Version 3 of ARNECC’s Participation Rules currently released for consultation will, if adopted, create problems for mortgagees and brokers.
In NSW, Victoria, South Australia, and Western Australia, mortgagees are currently required to take reasonable steps to identify mortgagors. If reasonable steps are not taken, Registrars may refuse to register mortgages and may remove registered mortgages from the register.
These states specify a ‘safe harbour’ procedure which is deemed to constitute taking reasonable steps. Currently, Version 2 of ARNECC’s Participation Rules applies in NSW, Victoria, and South Australia, and a modified version applies in Western Australia. It is proposed that Version 3 will be adopted by all Australian states and the Northern Territory.
Witnessing the ‘Registry Instrument’
The Version 3 safe harbour procedures provide that the Subscriber or the Subscriber Agent must witness any Registry Instrument at the time the identity verification is conducted. For mortgagees, the Registry Instrument is the copy of the mortgage document which is signed by the mortgagor and then lodged for registration (if using the paper system) or retained by the mortgagee (if using PEXA, or after alignment expected 1 July 2015 in Victoria). Alignment will require the electronic process to be used even if PEXA is not used and paper documents are lodged.
It is common practice for lenders to conduct VOI and AML/CTF identification procedures early in the loan process (normally at application stage) and before a loan is approved and loan documents prepared. The proposed procedures will mean that, in order to meet safe harbour, mortgagees will need to conduct VOI again at the time the mortgage is signed. This will result in an unnecessary duplication of processes, and is likely to add significant expense and frustration.
Example: At present many lenders conduct VOI and AML/CTF identification procedures at or about the time an application is made. It is possible for lenders to conduct a face to face identification, and meet the safe harbour procedures for both VOI and AML/CTF at this point. Under the proposed procedures, assuming that a lender conducts VOI and AML/CTF identification procedures at application stage, the lender will need to conduct an additional face to face interview when the mortgage document is signed in order to meet safe harbour. Often these functions are undertaken by brokers on behalf of lenders.
Mortgagees are not required to follow the safe harbour procedures, and so there is no legal requirement for VOI to be conducted at the time the mortgage is signed. Many lenders may, however, feel more comfortable if their process does comply with safe harbour. Gadens therefore propose to submit that this change to the safe harbour procedure is abandoned or modified.
For technical reasons, mortgagees who are not Subscribers can never fall within safe harbour, and so for many lenders, following the safe harbour identification process will not technically result in safe harbour protection in any event. Gadens will also submit on this issue.
Insurance for Subscriber Agents
Subscriber Agents are agents appointed by Subscribers (lawyers, conveyancers, and lenders who sign up with PEXA). Version 2 already requires Subscriber Agents to hold insurance. Version 3 proposes to change the insurance requirements for Subscriber Agents to comprise professional indemnity insurance and fidelity insurance for the purposes of verification of identity of:
- at least $1.5m per claim including legal costs;
- an excess no greater than $20,000; and
- an annual aggregate amount of not less than $20m.
This is significantly higher than the insurance held by many brokers. Unless this requirement is modified, brokers will not be eligible to conduct VOI for lenders who wish to fall within safe harbour.
Gadens will submit that a lower level of insurance consistent with current industry practice is appropriate for brokers who hold an ACL or are credit representatives. This is appropriate given the special AML/CTF and other training brokers are required to undertake and the licensing regime within which brokers work.
Contact Gadens for details of other changes proposed in Version 3 and assistance with making submissions.