at least five letters in the last two weeks where there have

been breaches of undertakings by solicitors. Time will tell whether dishonesty is involved, but whatever the underlying circumstances, the lenders involved are at risk of lacking security for advances made and spent. As the lending market increases and drives for greater speed and efficiency, some lenders choose to rely on non-panel firms for execution and registration. There are probably around 9500 law firms at the moment, of which three quarters are firms with four partners or fewer. Smaller law firms are under great pressure and so things get missed, risks get taken.

CT: And at the same time as these risks being taken, loan sizes are getting much bigger. In short-term lending space. It wasn’t too long ago that our cover for a loan capped out at £2m. Now this would only cover a small proportion of lending being issued by our clients. We’re working on a loan of £50m at the moment and double digit million pound loans have become the norm – there’s big stuff going through the system, most of which is conveyed and completed by some of these quite small law firms.

We have started asking our clients which solicitors’ they are using and moreover we are considering the introduction of greater scrutiny and due diligence over those firms. We prefer that the tried, trusted and experienced firms instructed by the lenders firms to register charges, and whilst we have not yet gone so far as to insist on this level of control, this is something currently under consideration.

JN: There’s also been a huge increase in the last 12 months in professional negligence claims. Historically these would be almost exclusively formed against valuers, but not now. Solicitor professional negligence claims are on on the rise. There can be a disconnect between the lender and the valuer, which lawyers fail to identify and pick up, with the result being that the lender doesn’t get a saleable property and in some cases they fail to obtain the exact same security envisaged in the application, and valuation. My job really is getting very interesting and, while these trends may make my work life ever more interesting from an academic perspective, they’re bad news for lenders. It’s quite a frightening trend – as bad as I have seen in my career.

CT: From our experience, claims track the economic cycle and when this turns, people get more desperate. Failure to exit on short-term loans has been masked in the last 12 months as lenders have been using forbearance to extend terms or rollover loans. But at the end of this forbearance, they are thinking ‘do we really want these loans on our books?’ If ultimately the lender calls time on a loan, this is when the issues start to come to the surface and the claims are made. It doesn’t matter if loan documents were executed badly provided the merry-go-round continues to turn, allowing borrowers to bounce from one lender on to another, but it’s when it stops that the problems start. It’s the last lender of record that is left holding the problem and they may struggle to enforce their security if an in experienced firm has failed to follow their instructions.

JN: We may be in a challenging economic environment, but there’s an exponential growth in claims, and it needn’t be like that. There is so much scope for dishonesty in this industry and the amount of human time and resource to identify dishonesty can be overwhelming. That’s why experience is so important as it helps to sniff out the problem cases at the outset.

CT: We have seen a prolific number of new lenders enter the short-term lending arena, often without experience but attracted by what they think a strong returns, with little risk attached. Unfortunately, some are finding that the risk profile is somewhat different to what they expected and the losses made would have been mitigated, hard they worked with trusted and experienced specialists to complete their loans.

JN: Many think it’s a no risk proposition because the lending is secured. But there are a number of reasons why that lending might not be secured or secure and it’s important that lenders and solicitors work together closely to ensure they mitigate against the risks as effectively as possible.

CT: Do you think a solicitor should refuse to complete on a case where they suspect a fraud?

JN: In short no. A lawyer is meant to provide external counsel. A good lawyer will protect and steer. A bad lawyer will act as a postbox, bringing attention to oddity, but passing the buck to their client to make the call. When lenders drive down costs they are more likely to be relying on less experienced lawyers, lower paygrade lawyers. It’s really important when you get a lawyer that you get one who is prepared to say no.

CT: Commercial pressures often overrule any risk mitigation and it’s tempting for lenders to choose their solicitors based on price as they look to reduce their costs or speed, where they are seen as providing a better service but really this is because they are not asking the right questions to protect their clients.

JN: And this is happening at a time when lenders need as much protection as possible. We are really concerned about some very dangerous trends in the market. It’s in everyone’s interests that we address these and so Christopher and I will be putting in place a select seminar to discuss the rising trend of fraud. Anyone interested in attending should get in touch. We don’t think lenders can afford to miss it.