eConveyancing Update: ELNO source accounts may have compliance issues in Victoria
Recently the Victorian Legal Services Board+Commissioner (VLSB+C) issued regulatory guidelines surrounding the use of source accounts operated by Electronic Lodgement Network Operators (ELNOs) for e-conveyancing. The guideline was developed after considerable consultation with stakeholders and after a significant period of reviewing the operation of e-conveyancing, now mandatory for the settlement of conveyancing transactions with a few minor exceptions. The guideline has a significant impact on the interpretation of the type of trust money used during the settlement process and the resulting recordkeeping requirements for participants.
PEXA is the current Electronic Lodgement Network Operator (ELNO) in Victoria and is expected to be joined by other operators in future. In order to process e-conveyancing settlements, it is necessary either for users to connect their existing law practice general trust account to an ELNO or alternative arrange for funds to be entered to the ELNO source account for redistribution to payees. When PEXA’s account is used typically a practitioner would direct the distribution of those funds via instructions entered online, which had been defined as 'power money'. Funds are typically distributed to payees such as the vendor, their solicitor, any mortgagees and statutory authorities.
Interpretation of trust money type held by ELNO
In Victoria, an ELNO source account is not considered by the Legal Services Board+Commissioner (VLSC+B) to be a solicitor’s trust account under the Legal Profession Uniform Law and the recording of transactions that occur within the source account are not considered general trust transactions recorded under Regulation 47 of the Legal Profession Uniform General Rules. The monies introduced to the ELNO’s source account and resulting transactions fall under the definition of power money. The VLSC+B recommends that Victorian lawyers should not use ENLO source accounts.
When a practitioner has in past provided instructions to an ELNO as to how to disburse funds from the source account, they are exercising a power over those funds allowing the definition to accord with ‘power monies’ in line with Regulation 55 ‘Trust money subject to specific powers’. The requirements for power money are that a ‘record of all dealings with the money’ and ‘all supporting information’ must be kept in a manner that enables the dealings to be clearly understood. Power money arises whenever a practitioner has a power over trust money and property that can be exercised, such as being a signatory to a client’s bank account or any other circumstance whereby control over that property is possible, unless that money is specifically general trust money, controlled or investment money or transit money.
ELNO source accounts are not covered by the Fidelity Fund
The LPUL requires the operation of a fidelity fund in Victoria for the benefit of clients in the event their lawyer or a law practice commits fraud or dishonesty resulting in a loss of that client’s trust money or trust property. Additionally, the Legal Practitioners Liability Committee provides a level of professional indemnity insurance cover for Victorian trust accounts. The Legal Services Board has formed the view that fidelity fund cover may not extend to the source account of an ELNO due to the ELNO not being considered an ‘associate’ of a law practice under the Uniform Law.
Associate, defined under Section 6 of the LPUL, means a principal, partner, director, officer, employee or agent of the law practice or an Australian legal practitioner who is a consultant to the practice.
Benefits of a trust account
A law practice general trust account confers the following benefits:
* Client’s funds are covered by the protections and safeguards offered by the Uniform Law
*Requesting and holding payment in advance of your legal costs provide surety that your account can be paid and may reduce doubtful or bad debt
* Interest that accrues on law practice general trust accounts can be paid to the Public Purpose Fund supporting Legal Aid, law reform, education and research
For practices who do not wish to open a law practice trust account, it is possible to use a third-party law practice in order to facilitate interaction with the ELNO. The third-party law firm would need open a separate trust ledger account under the name of your client, receives your instructions and acts on those instructions recording all transactions in strict accordance with the Uniform Law and Rules.
Increased transactional activity highlights the need for effective and secure controls over the transmission of funds. Law practices both who regularly request advance monies for costs and disbursements and now who many have to commence using their general trust account as the source for property settlements may really benefit from using RapidPay as their provider of bank feed data. More information can be found here https://rapidpay.com.au/