At Hallett Law, we really don’t like saying “no” to clients, especially in an area where we specialise (commercial, corporate and employment law). We work alongside many of our clients to assist with the financial aspects of their business transactions (unless of course we step into the realm best left for accountants, tax consultants or financial planners).
However, there is one instance where we have made the decision to not assist, and that is with financial certificates.
What is a financial certificate?
A financial certificate is where a client is seeking a bank loan (or a refinance of a loan) from a bank and that bank requires a person to go “guarantor” for such loan. The bank will often requires the client to have us sign a “certificate” to state that we have given that client independent legal advice. The reason banks seek this kind of certificate is so that they can protect themselves from situations where a loan is obtained (often a considerably large one) and upon default, the guarantor claims that they did not understand the implications of “going guarantor” for such loan.
We saw in the well known case of Commercial Bank of Australia v Amadio  HCA 14 that a mortgage and guarantee was set aside because the person/s who executed those documents had no proper understanding of the effects of the documents they signed (‘the Amadio Principle’).
Given the complexities documents relating to loans and guarantees by banks these days, an unassisted borrower or guarantor can easily argue that the documents were not fully understood at the time of execution. The banks have sought to deal with this through the mandatory requirement of a “financial certificate”.
Why do the banks require a lawyer to sign the document?
The financiers believe that lawyers are the key to ensuring their borrowers understand the terms of the loan contract and guarantee. However, their intention goes beyond simply ensuring that the borrower understands the transaction. The bank will often seek to sue the lawyer in instances where the borrower fails to pay and the security provider seeks to set aside the transaction (based on the Amadio principle).
Why we do not sign financial certificates.
We did consider at one point whether offering this service would be viable. However, upon the advice of our professional indemnity insurer, it was determined that providing advice on these certificates goes beyond “traditional” legal advice on the nature of the documents. Rather, it requires us to sit with the client in understanding the legal, financial and personal risks that he or she is undertaking. It is not that we cannot give that kind of advice. It is just that it would require intensive work with the Client that would go well beyond a simple case of reviewing the documents. We believe that it would require over five to six hours of legal work for us to feel that we have given you the level of legal advice required in order to meet the high standard of care required for this kind of advice. This makes for a very expensive exercise for our clients.
Given the heightened risk of lawyers to carry out this kind of work, in the event of a claim, the Law Claims Scheme requires us to pay triple excess to be payable by the insurer lawyer (being, us!). Therefore in the event of a claim by a bank that we failed to give proper advice, we would have our excess move from $5,000 to $15,000.
What do we advise our clients?
We have seen an increase in the demands of the banks to have these certificates signed, especially since the Banking Royal Commission, and even more so, the raised concerns of loan defaults as a result of the economic impact of COVID-19.
We are advising our clients to “push back”.
That is, return to the bank and remind them that lawyers rarely sign off on these certificates – this will not come as a surprise to them. They know the position of the Law Society of South Australia and the Law Claims Scheme (and the various other law societies around Australia and their associated insurance schemes).
Often, the bank will not insist on the certificate and where they do insist, we remind our clients that they can always seek finance from another financial provider who does not require these certificates. We tell our clients that they should simply insist that the transaction occur without the certificate, or if the bank requires the lawyers certificate, the bank should pay for that. If they are a decent bank, you will see them quickly back down.
If you have any questions in relation to the above, please do not hesitate to contact us to discuss this further.