Mandating madness. Photo credit: Anno Málie on Flickr
Disclosure
In the interest of full disclosure, I am:
- A Director of Residential Settlements, a mid-sized real estate settlement agency in Burswood, Western Australia
- A PEXA subscriber
- A councillor of the Australian Institute of Conveyancers WA
- All views expressed herein are my own and should in no way be viewed as reflective of the position of the AICWA council.
- This post has not been vetted or endorsed by AICWA.
Introduction
On 13 December 2016 the Registrar of Titles signalled her intent to require that, pursuant to powers granted to her by s182A of the Transfer of Land Act and commencing 1 December 2017, “all eligible land registry documents to be lodged electronically through an electronic lodgment network such as the one operated by Property Exchange Australia (PEXA)”.
I oppose that requirement. In the words that follow I explain why.
The arguments I will advance are founded on protecting the long term future of all settlement agents in WA. They are also founded on the belief that conveyancers are fundamentally progressive.
As an industry we have embraced Revenue Online without being compelled to do so by legislation. And we have actively engaged with both Landgate and PEXA with the intention of contributing our skills and expertise toward the creation of a platform that serves the needs of both conveyancers and consumers.
Individually, I support e-conveyancing. We need a more efficient system, one that uses the best technologies for the benefit of business and consumers alike. We need to free ourselves from manual document checking and from running around picking up bank cheques on the morning of settlement. These, amongst many others, are activities that have been forced upon our industry by banks and Landgate.
Electronic conveyancing has benefits for both consumers and conveyancers. Buyers will have their name registered on the title instantly, there’ll be less settlement delays as a result of the signatures on the Transfer of Land and the mortgage being different, and sellers will have access to their funds sooner.
But these are of marginal benefit for consumers. In the 30+ years I’ve been involved in real estate, I’ve never once had a buyer ask me how soon their name would appear on the title. Most signature mismatches can be sorted on the same day. And I’ve rarely had a seller ask for instant access to their funds.
It’s my belief that we don’t need the blunt force trauma of mandating in order for the industry to adopt it. We don’t need big business lecturing us about how to run our business. And we don’t need legislators bullying our industry into dancing to a song played by big bank executives.
I’m aware that Landgate knows about at least some of the concerns raised in this article. Still, aside from corporate speak that commits to nothing, the legitimate concerns raised by the industry and mentioned below remain unaddressed.
In daily life I have a low tolerance for whingers, those people who clang like an empty tin can but who never offer a solution. Therefore, toward the end of this article, I propose a way forward for all of the industry.
A brief history of electronic conveyancing in WA
The Electronic Conveyancing Act 2014 was created as a result of “the Intergovernmental Agreement for an Electronic Conveyancing National Law (“IGA”) signed by all Australian States and the Northern Territory. The IGA came into operation on 21 November 2011.” The act corresponded with the Electronic Conveyancing National Law (ECNL) and created some consequential amendments to related legislation including, amongst others, the Transfer of Land Act 1893 and the Settlement Agents Act 1981.
The act provided for the appointment of an Electronic Lodgment Network Operator (ELNO) to provide and operate an Electronic Lodgment Network (ELN) “that enables the [preparation and] lodging of registry instruments and other documents in electronic form for the purposes of the land titles legislation.” Property Exchange Australia Ltd (PEXA, previously National E-Conveyancing Development Limited (NECDL)) was formed in early 2010 with the purpose of becoming the first ELNO. To this point it is the only ELNO in Australia.
PEXA’s activities are regulated by Australian Registrars’ National Electronic Conveyancing Council (ARNECC) who determine the rules to which ELNOs and Subscribers must adhere.
About PEXA
In addition to acting as an ELNO, PEXA has positioned itself as a virtual settlement room, replacing the existing requirement to physically attend settlement with documents and bank cheques. They predict that, as a result of the use of their services, “the conveyancing costs associated with buying or selling a property will reduce by $120 to $150 per transaction based on direct reductions in disbursements and the increased efficiency of service provision.”
According to the Landgate Annual Report 2015/16, Landgate owns a 14.31% stake in PEXA.
Along with a variety of other fees, PEXA charge $107.80 for the lodgment of a land transfer document.
The effects of mandating
The following tables identify the broad gains and losses that flow to various stakeholders as a result of the mandating of e-conveyancing.
PEXA
PEXA is set to become the primary beneficiary should mandating proceed. They will gain a significant increase in income over a very short period of time and the precedent set in WA will create a template for other jurisdictions to follow. For PEXA, mandating is a dream play.
| Established as an effective monopoly | Gain |
| A substantial increase in income over a very short time frame | Gain |
| Slows down their cash burn rate, profitable faster | Gain |
| Entrenches first mover advantage, no time for other tech companies to create a competitive offering | Gain |
| Increases their valuation at IPO, estimated at $1 billion | Gain |
| Creates a precedent for other jurisdictions | Gain |
| Increase in support staff required to assist settlement agents with the transition | Loss |
Landgate
Landgate will also be a significant beneficiary of mandating particularly through reductions in labour costs.
| Will no longer need to manually check the eligibility of documents at the point of lodgment | Gain |
| Will be able to reduce staff numbers | Gain |
| Will become more profitable | Gain |
| Established as a template in the development of “a single world class registry system… operated under a Business Process Outsourcing (BPO) commercial arrangement…” |
Gain |
| Will be more valuable if Landgate should be privatised | Gain |
Settlement agents
| Forced to use PEXA for most transactions | Neutral |
| Because all have to use PEXA no-one is at a price advantage when quoting. This gain may become neutral if the Code is amended. | Gain |
| Significant amount of business process changes | Loss |
| Settlement agents will find the PEXA fee easier to pass on to clients if it’s compulsory and everyone else is using it | Gain |
| Need to invest heavily in training to teach conveyancers how to use PEXA | Loss |
| Outside clerks will be made redundant | Gain |
| Exposed to increased business and regulatory risk | Loss |
Banks
| Reduced reliance on mortgage settlement services such as SAIG, FMS, Scott Ashwood | Gain |
| Will need to retool their processes to reflect that manual checking of mortgage and land transfer documents is no longer required | Loss |
Mortgage settlement services/intermediaries
| Will lose most of their mortgage settlement service business overnight with the an Australia-wide loss estimated at $124 million | Loss |
The reasons to oppose mandating
It’s the wrong thing to do by consumers
- Despite PEXA’s claims to the contrary, their fees will “invariably passed on to the customer”. As a result, the cost of a settlement will increase by around $150.
- Because PEXA is an effective monopoly there will be no downward pressure on their prices. Although they are required to maintain a “publicly available, equitable and transparent pricing policy” their prices are otherwise unregulated. If electronic settlements are mandated consumers are forced to accept whatever price PEXA charge.
- Without a competitor there’s no competitive pressure or incentive to improve the PEXA product.
- There are numerous contracts (particularly off-the-plan contracts) that are or will be awaiting settlement as of 1 December 2017. If one or both parties to those contracts refuse to vary the definition of the term “settlement” and clause 3.4 of the Joint Form of General Conditions (JFGC) any attempt to settle electronically exposes the client to potentially significant legal risks.
It’s the wrong thing to do by the industry
Real estate agents won’t be ready
REIWA and the Law Society of WA are currently working on amendments to the JFGC that address the issues raised by e-conveyancing. The new e-conveyancing-ready version of the JFGC is due for release in the second half of 2017. This will give REIWA and the Department of Commerce approximately 120 days to train over 12,000 real estate agents and registered sales reps on the implications to them and their clients of the changes to the JFGC. These implications will include:
- The compulsory verification of identity for buyers. Agents who write short-dated contracts for buyers who live overseas or in remote locations may expose the buyer to legal risks including penalty interest if the buyer is unable to have their identity verified in time for settlement.
- The effects of withdrawal notices on the settlement date. There maybe legitimate reasons why a settlement has to be withdrawn from the electronic environment. When that happens a paper-based settlement will be required and this may cause significant delays while new documentation is prepared, issued, signed and exchanged.
- Depending on how the JFGC is written there may be changes to the way penalty interest is charged in the event of a delayed settlement.
- There may be other issues that arise as a result of the wording of the new JFGC but these won’t be known until after they’re released.
Settlement agents will face additional risks
Settlement agents, and lawyers performing settlements, face additional risks that include:
- Landgate and PEXA have provided insufficient training on the platform. Untrained and inexperienced conveyancers may place consumers’ funds and legal rights at risk. It will take a significant amount of time before a substantial majority of the industry has sufficient skills and experience to be aware of and mitigate the risks created by settling electronically.
- There are still questions over what professional indemnity insurance coverage will be available to settlement agents if a client was to incur a loss as a result of settling a transaction on PEXA. The worst case scenario is for a client to sustain a loss and the settlement agent not have PI coverage. It will take months, if not years, before insurers will be in a position to understand the risks of e-conveyancing and price the coverage of those risks.
- Banks are still not ready to settle online. Retooling of long-established systems will take time. Mandating places consumers at risk of a delayed settlement because banks are simply not geared up for electronic conveyancing.
- Settlement agents are placed at risk of breaching the Settlement Agents Act and other consumer legislation if they fail to disclose the PEXA fee to their client. Rule 6B of the Code of Conduct requires that settlement agents disclose their service amount. To assist consumers to compare quotes that amount must not include government, statutory and financial institution charges. As the PEXA fee includes a component of a statutory charge (a check search) and a financial institution charge (the amount usually charged for bank cheques) it has come to inhabit a dead zone that settlement agents are being told to navigate on their own and at their own peril. If they include the PEXA fee as part of their service amount they risk breaching Rule 6B of the Code. If they don’t include it in the service amount they may be found in contravention of s44(9) of the Settlement Agents Act and face a criminal conviction. If for no other reason, all thoughts about mandating should be abandoned until this issue has been resolved.
- Mandating will place PEXA – an effective monopoly – in a position to dictate unfavourable and onerous terms and conditions on subscribers. These terms and conditions won’t be open to negotiation and may pose additional financial and legal risks for settlement agents.
The platform isn’t ready
As much as PEXA and Landgate are spruiking the benefits of the platform, it’s a long, long way from being ready to handle large scale adoption. Just some of the issues that need to be addressed are as follows:
- Digital signatures don’t match bank signatures. This means that a licensee can’t effectively delegate their authority to sign the transfer in the same way they would delegate their authority to sign trust account cheques to two staff members. What happens if they run a three person operation consisting of the licensee and two unlicensed employees and wish to go on holidays? Who has the electronic signature? At the moment the only option is to provide one of the employees with a digital signature and let them sign in the absence of the licensee. But this move gives the employee unlimited single-signature authority over the trust account via their PEXA digital signature. There are zero checks and balances, which is poor trust account management practice.
- No built in bank account verification. One of PEXA’s boasts is that funds will be available in a client’s bank account (usually) on the day of settlement. It’s a great sales pitch. But it’s fatally flawed. Why? Because there’s no built-in verification that the account number belongs to the client. With a manual settlement, cheques are banked across the counter at which point the teller checks the name on the account with the name on the cheque. It’s a simple procedure which stops often large cheques ending up in the wrong person’s bank account. But there’s no such verification procedure in PEXA. That means a $500,000+ deposit could be made into a perfect strangers bank account if, for example, a transposition error were made when the account details were entered into PEXA. I know for a fact this scares a lot of conveyancers and is why many are refusing to jump on the PEXA bandwagon.
- As of now, the PEXA system only handles three transactions in a daisy chain (sales that depend on each other to effect settlement). Longer chains (it’s not uncommon to have five in a daisy chain) will still require manual settlement.
- The PEXA system doesn’t handle properties with caveats where the caveator isn’t represented by a PEXA subscriber. This scenario occurs as a result of fencing disputes, unsecured loans and domestic relationship separations.
- If someone bails out of an electronic settlement there are significant time and monetary costs involved in the additional work required to retroactively sign the documents required to settle manually. If electronic settlements are mandated, this scenario will happen regularly as a result of one or more of the banks involved in the transaction not having their systems ready to accommodate the issues posed by electronic conveyancing.
Mandating doesn’t pass the sniff test
There’s something just not right in the Registrar using the power granted to them by the government of WA to nurture the establishment of an effective monopoly in PEXA, of which the Registrar’s employer is a substantial shareholder.
It’s a conflict of interest of the grandest proportion and one that the CEO of PEXA Marcus Price is well aware. A 2015 Sydney Morning Herald article noted: “Mr Price said they want to sell the business after it begins to make a profit. In part this is because they will have a conflict of interest in being both owners and customers of the system. The most likely natural owners would be retail investors.”
Through mandating, the people of WA will be forced to pay for a defective product in order to help make big banks and professional investors rich when PEXA lists on the stock exchange.
Those who point to the ASX as proof that a monopoly can be a good thing should think again! There is broad agreement that the ASX should be exposed to competition. According to Federal Treasurer Scott Morrison, “the government [is] committed to open and competitive markets which are “fundamental to a vibrant 21st century economy””.
Mandating the use of an effective monopoly when the rest of Australia is moving to open and competitive markets smacks of a greedy, short-term cash grab at the expensive of WA consumers.
What needs to be done
For the real benefits of electronic settlements to be realised, it’s important that everyone involved in the process “transition quickly”, but in an orderly manner.
If the transition isn’t orderly it will leave businesses and consumers battered, bruised and resentful.
Therefore the Registrar should immediately defer all plans to mandate electronic lodgment. This move will allow banks, settlement agents and the real estate industry the time needed to re-engineer their systems without exposing clients and small business to further risk.
ARNECC should then immediately introduce rules into their Model Operating Requirements making it compulsory that all ELNOs provide a standards-based means of interoperability between one another. Interoperability is essential if subscribers are to be allowed to choose between ELNOs. Establishing standards for interoperability will help create the certainty needed for corporations to invest in the establishment of other ELNOs.
AICWA need to continue their efforts to stop mandating, however they need to do more to assist their members achieve an orderly transition to electronic conveyancing. They should speed up the delivery of relevant training courses that address the business issues created by the use of electronic conveyancing. Course topics could include:
- Risk management in an electronic environment
- PEXA fee disclosure that works for the consumer without landing you in jail
- How to deal with redundancies
- Change management
- Digital security
- Services marketing
Yet, as much as the AICWA need to work hard for their members, Landgate and PEXA need to help with the heavy lifting. To speed the uptake of e-conveyancing they need to partner with AICWA to create free or low cost training to settlement agents, financial institutions and lawyers on the use of the PEXA platform. These courses need to be offered regularly, often, and at times that suit the conveyancers.
The Department of Commerce should immediately set about amending the Code of Conduct to address the issue created by PEXA’s fees. It would make sense to remove the fee disclosure requirement in r23 in their entirety and replace it with a more general requirement for the agent to act in accordance with Australian Consumer Law.
Finally, regulations should be introduced into the the Electronic Conveyancing Act 2014 or other appropriate legislation to the effect that, until such time as there is more than one ELNO, the fees charged by PEXA be capped to a maximum amount approved by the Commissioner for Consumer Protection.
These are no small undertakings. If implemented, they will ensure a better deal for the consumers of Western Australia and help make the transition to e-conveyancing smooth, orderly and quick.
If you’ve made it this far and share my view that mandating is madness, please do one or more of the following:
- Share this post on Facebook, LinkedIn, GooglePlus and Twitter
- Send it to your friends and colleagues via email
- Send it to your local MP
- Send it to your local media outlet
- Create a Meetup group to discuss what more you can do to stop mandating
