NECS Risk and Liability Forum for regulators, law societies and insurers Electronic payments Murray McCutcheon4 March

Introduction The vast majority of business to business payments are now made electronically. NECS payments will only be able to be made electronically. NECS is a closed system for payments and receipts. Payments to known subscribers or identified payees into Australian ADI accounts. NECS involves 3 types of payment: –settlement moneys; –deposit moneys; –payments for services.

Introduction cont’d Payments can be made from any account into NECS but an ADI must guarantee that the funds will be available on the settlement date. However, NPT identified the need for there to be payments from settlement to parties not known to NECS eg. the parties themselves, financiers of goods in business sales and other payees required by the parties.

Current practice in the paper world NECS terminology of "settlement statement“

Current practice in the paper world cont’d

Who authorises payment and how?

The problem with electronic payments Only BSB and account numbers are effective. No account names verification is possible. Client supplying the wrong bank details for paying or receiving “Fat fingering” by lawyer/conveyancer Fraudulent misdirection of funds Fraudulent misdirection of funds by employee

Consequences Settlement occurs: –Cleared funds are transferred if BSB and account number protocol are consistent –Title passes –Identity of the receiving account owner protected by privacy –Delay in identifying the receiving bank account owner –Receiving bank account owner absconds or refuses to correct error

Consequences cont’d Legal principles for possible recovery: –Contractual connection –Mistake –Unjust enrichment –Contract between account owner and ADI –Special legislation

NPT solution for payment to non-recognised payees BSB and account number to be entered twice The parties’ lawyer’s/conveyancer’s trust account for subsequent distribution in the way that it occurs now Regular receiver of funds from settlement such as property developers and investors can be recognised by the system

NPT solution for payment to non-recognised payees cont’d Pre-established payee details with financial institution confirmation –The subscriber enters the payee’s names and account details. –The receiving ADI confirms the details are correct and the payee identifies himself or herself in advance with the ADI and advises ADI of the workspace number. –The moneys are paid into the ADI’s suspense account for subsequent claim if the account owner has not pre- identified themselves with the bank and the workspace number. –Note: all the components are required.

Other consequences of lawyer /conveyancer fraud by misdirecting funds Vendor/mortgagee has lost title Vendor/mortgagee has claim against lawyer/ conveyancer/ fidelity fund Vendor may be unable to claim if there is no lawyer/ fidelity fund Lawyer/conveyancer principal not liable for criminal activity of employee unless lawyer is negligent

Other consequences of lawyer /conveyancer fraud by misdirecting funds cont’d Currently fidelity funds for conveyancers are even more inconsistent than those for lawyers. Law Council of Australia has adopted national professional conduct rules which will have force of law. Professional conduct rules for conveyancers are still very disparate.

Deposit moneys held by estate agents Not usually required for settlement. However, they may be where: –mortgages exceed 90% of the sale price, and –there are simultaneous sales and purchases. Solution: –Payment to lawyer/conveyancer’s trust account before settlement, or –Estate agent to authorise deduction of deposit direct from their trust account as part of settlement.

Subscriber payments for services Moneys paid from trust account, office account or credit/debit card. Control mechanisms required as part of overall practice supervision.

Legal and practical issues for regulators Nature of subscriber’s payment directions. –Trust moneys –Controlled moneys –Transit moneys Integration of records

Questions Discussion