The Australian Registrars' National Electronic Conveyancing Council (ARNECC) has been established to coordinate the legal framework for National Electronic Conveyancing. The centrepiece of this legal framework will be the proposed Electronic Conveyancing National Law (ECNL) which provides for the establishment of Electronic Lodgement Networks (ELNs) by independent operators. ELNs will provide an electronic gateway for the preparation of instruments and the settlement and lodgement of land transactions.
The ELN is not proposed to be an electronic method for handling the whole of a land sale or mortgage transaction. For example, the contracts for sale of land and loan agreements will still proceed as they do today. Rather, the ELN provides an alternative to the physical 'get together' to conduct land settlements. It is hoped that this electronic system will produce cost savings and increase efficiency. ELN will be a national land settlements system.
Under the current paper based system, the parties to a conveyance or mortgage usually meet together to hand over the title documents, cheques and associated documents. Under the ELN, there will be no physical meeting, and the transaction will proceed on line (a bit like CHESS handles share transactions).
Recently ARNECC released Proposed Model Participation Rules for discussion. The MFAA and Gadens Lawyers will be lodging submissions in respect of those rules. The draft rules can be accessed from http://www.arnecc.gov.au
Participants in the ELN are called Subscribers, being businesses such as lawyers, conveyancers, and banks.
In order to protect the integrity of titles, the draft rules envisage the verification of the identity of 'Clients' (people buying, selling and mortgaging their houses). Generally, the draft rules envisage a face to face meeting with Clients conducted by the Subscriber or an agent of the Subscriber who will perform the identity verification. Usually, photographic identity documents will have to be produced and the customer will be identified using those documents at the face-to-face interview.
This is an additional requirement that does not occur under the current paper based system. Many vendors and purchasers are not identified at all. Although most mortgagors are identified for AML/CTF purposes, that identification often does not require the face to face interview contemplated by the draft rules.
The face to face identification can be conducted by the Subscriber through an agent appointed by the Subscriber (Subscriber's Agent), for example a finance broker acting for the Subscriber. However, the Subscriber is ultimately responsible if the identification is not carried out as prescribed or is carried out negligently. (If the identification was carried out properly, but there is still identity fraud, the draft rules envisage that the Subscriber is not liable). Although usually there would be an indemnity by any Subscribers Agent in favour of the Subscriber, in the absence of appropriate limitation of liability on the amount that be claimed from a Subscriber if the identification is not properly carried out, Subscriber's may not be prepared to rely on this indemnity.
The rules envisage an exemption for ADIs that can use their AML/CTF program so long as they accept the risk of identity fraud.
There may be many ADIs that are not prepared to accept that risk and will require customer identification to be conducted using the face-to-face system prescribed in the draft rules. In addition to these ADIs, lenders without wide branch networks will be keen not to be disadvantaged by having to arrange for a face-to-face identification.
Submissions made by the MFAA and Gadens Lawyers focus on ways to ensure a level playing field for lenders without wide branch networks that need to conduct face-to-face verification. The submissions suggest that holders of Australian credit licences and their credit representatives should be able to conduct the verification, as should employees of Australia Post without ultimate liability being sheeted back to the Subscriber.
Example 1: lender has no branch network and markets mortgage loans through brokers. The lender outsources mortgage preparation to a law firm like Gadens. Gadens is a Subscriber in the ELN. Gadens must verify the identity of the mortgagor. This means that the mortgagor must attend a face-to- face interview with Gadens staff, or an Agent appointed by Gadens. Besides having to put these agency arrangements in place, Gadens will be liable if the Agent does not conduct the identification properly.
Example 2: Gadens is acting on the sale of a property. Currently, Gadens may never have a physical meeting with the vendor. Under the proposals, Gadens or its Agent will need to meet with the vendor to conduct the identity verification. When a company is involved in the transaction, the office bearers signing must be similarly identified.
It would appear that the cost of the face-to-face identification would more than offset any cost savings involved in avoiding a physical settlement. The ELN initiatives have the potential to impact the businesses of all mortgage lenders and intermediaries.
A proposal being explored by Gadens and the MFAA is that the Subscriber is not ultimately liable for breach by the Subscriber's Agent if the face-to-face interview is conducted by Australia Post employees or finance brokers holding an ACL or that have been appointed as a credit representative. This would give lenders that wish to participate in the ELN a way to do so without assuming additional liability for identity fraud.
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This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.