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The peak body for NSW conveyancers will hold talks with NSW Fair Trading over “deposit flicking” as the agency’s investigation into the contentious practice continues.
The practice, where real estate agents transfer purchaser property deposits to third parties to hold on the agents’ behalf until settlement, has sparked concerns it could be used to dodge new AML/CTF rules and leaves consumers financially exposed.
In July, NSW Fair Trading launched an investigation to look at safeguards in place for buyers and whether agents are acting in accordance with existing legal obligations.
It was initiated after at least 170 conveyancers lobbied authorities for a clampdown.
A source familiar with the matter said the probe was ongoing, without providing details.
AIC NSW president Jennie Tonner said she was working closely with NSW Fair Trading to resolve the issue and was “speaking to them on a regular basis”.
“They are working on the issue with a view of getting a decision made as soon as possible,” Tonner said.
“I know this is frustrating to members that we can’t get government to move at the speed of property conveyances and lawyers but, unfortunately, that is the speed they work to.
“We can only help and assist them where possible to get to that decision as soon as they can.”
Griffith University’s Graeme Hughes, an expert on business and consumer issues, said NSW Fair Trading was “right to investigate but an open-ended inquiry with no interim guidance leaves buyers transacting in the dark”.
“The regulator can take the time a proper investigation needs and still tell the market, plainly, where a deposit should sit and what safeguards apply to it,” Hughes said.
“A home deposit is the largest sum most people will ever transfer in their lifetime and they are entitled to know it is sitting in a regulated account with clear protections around it.
“Deposit flicking puts a question mark over that, occurring at a moment in time, where the buyer is most exposed.”
Dott & Crossitt founder Jared Zak urged the agency to resolve the “live consumer concern” of deposit flicking.
“It is really concerning that the regulators are taking this long to respond,” Zak said.
As the investigation continued, deposit flicking was putting property buyers at risk, he said, pointing to property sale contracts that he argued lacked adequate consumer protections. “One thing that we’re noticing on the ground at the moment, which is really worrying, is just the amount of deposits that are being flicked without any special conditions,” Zak said.
“We’ve seen a dozen contracts go through, or deposits be flicked, without a special condition. There doesn’t seem to be any real care or urgency from the agents to get them returned.
“I’m concerned that basically the regulators in action is just giving the green light to this kind of activity.”
The comments by Zak, an outspoken critic of deposit flicking, come after high-profile court action against him linked to the issue was discontinued last month.
The lawsuit, launched by law firm Agency Settlements, was initiated after Zak took aim at the Riverstone Partners-backed practice in an online petition critical of deposit flicking.
Agency Settlements, which offers services that assist real estate agents in complying with their obligations under new anti-money laundering laws, abandoned the lawsuit weeks later.
The firm was ordered to pay Zak $60,000 in legal costs.
It has previously said it stands by its legal advice and business processes, which have been reviewed by the NSW Supreme Court, Thompson’s Lawyers and law firm Jemmeson Fisher.
Real estate agents and conveyancers in July came under a new federal AML/ CTF regime aimed at cracking down on transnational organised crime in Australia’s property sector.
Under the laws, overseen by federal financial crime regulator AUSTRAC, practitioners must conduct due diligence on clients, report large cash transactions, keep records and report suspicious activity or face potential multi-million-dollar fines.
AUSTRAC has warned agents that they remain covered by tough new AML/ CTF laws enacted in July, despite the availability of deposit flicking.
AML/CTF experts, too, have warned agents to steer clear of the contentious practice. They caution that it is not possible under Tranche 2 for designated operators, such as real estate agents, to avoid screening clients via outsourcing obligations to third-party solutions.
Weeks after the new laws took effect, AIC NSW issued a special alert to members, urging them to take “pre-emptive action” against deposit flicking in order to protect clients.
The measures included making sure to verify agent intentions on purchaser deposits as early as possible and not to assume the agent will hold the deposit.
“Contact the selling agent immediately you receive instructions to confirm they will hold the deposit in their trust account [only] for the duration of the matter”, the alert said.
REINSW, the peak body for the state’s real estate agents, has also put its members on notice.
In an alert, it said the peak body has “serious concerns” with the practice, urging deposit holders to “not agree to release, transfer or direct a deposit to be paid to another party”.
“There appears to be a belief held by some that outsourcing the trust accounting function to a third party removes the AML/ CTF obligations. That is not our position,” CEO Tim McKibbin said at the time.
While most concerns have been raised in NSW, other states are monitoring the issue.
Australian Institute of Conveyancers Victoria says it is worried about a potential impact on reliance agreements, although it cannot see “major issues at the moment”.
However, consumer protection must remain top priority, according to AIC Victoria president Shakila Maclean.
Maclean warns that innovation “should never come at the expense of transparency, informed consent or the safeguards that have long existed to protect buyers and sellers”.
In Queensland, the Law Society does not yet see the issue as significant but is closely watching.
“Our message to practitioners is to ensure they understand and comply with their AML/CTF obligations and maintain appropriate safeguards,” it said recently.
Hughes described deposit flicking as “not only a NSW question”.
“The same practice is being examined in Queensland and Victoria and the principle is identical in every state. A deposit should be protected by rules a buyer can understand and rely upon.”