There are two initiatives progressing simultaneously:
- NECS – National Electronic Conveyancing System; and
- EC – the Victorian Electronic Conveyancing Project.
NECS is very much in the consultation phase. It is likely to adopt some, but not all, of the Victorian model.
Even though NECS is in the planning stage, there is potential for procedures to be adopted which unintentionally prejudice certain business models. Accordingly, it is important that there is ongoing monitoring of developments to avoid those biases.
Most of the following comments relate to the Victorian proposals as they are further progressed.
In Stage 1, financial institutions transact discharges and mortgages (ie, essentially refinance transactions). Testing of this stage has already commenced.
Stage 2 will provide financial settlement and allow transfer transactions. Trials for Stage 2 are expected to commence in the second half of 2007.
Expected use of the system
E-conveyancing is intended to be optional. The paper-based system will remain. Industry is only likely to adopt EC if:
- it involves no additional cost (and probably only if it produces some savings)
- there is no increased risk.
Victoria estimates the use of the system will cost about $75 per settlement (ie. not per party). Compare this to the current cost of $120 per settlement based on the cost of attending a physical settlement of $30 per party and four parties (discharging mortgagee, vendor, purchaser, new mortgagee).
Another cost-saving may arise from the removal of bank cheque fees. Whether this is a saving or an additional cost will depend on the fees charged by Australian Deposit-taking Institutions (ADIs) for providing the electronic payment system.
A potential cost for users is the cost of identifying the client (ie. the party to the transaction). The method of identification is likely to follow the requirements of the new Anti Money Laundering/ Counter Terrorism Financing (AML/CTF) legislation (whose rules are not themselves yet finalised). However, whatever those requirements are, they are likely to require a physical meeting to identify the transaction parties. Many, if not most, conveyancing transactions are conducted without a physical meeting by the lawyer/conveyancer and the client and so the potential for additional costs in this regard is significant.
Another factor is the cost of establishing the new system, training, the cost of maintaining a dual system (because many counterparties will not move to electronic conveyancing) and the cost of building IT systems to interface with the EC System in order to optimise the benefits of the system.
Documenting mortgage transactions
Mortgage transactions are usually documented by one of the following methods;
- lender prepares documents internally and arranges for them to be signed by the mortgagor; or
- a lawyer or documentation house prepares mortgage documents for the lender and sends them to the mortgagor for execution.
In either case, the mortgagor may or may not be represented by a lawyer/conveyancer. The borrower would not normally be represented in refinance transactions.
The current EC proposal contemplates two options.
- A paper mortgage is produced and signed in the ordinary way. The lender then uses the EC System to certify that it holds a mortgage signed by the mortgagor,
- If a mortgagor is represented by a solicitor/conveyancer, there is no need for a paper mortgage. The representative of the mortgagor electronically 'signs' the electronic mortgage on behalf of the mortgagor.
Under the current proposals, lawyers acting for lenders would not be entitled to use method 1 as only lender Subscribers are entitled to use the first method. This restriction could be circumvented by the lender appointing the lawyer as an Authorised User so that the lawyer acts through the lender's membership of the scheme. This could be unwieldy because lenders:
- may not wish to give lawyers this authority; and
- there may be systems issues for lawyers having to access through the lender's membership.
If the solicitor acting for the mortgagee is required to meet the mortgagor, the additional cost of that meeting will more than offset any potential cost savings.
Although Victoria contemplates that a mortgagee can certify that it holds a mortgage, it is not contemplated that a transferee can certify it holds transfer. Under the current drafting of the rules, it is unclear under what authority a mortgagee can sign for the mortgagor and why, if there is such an authority, it does not also authorise a transferee to sign on behalf of a vendor.
It is proposed there will be a prohibition on mortgagees (or Subscribers representing mortgagees) signing on behalf of mortgagors. It appears that each party will need to be represented by a separate Subscriber.
This approach by Victoria appears to differ from the preliminary views of NECS. NECS contemplates that certifiers who are legal practitioners can certify and sign instruments on behalf of their Subscriber or their Subscriber's Clients. For example, a legal practitioner employed by or contracted to a lender can certify and sign instruments on behalf of the lender and on behalf of a mortgagor. Certifiers who are not legal practitioners can only certify and sign instruments on behalf of their employer. For example, a clerk in a lender's office can only certify and sign instruments on behalf of that lender.
Victoria contemplates that a Client can be identified by using an agent, but the Subscriber will be liable for the errors of the agent.
Often, fraud is detected immediately after settlement of a mortgage transaction. This allows time to stop bank cheques and/or to lodge a caveat to protect a position.
There are a number of occasions where material frauds have been prevented by prompt action taken immediately after settlement. Under the EC, it is proposed financial settlement and lodgement of dealings occurs virtually simultaneously with settlement. Lenders will need to assess whether the benefits of using the EC System outweigh the risk of losing the time gap to solve problems immediately after settlement.
eCT Control is the right to nominate that the relevant electronic title may be used for a specific transaction.
The eCT Control will automatically vest with a specific Subscriber. A Subscriber is a user of the EC System.
For example, where a purchaser pays cash, the eCT Control will vest with the lawyer acting for the purchaser. If there is a mortgagee, the eCT will vest with the Subscriber representing the mortgagee (this may be the mortgagee itself).
We had submitted that it should be possible to transfer eCT control to a third party. This could be necessary where custody of the title is required by:
- a custodian/trustee in a securitisation or mortgage trust transaction
- a lender wishing to have eCT control vested in it, rather than a particular panel lawyer.
The response at this stage is to reject this proposal. The basis of the response is that it is important that the Torrens system only record prescribed interests and custody of a title deed is not such a prescribed interest. If such control is required, the eCT will need to be converted back to a paper title. Depending on the requirements of trustees/custodians, this may mitigate strongly against use of the EC System.
Registration gap risk
Under the current Victorian proposal there is no 'lock-up' of the title. Even though dealings are lodged promptly under an EC settlement, there is still the potential for a virtually simultaneous EC settlement or paper settlement and a resulting loss of priority.
We had suggested the introduction of a settlement notice such as those which occur in Queensland and Tasmania (called a priority notice in Tasmania). Under these notices, no conflicting dealings can be registered for up to 20 days.
There is resistance to changing conveyancing procedures to facilitate EC. We will continue to press for a 'lock-up' of the title by a settlement notice or similar to provide a tangible benefit for EC users.
There is much work to be done and these conclusions are preliminary only:
- There seems little economic reason to move to e-conveyancing. Indeed, the system may introduce additional costs and risks, so the take up may be low.
- It is essential any system is uniform nationally. Why would someone tool-up for the Victorian system if different national systems follow within a few years?
- It is important that there is no bias in favour of any particular sector of the mortgage industry. For example, there should be a level playing field between lenders with a large branch network and internal documentation ability and lenders without those resources.
- The opportunity should be taken to remove registration risk altogether by establishing a settlement notice or similar system to 'lock-up' a title.
By Jon Denovan
t (02) 9931 4927
t (02) 9931 4753
t (03) 9617 8596
t (03) 9617 8538
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.