Licensed Conveyancer Corruption Must Be Stopped!
OPINIONby Peter Mericka B.A., LL.B
Real Estate Consumer Advocate
Real Estate Lawyer
Qualified Practising Conveyancer Victoria
Director Lawyers Real Estate Pty Ltd
An Appeal To The Australian Institute Of Conveyancers (Victorian Division) (AICVIC)
The Australian Institute of Conveyancers (Victorian Division) Inc. (AICVIC) regards itself as the peak body representing licensed conveyancers in the state of Victoria, and it appears to have some influence over the way in which Victoria’s licensed conveyancers conduct themselves. I now make this plea to the new Committee of AICVIC: “Please, in the interests of all conveyancers and consumers, take some responsibility for preventing the spread of corruption in the industry.”
The Oxford Dictionary defines corruption as “influenced by bribery…moral deterioration; use of corrupt practices (bribery etc.)“. My use of the terms “corrupt”, “corruption” and “client trafficking” refers to a practice whereby consumers seeking conveyancing services are directed to a conveyancer (which term includes unlicensed conveyancers, licensed conveyancers and lawyer conveyancers) by a third party on the basis of some benefit received or enjoyed by the third party. Usually, the third party is a real estate agent.
History of conveyancer corruption
Corruption in the conveyancing industry of Victoria has a very long history, and has become regarded in the industry as something of a standard operating procedure.
When conveyancers first sought to appropriate market share in the conveyancing industry, they did so by claiming that lawyers enjoyed a monopoly in the provision of conveyancing services, that non-lawyers were quite capable of conducting conveyancing transactions, and that allowing non-lawyers to offer conveyancing services would cause the cost of conveyancing to fall as the result of “competition” between lawyer conveyancers and non-lawyer conveyancers.
Nowadays, competition in the conveyancing industry has shifted from competition on the basis of conveyancing costs, to competition on the basis of “referral fees” paid to client traffickers.
Conveyancers and the problem of consumer risk
Consumers were used to having lawyers look after their conveyancing, and a lawyer could also attend to other legal matters associated with, or arising from, the conveyancing transaction. Because non-lawyer conveyancers were unregulated and uninsured they were initially a cheap, but also very risky alternative to lawyer conveyancers. When risk was taken into account, the amount saved by resorting to a non-lawyer conveyancer was simply not worth the risk.
Conveyancers had to find a way to attract consumers, despite the problem of risk.
Conveyancers and the need for volume
No conveyancer could attract the volume of clients needed in order to set up a single-service business. A single conveyancing client for a lawyer could become a client for wills, estate planning and other legal services. Furthermore, other members of a client’s family may come to regard the lawyer as “the family’s solicitor”. The conveyancer, on the other hand, was simply a single service provider with no ongoing relationship with the consumer.
In order to survive as a business, a non-lawyer needed a constant stream of simple conveyancing transactions.
Conveyancers and the need for client referrals
Conveyancers realised that they needed “friends” in the industry – sales-people who could not only tell potential clients about their services, but could also convince consumers that their services were a better option than those of qualified lawyer conveyancers. It was obvious that conveyancers would need the assistance of real estate agents.
Conveyancers covet the estate agent/lawyer relationship
Setting up a conveyancing business was impossible, unless the conveyancer had someone who would regularly send or “refer” clients to the business. Conveyancers also knew that estate agents had some influence over the choices consumers made regarding their selection of conveyancing lawyer.
Estate agents were used to telling clients to find a local lawyer, and professional relationships between lawyers and estate agents were fostered by the Real Estate Institute of Victoria (REIV) and the Law Institute of Victoria (LIV), through common promotions and social events such as golf days etc.
(While it is likely that the relationships between estate agents and lawyers may have been helped along by lunches, Christmas hampers, and other gratuities (all of which are precursors to corruption, if not a form of corruption themselves) there was little if any systemic corruption in the form of the client trafficking that takes place today.)
Conveyancers “bribe” estate agents
Conveyancers had to find a way to convince estate agents to refer clients to them, instead of to lawyers. In addition, conveyancers needed estate agents to assist in convincing consumers that conveyancers were not “risky”. Both of these goals could be achieved by paying money to the estate agent in return for referrals.
The Allen Consulting Group warned the government about the problem of referral bribes:
“…to reduce the risk of a conflict of interest and undue consumer lock-in, any actual or potential conflicts of interest should be disclosed to the customer. These would specifically include the disclosure of…any financial arrangements between conveyancers and other parties in the property sales process – one submission (to the debate on the licensing of conveyancers) noted that,
‘I am aware of a conveyancing practice…that openly admits to paying a $50 “kick-back” to the agents that refer them business, 99% undisclosed illegal‘”
Source: The Allen Consulting Group “The Regulation of Conveyancing Services in Victoria – Final Report” June 2005.NOTE: The conveyancer who disclosed the use of “kick-backs” by conveyancers was Paul Garson, a current committee member of the Australian Institute of Conveyancers (Victorian Division) Inc.
The power of these payments was enormous. Payment acted as an incentive, turning an otherwise disinterested estate agent into an agent for the conveyancer – one who would not only refer the client to the conveyancer, but would also use his or her salesperson skills to “sell” the skill and professionalism of the conveyancer to the consumer. In return for payment the estate agent would even convince existing clients of lawyer conveyancers to switch to the estate agent’s “preferred conveyancer”.
Estate agents gained a further benefit through the payment of bribes for referrals – POWER! An estate agent who was challenged by a conveyancer or lawyer over improper conduct could threaten to divert the client elsewhere. (See “Estate Agent Referrals – Punishment & Corruption” for an example of this.)
Failure of the Conveyancers Act 2006
The Conveyancers Act 2006 attempted to address the problem of corruption by requiring a conveyancer to disclose a conflict of interests to the client. This measure has failed for two reasons:
1. Non-lawyer conveyancers have a history of ignoring regulations. As noted in D-Brief No.3 2006 Conveyancers Bill 2006:
“Although Victorian conveyancers are not authorised by legislation to do legal work, the restriction is often ignored.“
2. Disclosure to the client is easily circumvented.
Licensed conveyancers and conflicts of interest
Section 49 of the Conveyancers Act 2006 requires a licensed conveyancer to disclose to a client any actual or potential conflict of interest that the licensee has in relation to any transaction relevant to that client. The legislation also acknowledges, at Section 49(4)(c), that “referral fees” are a particular problem:
“For the purposes of this section, a licensee has a potential conflict of interest in respect of a transaction if the licensee or an associated of the licensee – pays or receives, or is to pay or receive, a commission in respect of the transaction.”
and even provides a definition of “commission” at Section 49(5):
“In this section, “commission”, in respect of a transaction, means any valuable consideration, whether in monetary form or some other form to which a monetary value may be assigned, received from, or paid to, a person who is not a party to the transaction.“
The reference to conflict of interest in the Conveyancers Act 2006 does little more than prescribe a simplistic process for avoiding responsibility.
Payment of commissions is ineffective unless they are kept secret
The Conveyancers Act 2006 and those who accept the payment of referral fees/commissions fail to take into account a very important reality. Such payments do not work unless they are kept secret. This was explained in another article associated with client referrals made to a lawyer (see Richard Wood Solicitors Letter – What If The Right Way Doesn’t Pay!“), in which the following example was provided:
“Imagine that you have just closed a deal to buy a home through an estate agent, and the estate agent hands you a card and says,
“This is the business card of a local lawyer who will help you with your conveyancing.”
The average consumer would probably assume that the estate agent and the lawyer have a good working relationship, that the estate agent has faith in the lawyer’s ability to represent and assist the consumer, and that the consumer is benefiting from the knowledge and experience of the estate agent. In short, the consumer would appreciate the assistance of the estate agent.
But what if the estate agent, holding out the lawyer’s business card, were to say,
“This is the business card of a lawyer who gives me gift every time I send her a client.”
- The average consumer would probably become suspicious, and wonder:
- Why does the lawyer have to pay for referrals?
- Why doesn’t the lawyer attract me by giving the gift to me rather than to the estate agent?
- How much has the lawyer invested in gifts to the estate agent?
- How supportive will the lawyer be if I have a dispute with the estate agent?
Secret commissions are more likely to be effective because they suggest that the referral is being made for noble reasons when in fact they are simply a business transaction.
Disclosure exposes the referral as a desperate attempt to buy business, and consumers tend to find this offensive.“
Failure to prohibit corruption becomes promotion of corruption
Unfortunately, instead of seeing Section 49 of the Conveyancers Act 2006 as an attempt to stop corruption, some conveyancers seem to regard the Section as authority to participate in corruption. As the conveyancer is likely to see it, paying a bribe to an estate agent is OK, so long as the client is given a document which includes some reference to the payment of commissions to third parties.
Failure to address the responsibility of the estate agent to disclose
The real problem with secret commissions paid to estate agents is that the consumer is unlikely to know that a secret commission has been paid. The licensed conveyancer may be able to circumvent the spirit of the legislation by burying disclosure of commission payments in a written document, while the estate agent is still free to receive a corrupt secret commission without the client’s knowledge.
This is because the legislation does not require a licensed conveyancer to disclose the most important details of the commission to the client:
- WHO the commission is paid to;
- WHY the the commission is being paid; and
- HOW MUCH commission is being paid.
Of course, the estate agent commits a serious criminal offence by accepting a commission and not disclosing it to the client, but this is the norm in what has become a seriously corrupt industry.
See also Licensed Conveyancers – A Risk For Consumers.
Corruption and the cost of conveyancing
Industry commentators, such as Chris Merritt, editor of the Legal Affairs section of The Australian newspaper, lauded what was described as the “breaking of the lawyers’ monopoly” over the provision of conveyancing services. In fact, the situation is better described as an “infiltration” of the industry by non-lawyer conveyancers, as no-one but former law clerks were interested in competing against lawyer conveyancers. After all, only lawyers and their employees had any understanding of the processes and procedures involved in conveyancing transactions.
The entry of experienced non-lawyer conveyancers into the industry was always destined to be limited. Only a small number of former law clerks were interested in setting up businesses in competition with lawyer conveyancers, and of these, fewer again were prepared to cultivate the referral networks necessary to establish and maintain the constant flow of conveyancing transactions necessary to keep a conveyancing business viable.
With the introduction of licensing, inexperienced people with minimal legal knowledge, training or experience have found that, by satisfying a few eligibility criteria, they too can participate in what appears to be a lucrative “paper shuffling” business, as licensed conveyancers. However, the costs associated with setting up and operating a conveyancing business are now enormous as compared with the simple “kitchen table” start-ups of the original unregulated non-lawyer conveyancers.
After investing time, effort and money in entering the industry, the imperative is to gain and maintain the necessary volume of work. This has placed immense pressure on conveyancers and their relationships with each other, and with estate agents. The competition in the conveyancing industry has now shifted from competition related to the price of conveyancing, to competition in the area of “referral fees” in the shadowy world of client trafficking.
Lawyer conveyancers involved – estate agents bargain for bids
There have also been examples of lawyer conveyancers attempting to compete with non-lawyer conveyancers in the world of client trafficking. Richard Wood Solicitors sought clients from estate agents in return for movie tickets and Gold Coast accommodation. (See “Richard Wood Solicitors Letter – Gifts To Agents For Client Referrals“).
I received a copy of Richard Wood Solicitors’ letter to estate agents when an estate agent, keen to see if he could do better, delivered the letter to other lawyers and conveyancers in the local area.
The Goodman Group “Referral Program” raises referral fees to new heights
Licensed conveyancer, Scott Goodman, of Goodman Group Conveyancing has upped the ante in the payment of referral fees, and inevitably the cost of conveyancing for Victorian consumers will rise as others attempt to out-bid Goodman Group.
In an email circulated to estate agents and conveyancers, Goodman Group have issued the following invitation:
“Join the Goodman Group Conveyancing Referral Program
Be rewarded by referring your Vendor(s) or Purchaser(s) to Goodman Group Conveyancing. Every successful referral will earn you $150 upon the contract going unconditional. How you use the referral payment is up to you; keep it, give it to charity, or take it off the cost of the conveyancing.
All you need to do is call or email the referral to Goodman Group Conveyancing internal sales team. Call Chriss today on 1300 134 072 or email: infor@goodmangroup.com.au (7 days).
All referral payments are disclosed to the client so there is no hidden commissions (sic). Call now to find out more 1300 134 072 (7 days).”
Amazingly, the Goodman Group website claims “Goodman Group’s unique systems are considered as ‘Best Practice’ in Victoria“.
AICVIC’s contribution to the problem
The Australian Institute of Conveyancers (Victorian Division) Inc. acknowledged long ago that conveyancers would pay “referral fees” in order to have consumers directed to them. However, instead of condemning the practice as a catalyst for corruption, AICVIC provided a written warning to its potential members, as follows:
“When commencing your Business and establishing contacts you may consider paying Referral Fees. Whilst this is your decision you should remember that depending on how you conduct this, it may constitute an offence under the Crimes Act. It has been brought to the attention of the VCA that the Victoria Police Fraud Squad have been instructed by Consumer and Business Affairs to investigate any complaint made regarding this issue.“
The irony of this “advice” is that it is the very last paragraph of a document, the first paragraph of which states, “When starting your Company it is important to remember that Conveyancing is a profession, and certain standards are implied. Give consideration to how you wish the Public to perceive your Business.”
Clearly, the paragraph regarding “referral fees” was the result of naivete and ignorance, rather than any intention to promote corrupt practices. However, the sentiment appears to be one of subtly condoning questionable conduct, warning of possible criminal investigation, and leaving the potential AICVIC member to decide on how to “conduct this” behaviour.
In my opinion, by openly acknowledging the use of “referral fees” in the context of setting up a conveyancing business, the Australian Institute of Conveyancers (Victorian Division) gave the practice its imprimatur.
The document is still promoted on the Australian Institute of Conveyancers (Victorian Division) Inc. website as at 24 November, 2008. The document appears to bear the date of 6 March, 2002, which would indicate that it has been available for over 6 years.
How to deal with licensed conveyancer corruption
1. AICVIC website – Amend or remove or reference to “referral fees”
The first step the Australian Institute of Conveyancers (Victorian Division) Inc. must take is to remove its “Startup Kit” from its website, or to amend the Startup Kit so as to remove any suggestion that the payment of “referral fees” is in any way acceptable.
2. Education – Confirm to all members that “referral fees” are counter-productive
Referrals have value when the consumer believes that the referral is being made by a person the consumer can trust, in the interests of the consumer. This value is diminished when the the true motivation for the referral is at odds with the beliefs of the consumer.
Conveyancers must be taught that “referral fees” taint the referral, and reflect poorly on the skill, reputation and judgment of the conveyancer.
The Australian Institute of Conveyancers (Victorian Division) Inc. must also educate its members on the criminal offences associated with the giving and receiving of secret commissions. Particular attention should be drawn to the fact that innocent third parties can be corrupted when a conveyancer makes the offer of payment, as the offences associated with secret commissions are committed by both the giver and the receiver.
3. Educate members on the problem of “soft corruption”
Soft corruption is a form of unethical behaviour that almost inevitably leads to serious and criminal corruption. The most common form of soft corruption is the establishment of “sweetheart” relationships between businesses which favour each other over the clients.
A common example of soft corruption is the expectation by the estate agent that the conveyancer will never jeopardise the sale, or usurp the estate agent’s control over the parties. Many conveyancers will ignore the rights of the client in order to ensure that the sale (and the conveyancer/estate agent relationship) will proceed.
Examples:
1. Arrangements whereby the estate agent holds the contract of sale until the cooling off period has expired, before sending it to the conveyancer – with no objection being raised by the conveyancer.
2. Purchaser’s conveyancer allows the estate agent to insert special conditions into the purchaser’s offer, knowing that the conditions used by the estate agent work against the client, rather than in the client’s interests.
3. Refusing to negotiate the sale on behalf of a client (vendor or purchaser), and advising the client that it is the role of the estate agent to negotiate and arrange execution of contracts.
Sweetheart arrangements tend to fall outside of the definition of “commission” contained in the Conveyancers Act 2006, as they are not a “valuable consideration…in monetary form or some other form to which a monetary value may be assigned“.
4. AICVIC must develop a Best Practice procedure for members
All firms accredited to Legal Best Practice LAW 9000 must conduct a Conflict of Interests check before accepting a client. All incorporated legal practices (known as ILPs) must also conduct a Conflict of Interests checked before accepting a client.
The Australian Institute of Conveyancers (Victorian Division) Inc. must, as a minimum, ensure that all members conduct a Conflict of Interests check before accepting a client. This would include recording the source of any client referrals for future reference, as well as any money paid to the source, the amount paid, the identity of the person or business to whom it was paid, and the reason for the payment.
In his article “Catch 32 On Solicitors’ Independence“, Queensland lawyer and consumer advocate Tim O’Dwyer offers suggests that following measures would go a long way in dealing with the problem of anti-consumer relationships:
• Prohibit real estate agents from referring solicitors, conveyancers, finance brokers, building and pest inspectors to buyers
• Prohibit solicitors and conveyancers from handling clients’ conveyancing if not completely independent of “the other side of the transaction”
• Prohibit finance brokers, building and pest inspectors from providing services to buyers referred by agents
• Prescribe stiff penalties for solicitors, conveyancers, agents and others who breach or attempt to circumvent these prohibitions.
On Monday 24 November, 2008 I sent the following email message to all members of the Committe of the Australian Institute of Conveyancers (Victorian Division) Inc.:
“Dear Committee Members,
You may be aware that Mr. Paul Garson took it upon himself to declare that no lawyer in the state of Victoria is entitled to use the term “conveyancer”, and this prompted me to investigate the role of the licensed conveyancer in Victoria. During my investigations it became clear to me that the licensing of conveyancers in Victoria has had a detrimental effect on the industry, particularly in terms of the corrupt practice of client trafficking.
I note that the AICVIC website includes a PDF document titled “Startup Kit”, and which advises those interested in commencing a conveyancing business, “When commencing your business and establishing contacts you may consider paying referral fees…” I believe that this statement suggests to newcomers to the industry that this practice is the norm, that AICVIC condones the practice, and that AICVIC seeks to warn newcomers to take care when paying for referrals.
I request that, as the AICVIC committee, you take a leading role in banning the corrupt and unethical practice of client trafficking. I recommend to you my recent posting on www.AustralianRealEstateBlog.com.au as my contribution to the battle against corruption in the conveyancing industry.”
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