LAWFUEL – The Legal Newswire – New Zealand Law Society should lobby banks to provide practitioners with the option of linking electronic payments on settlement to the registration process, says Sanderson Weir principal, Jonathan Flaws.
Mr Flaws was commenting following two recent cases in which practitioners have been caught out by funds being reversed by banks. In both instances, the advances were made by a finance company through its bank and confirmed by fax to the solicitors, together with a copy of the direct link batch receipt.
Relying on that advice, in one instance a refinancing was completed, including the immediate electronic registration of a mortgage to the finance company. In the other case, a purchase was completed. Both advances were reversed the following day when the finance company was placed in the hands of the receivers leaving the solicitors’ trust accounts significantly overdrawn.
No contact was made by the bank with the solicitors before the payments were reversed. Mr Flaws said that his firm had also been caught out in a third case. It had registered a discharge of mortgage and a new mortgage immediately. It had then taken several days to unwind the transaction, obtain a discharge from the new mortgagee, and a replacement mortgage from the old mortgagee, which had agreed to readvance the funds to the client.
Mr Flaws said that practitioners had become so used to the efficient transfer of funds electronically that some were overlooking the fact that not all funds were cleared funds. He said that the NZLS Property Law Section had gone to great pains with ASB, the first to introduce electronic transfers of cleared funds, to establish and implement a set of electronic settlement protocols for solicitors with ASB nominated trust accounts. The basic proposition between lawyers, was that transfers from a solicitor’s trust account could not be reversed as they were the equivalent of a trust account payment.
Mr Flaws said that, when practitioners were dealing with third parties, extra care must be taken to ensure that confirmation was obtained that the funds had been cleared and would not be reversed. To do that, solicitors should go back to the source and preferably to the bank being used, to obtain confirmation directly from the bank that the funds were cleared and would not be reversed.
Mr Flaws said that the proposed National Electronic Conveyancing System in Australia intended to provide, as its preferred option, for the flow of funds on settlement through the banking system by way of cleared payments to occur first before a dealing was submitted for registration. The option to register only without there being any settlement payments was provided as an alternative.
Mr Flaws said that, to date, he had taken the view that the Australian proposal was an overcomplication which was typical of the conveyancing system in Australia. However, following his recent experience of being required to fund clients for several days while unwinding a transaction, he was changing his view.
“On the basis that our four major banks are all Australian owned and, I understand, are all involved in the pilot in Victoria which is about to move into trialling electronic settlements, they should be able to implement the process over here reasonably quickly. It is interesting to reflect on why the banks in Australia have done this – primarily because on a mortage they tend to do this conveyancing themselves and are therefore much more at risk,” he said.
“In New Zealand, they instruct borrower’s lawyers to do the work and therefore the risk they take in Australia on a conveyancing settlement has been pushed across to the legal profession. Lawyers in New Zealand have simply accepted this risk, while in Australia it remains with the banks.” Mr Flaws said that he now believed that this should change. NZLS should lobby banks to implement the Australian proposal.
“Because we have e-dealing already in place, it should not be difficult to implement a conveyancing protocol to incorporate the transfer of settlement funds into the registration process.” Mr Flaws said that the real benefit of the proposal would be that, while lawyers had sorted out a system for electronic payments between lawyers, third parties such as banks and finance companies had not.
The recent experiences with a finance company going into receivership and practitioners being caught out highlight the danger of not including third parties in a system to transfer cleared payments electronically on settlement of a conveyancing transaction. Property Law Section convenor, Chris Moore, said he had not had a chance to discuss these issues with the executive but any process which provided greater certainty in relation to settlements must be a good thing.
The issue was how this could be done but the section would be happy to consider proposals for changes that could be made to avoid the problems which had occurred recently. New Zealand Bankers’ Association chief executive, Alan Yates, said that, under normal circumstances, the bankers’ association standards allowed payment-originating banks to dishonour uncleared payments until the end of the next business day following payment.
“Thereafter, the payment-receiving bank will need to ensure that the solicitor is advised of the dishonour and it may be the third, or possibly the fourth day, from when the original payment was made before the dishonour notice is received.”
The Bankers’ Association standards are rules to which all banks belonging to the association are required to adhere. They set standards for the interchange of payments between banks, and include rules relating to presentation and dishonour. The details of the rules are not publicly available. Mr Yates said that, if solicitors had any concerns over the status of any payment before they on-forwarded the funds, they should seek advice from the bank.
Alternatively, there were ways that funds could be sent as “cleared.” Solicitors could contact the paying bank and discuss the option of funds being sent in that way. Another option was to request that funds be cleared the same day, which can cost up to $25.
ADLS Property Law Committee convenor, Bryce Town, said that solicitors must exercise judgment in deciding whether or not to rely on confirmations from finance companies. In deciding whether to rely on confirmations, Mr Town said he bore in mind that he had to make a call which he could justify to his partners. In one instance, admittedly in peculiar circumstances, a bank had reversed funds deposited to the firm’s trust account four days later and had not advised the firm. The firm had not spent the money in the meantime, as it had considered that there were questions marks about it.
“The reality is that lawyers need to be very careful to be aware of what’s going on. You’ve got to have your antennae up.”
This was particularly so in the current economic climate which had seen nine finance companies collapse in the past 18 months. Mr Town said that particular issues arose in relation to electronic lodgment, as a special clearance could not be obtained as could be done with personal cheques. “With electronic lodgment, you don’t know where the funds have come from. Anyone can put money into your account.
Mr Town said that practitioners needed to err on the side of caution. If reversals such as the two brought to the attention of ADLS occurred, the solicitors would need to take steps to remedy the situation. In one of the cases, the funds had already been advanced when the bank reversed the deposit. This meant that the solicitor’s trust account was overdrawn and the practitioner had advanced the money personally to the client but had taken no security.
Mr Town said the practitioner would seek to have the client execute a new security in his favour but it would be a second security. The receivers of the finance company could then be approached with a request that a discharge of the mortgage be given, as the advance had been withdrawn. This would mean that the practitioner’s security would then become a first mortgage.
However, if following receipt of independent advice the client refused to sign a new security, Mr Town queried what could be done – a caveat perhaps? He said that the solicitor had no contractual relationship with the company involved and it was, in any case, in receivership. Mr Town said that the safest course in all circumstances was to obtain confirmation from the bank that the funds were cleared and would not be reversed.
“That’s a painful exercise, but it’s safe. It’s a terrible position to be in, but, if you are getting funds from an untested source, you have to take precautions. That’s doubly so in a climate like this when you are dealing with someone other than a trading bank.”