Incentives to Lawyers from Suppliers

Response to OBA regarding incentives to lawyers by suppliers

Note: As you know, Maurizio Romanin, in addition to being the President and CEO of LDD, is also a practicing solicitor and an active member of the real estate bar.

I believe lawyers should be paid a reasonable fee for services provided. Undisclosed incentives distort the market for legal services and put downward pressure on those fees. Up front and full disclosure of the incentive, as part of the lawyers fee when a quote is provided, makes the entire incentive process pointless.

The following is my response to the OBA request for input on the matter of incentives to lawyers by suppliers.

A little bit of background on this. In the U.S. there evolved a very sophisticated system of inducements that linked:

  • real estate brokers and agents to title insurance underwriters;

  • real estate brokers and agents to title insurance agents;

  • title insurance underwriters to title insurance agents;

  • tile search houses and other information providers (i.e.surveyors, flood plain mapping services) to one or more of the players above;

  • mortgage lenders and brokers to one or more of the players above.

  • etc. etc. etc.

This practice became problematic. Consumers were paying twice as much as they should have been and had very little or no choice as to who they were dealing with. There was a complete lack of transparency.

The U.S. federal government was forced to intervene (notwithstanding that real estate matters are typically dealt with by each state) and passed the Real Estate Settlement Procedures Act ("RESPA").

I never believed a Canadian RESPA equivalent was necessary because lawyers do real estate in Canada and lawyers have fiduciary obligations to their clients.

Moreover, all things being equal, if more work is required of the lawyer in a deal involving title insurance, the market would determine (assuming equal access to information by consumers) whether the fee associated with the extra work was equal to or less than the benefit derived from the policy. If the benefit exceeds the cost, the policy would be obtained and an additional direct fee could be charged by the lawyer.

Although "Work share" or "admin services" arrangements are permitted under RESPA, these exceptions are intended to help consumers by either reducing costs or increasing the benefits to the consumer. Workshare arrangements allow one entity to pay another entity for services in order to increase efficiency and reduce costs.

This is not the result with the current examining counsel program. The cost of a title insurance policy is greater under the examining counsel program with no additional coverage or other benefits to the consumer.

It is important to be objective and frank about the examining counsel program. If it is sanctioned by the law society, other underwriters will implement comparable programs. If full disclosure is required, the allure of the examining counsel program (which I submit is the ability to quote a lower direct legal fee to a potential client while avoiding or skimming over the indirect fees to be paid by the consumer) will be virtually eliminated. Lawyers would need to disclose direct and indirect fees in quotes to clients. They would also need to disclose that the policy premium would be less in the absence of the examining counsel fee. Finally they would also need to advise that examining counsel fee is optional.

If full initial disclosure is required, why would a client ever agree to the extra cost? If initial disclosure of the EC was required ab-initio when the lawyer was quoting the fee on the deal what is the purpose of the EC fee?

It is relatively easy to rationalize an arrangement that puts money into lawyer's pockets. It is a lot harder to do the right thing in order to preserve and substantiate the lawyer's special and exclusive role in real estate transactions.

We should be very concerned about how the approach ultimately adopted reflects on the lawyer's current exclusive role in real estate as well as the law society's unique role in the governing process.

Maurizio Romanin