The most common questions we get from the finance industry are about VOI (Verification of Identity).  It’s not the most exciting subject and the situation is fluid, so confusion is to be expected.  Let’s try to resolve that confusion.

How is VOI conducted?

VOI is sometimes misleadingly used to describe face-to-face verification.  The correct meaning is to verify the identity of customers.  This identification may or may not include a face-to-face meeting.

What is safe harbour?

The AML/CTF rules require a lender’s AML/CTF program to have specific procedures to collect and verify certain information about customers.  A safe harbour procedure is provided for individuals having a risk rating of medium or lower, which allows lenders to verify certain information using certain documents or electronically using two independent and reliable data sources.

The real property identification laws are different and provide that lenders must undertake reasonable steps to verify the identity of mortgagors.  However, a safe harbour procedure is provided, which (if followed) means that the lender is deemed to have taken reasonable steps. 

Many lenders are keen to fall within safe harbour so that there is no risk of argument about whether the method used to conduct VOI is reasonable.  However this rush to safe harbour can create significant procedural inconvenience and cost.  Sometimes insisting on complying with safe harbour will be impractical.

What’s the difference between AML/CTF and the real property rules?

The AML/CTF rules require the collection and verification of information.  The safe harbour procedure does not require face-to-face identification. 

On the other hand, safe harbour VOI for real property generally requires face-to-face identification by the mortgagee or an agent appointed by the mortgagee.

When do the rules apply?

AML/CTF identification must normally be carried out before the provision of a designated service (a designated service includes most services provided by financiers to customers).  The information and verification required for AML/CTF is usually conducted at the same time as obtaining a privacy consent, electronic communications consent, and an application form (as applicable).

VOI for mortgages is required in all jurisdictions except Northern Territory, ACT, and Tasmania.  It is good practice to conduct VOI in all jurisdictions to reduce the risk of identity fraud.

The VOI rules in WA and SA require a certificate to be lodged with the dealing (ie a transfer or a mortgage) in order for the dealing to be registered, stating that VOI has been conducted.  This certificate is not required in other jurisdictions.

For PEXA transactions (electronic conveyancing) VOI must always be undertaken in all jurisdictions.  The ARNECC Participation Rules VOI standard applies in Western Australia, South Australia, Victoria and New South Wales (with some minor differences in WA). 

What is happening on 1 July 2015?

1 July 2015 is Victoria’s target date to require VOI for people dealing with land other than mortgagors – mainly vendors and purchasers.  This is already the case in SA and WA.

In early 2016, Victoria proposes to ‘align’ e-conveyancing and paper conveyancing. Alignment describes a regime under which the PEXA documents and process must be used even if the PEXA system is not used.  This will mean (amongst other things) that Client Authorisations must be obtained by lawyers and conveyancers acting for vendors and purchasers and mortgagees will be responsible for holding their own mortgage as a copy will no longer be lodged at the registry.

No other jurisdiction has announced when alignment will occur.  Alignment is likely to create a rush to use PEXA for lodgement.

What’s the status with ARNECC’s Participation Rules?

Version 3 of ARNECC’s Participation Rules is expected to be released by June 2015.  The updated rules may make changes to the VOI safe harbour procedure.

The Version 3 consultation draft contemplated that VOI must be conducted when the mortgage is executed, and the person conducting the VOI must witness the mortgage.  If this procedure is adopted, it will create significant problems for the lending industry as it represents a major change to business practices.

What is Gadens doing about it?

Representing the MFAA and a number of lenders, Gadens is working with ARNECC and PEXA with the objective of developing a system that works for branchless lenders, and will not add cost to the mortgage process.

We see e-lending and electronic communications with customers as a completely separate activity to the ARNECC/PEXA regime because to a large extent, the actual settlement process (which electronic conveyancing impacts) is largely transparent and irrelevant to customers.

Electronic communications will reduce cost and reworks while improving the customer experience and reducing the ‘paper war’.