Why Corruption Flourishes Under Consumer Affairs Victoria
 OPINION
by Peter Mericka B.A., LL.B
Real Estate Lawyer
Qualified Practising Conveyancer Victoria
Director Lawyers Real Estate Pty Ltd
Consumer Affairs Victoria (CAV) has a sorry history when it comes to regulating Victorian real estate agents and, in more recent times, licensed conveyancers. It is one thing to be powerless to stop corruption, however it is something completely different when the government regulator not only fails to act, but also refuses to investigate. In this article I will explain how CAV has refused to use its statutory powers, and has itself become a part of the problem.
The bribery problem
Bribes paid to real estate agents for conveyancing referrals - a short history
Client trafficking is a particularly grubby part of the real estate industry, and it has a long history. Long before licensed conveyancers came onto the scene, it was common practice for lawyers to schmooze with local real estate agents in order to win conveyancing referrals. Initially the currency used in the trade of conveyancing clients was the occasional free lunch, supplemented by a bottle of Scotch at Christmas time. If a real estate agent ever had trouble with a client, the "pet" lawyer would quickly step in with some free advice, and may even come to the estate agent's aid with correspondence on the law firm's letterhead.
The more successful conveyancing legal practices tended be those with close ties with real estate agents, and the staff of these law firms came to understand the need to favourably consider the real estate agent's position if a dispute should arise between the firm's client and the real estate agent. It was not uncommon for a client to wonder why his or her lawyer could not see any wrongdoing on the part of the estate agent, even in the most extreme of cases.
These close relationships between lawyers and real estate agents saw real estate agents gain more and more power over real estate transactions. Eventually, real estate agents in the Melbourne metropolitan area gained almost total control over the contract stage of the real estate transaction. Today, real estate agents in Melbourne expect to be permitted to prepare contacts, draft special conditions, and provide legal advice to vendors and purchasers alike. In fact, a real estate agent who is provided with a contract document that is not to his or her liking feels entitled to "switch" the contract without conferring with the vendor's lawyer or conveyancer. For some examples of this behaviour see:
Shane Lowe of Methven Real Estate - Switching of Contracts and Conditions
Geoff Thompson - Contract Switching At Barry Plant RE
Contract Switching & Lies At Ranges First National Real Estate
The Law Institute of Victoria has never expressed any concern about the close relationships between real estate agents and lawyers, and continues to turn a blind eye to the problem.
Unlicensed conveyancers exacerbate the problem
A few decades ago, law clerks in suburban legal practices took a bold step and began to offer conveyancing services to consumers in competition with lawyers. There was some confusion in the legal industry, as some lawyers supported their former employees in this venture while others opposed them.
Lawyers who had been struck off, and could not practice as lawyers, found that they could start a conveyancing business and continue to offer conveyancing services. Former lawyers, retired law clerks and anyone else who knew a little about real estate transactions could work from home and make good money without the need for formal qualifications, office overheads, fidelity insurance, or even professional indemnity insurance. Conveyancing in Victoria became a free-for-all.
But how does an unqualified, uninsured and untrained conveyancer attract new clients? The most obvious and immediate answer to this question was to recruit real estate agents who would refer clients in return for gifts.
Non-lawyer conveyancers were now competing with established lawyers for client referrals. Instead of the occasional free lunch and Christmas gift, real estate agents were being offered regular gratuities. I was told by a real estate agent (like myself, a former policeman) of a conveyancer who would deliver an envelope to his office each week. The envelope contained a dinner-for-two voucher for a local restaurant. Each month a portable TV, video recorder (yes, this was a few years ago), camera or similar type of gift would be awarded to the real estate agent who referred the most clients for the month. Finally, the real estate agent who referred the most clients in 12 months would receive a weekend for two at a Gold Coast hotel.
Of course, lawyers did not want to lose their clients to conveyancers, and they fought back. For example, see the letter Richard Wood Solicitors sent to local real estate agents and Conveyancing Corruption - Lawyers Too!
It became routine for any new conveyancing business to offer bribes to real estate agents in return for client referrals (the term "bribe" is defined in the Oxford Dictionary as money offered to procure (often illegal or dishonest) action or decision in favour of giver). In fact, the peak body for conveyancers in Victoria, the Australian Institute of Conveyancers (Victoria Division) provided this advice/warning on its website:
"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."
It should be noted that this warning was written over a decade ago, before conveyancers in Victoria were required to be licensed. At that time CAV had no responsibility for the conduct of conveyancers. Between the time the warning first appeared, and right up to the present, no-one has ever been prosecuted by CAV for any offences relating to the use of bribes.
Licensed conveyancers up the ante
Scott Goodman of Goodman Group Conveyancing
Regular readers of my blog postings will be familiar with my criticism of Scott Goodman and his conveyancing business Goodman Group Conveyancing regarding bribe payments. Mr. Goodman openly admits, and publicly advertises the fact, that he offers bribes of $150 to real estate agents for referring conveyancing clients to his conveyancing business (see Goodman Group Conveyancing Bribe Payments).
David Dawn of Victorian Property Transfers
 David Dawn, former Councilor and Mayor of Frankston and the owner of conveyancing business Victorian Property Settlements, has upped the ante by offering as much as $200 per client referral.
A brochure distributed by Dawn to real estate agents states:
"Why you should use the services from (sic) Victorian Property Settlements, the following is a quick overview of some of our points of difference and why you should use us for your conveyancing referrals."
Note the language Dawn uses. The brochure addresses the real estate agent as though the real estate agent is the owner of a valuable commodity (client referrals) and the brochure's purpose is to convince the real estate agent of the benefits of entrusting it to Dawn. In short, it's all about the relationship between the real estate agent and Dawn - the person being referred, the actually client, seems to be no more than a chattel.
The brochure then sets out a number of points, the purpose of which is to impress the real estate agent and to convince the real estate agent to "use the services from Victoria Property Settlements". These include:
- Section 32 in 20 minutes
- We refer your clients back to your people, finance, building, pest etc. (you maintain control of your files)
- All staff have also been selling agents and know the industry from the agents point of view
- Section 27s in most, if not all 32's and special conditions to back them up (money in 28 days from contract date EVERY TIME)
- Payments made on all referrals on the Monday following settlement (cheque to office or home) $100.00 for purchasers, up to $200.00 for sellers ($100 if REIV Contract used or $200 if VPS Contract used)
Why bribery reduces the value of a referral
It is common experience that "word of mouth" referrals are the best form of advertising. This is because a word of mouth referral is usually generated when a person receives good service, and wants to assist another person to enjoy a similar experience. The referral is a favour to the person referred, and a reward to the professional who provided the service.
But what happens when a word of mouth referral is motivated by a gift or reward? The gift or reward is likely to taint the referral, changing it from being an expression of genuine gratitude and helpful advice to a trade in which trust is sold for cash.
Gift or commission?
A gift is usually unexpected; given in gratitude and received with humility and appreciation. Usually, a gift is an expression of thanks for better-than-expected service. A commission, on the other hand, is payment expected or demanded in return for something. It is a business arrangement. Something is being sold.
When an estate agent expects to be paid for referring clients, and when the lawyer or conveyancer making the payment for the referral knows that the payment is the reason for the referral, there are no favours being done. The client is simply being sold.
The buying and selling of clients in this manner may be unsavoury, but it is not illegal if the client is aware that he or she is being treated as a commodity. This is because the client is aware of what is going on, and can make a decision as to the value or otherwise of the referral.
But it all becomes rather grubby, and quite illegal, when the client is not made aware of the commission. A client who believes that she is being referred for reasons other than the payment of a commission may feel tricked and cheated if she later discovers that the the referring estate agent received a gift in return for ushering her in the direction of the gift-giving lawyer or conveyancer.
What is a secret commission?
Section 179 of the Crimes Act 1958 states:
179. Gift or receipt of secret commission in return for advice given
(1) Whenever any advice is given by one person to another and such advice is in any way intended to induce or influence the person advised…to enter into a contract with any third person…and any valuable consideration is given by such third person to the person giving the advice without the assent of the person advised the gift or receipt of the valuable consideration shall be an indictable offence…
So, if an estate agent gives a client a word-of-mouth referral to a conveyancer in order to have that client enter into a contract with the conveyancer to become the conveyancer's client, and the estate agent receives a gift for that referral without the client's knowledge, then both the estate agent and the conveyancer commit a serious criminal offence.
In other words, the client must be told that he is being bought and sold by the estate agent and the conveyancer.
Disclosure exposes the true reason for the referral
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 licensed conveyancer who will help you with your conveyancing."
The average consumer would probably assume that the estate agent and the licensed conveyancer have a good working relationship, that the estate agent has faith in the licensed conveyancer'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 licensed conveyancer's business card, were to say,
"This is the business card of a licensed conveyancer who gives me gift every time I send her a client."
The average consumer would probably become suspicious, and wonder:
- Why does the licensed conveyancer have to pay for referrals?
- Why doesn't the licensed conveyancer attract me by giving the gift to me rather than to the estate agent?
- How supportive will the licensed conveyancer 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.
Disclosure - to whom should bribe payments be disclosed?
The client
When a lawyer or licensed conveyancer pays an estate agent for referrals, the payment must be disclosed to the client. Failure by the estate agent to disclose the gift or payment at the time the referral is made would probably constitute a criminal offence as the payment of a secret commission. This is because the real estate agent is fulfilling an agreement between himself and the lawyer or licensed conveyancer, to make the referral in anticipation of payment. The fact that the payment is not made on the spot is of little consequence. Similarly, a subsequent disclosure of the commission arrangement does not remove the taint of criminality - the deal has been done, the client has been delivered and the relationship, if not the contract, between the lawyer or licensed conveyancer and the client is complete by the time the disclosure is made. This will be discussed in more detail below.
Of course, the lawyer or licensed conveyancer involved in the referral arrangement will be regarded as a party to the criminal offence committed by the real estate agent, and therefore equally guilty of the crime committed by the real estate at the time the referral was made by the real estate agent.
Consideration would also have to be given to the fiduciary duty owed by the estate agent to the client. In the case of Phipps v Boardman [1967] 2 AC 46 Lord Russell said,
"The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit in no way depends on fraud, or the absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his actions. The liability arises from the mere fact of the profit having, in the stated circumstances, being made. The profiteer, however honest and well intentioned, cannot escape the risk of being called upon to account."
Tim O'Dwyer a Queensland lawyer, and regular contributor to this blog, makes the following observations:
"Real Estate agents who receive kickbacks over and above their sales commissions are said to obtain "secret commissions"; seller clients are being cheated, of course, while buyers are mostly being used.
True story: an agent, engaged to sell his client’s property, negotiated a sale to a buyer whom the agent had dealt with previously. After the sale settled and the agent got his commission, the seller discovered that the buyer had made a secret payment to the agent. The seller sued the agent and recovered from the agent not only the amount of the buyer’s bonus but also the full sale commission.
Basic rule: agents who secretly score kickbacks from buyers (or advertising media outlets, or referred solicitors, finance brokers, building/pest inspectors, insurers etc.) are liable not only to lose their commissions but also to account to their seller clients for what they collected on the side or, rather, on the sly.
Usually secret commissions are money but may be gifts or other benefits. Whatever, a greedy agent’s liability to forfeit commission and account for the kickback remains the same. Property owners who discover their agents taking secret commissions in the course of selling (or managing) a property may terminate their agency agreements. Sellers may also cancel sales contracts with buyers paying secret commissions.
But wait, there’s more. The Criminal Code creates offences when an agent (or any agent’s parent, spouse, child etc.) corruptly receives or solicits any “valuable consideration” in connection with his handling of his client’s affairs. “Valuable consideration” includes money, gifts, loans, commissions, rebates and discounts. Similarly, anyone who corruptly gives or offers an agent a kickback commits an offence.
When a seller civilly sues an agent on the make, there is no need to prove “corruptness” – only the “secretness” of the deal."
The Australian Taxation Office
The estate agent must declare payments or gifts received from lawyers or licensed conveyancers for taxation purposes. Failure to do so could result in a variety of criminal charges.
The lawyer or licensed conveyancer who makes the payment will undoubtedly claim the payments made to the estate agent as a tax deduction. This would be likely to alert the ATO to the fact that the estate agent has been receiving the payments claimed, and the claim and income of the agent and lawyer or licensed conveyancer could be cross-referenced.
The accountant
The accountant for the lawyer or conveyancer should be told of the payments, because the accountant is responsible for monitoring the financial health of the business, and for preparing and submitting the taxation returns.
Similarly, the estate agent's accountant will need to know about the payments received by the estate agent so that they can be included in the estate agent's taxation assessment.
The professional indemnity insurers
Lawyers, licensed conveyancers and real estate agents carry compulsory professional indemnity insurance. The purpose of professional indemnity insurance is to cover a professional person where a client claims that the professional has been negligent in fulfilling his or her professional duties, causing the client loss.
The insurer is entitled to know of anything that could affect its decision to provide cover. The offering of payments in return for client referrals could seriously affect the lawyer/client relationship and the estate agent/client relationship, and increase the insurer's exposure. Prudent lawyers, licensed conveyancers and estate agents would certainly discuss a payment-for-referral arrangement with their professional indemnity insurer.
Professional organisations
The professional bodies representing lawyers, licensed conveyancers and estate agents would (should) be interested to know about payment-for-referral arrangements, so that members could be warned of the associated dangers. As discussed above, the Australian Institute of Conveyancers (Victoria Division) is aware that there is a significant problem with the payment of secret commissions to estate agents, and provides the following warning to conveyancers as part of its "Startup Kit" for new members.
It reflects poorly on a profession if rogue members draw unwanted attention. While AICVIC doesn't go far enough to discourage the practice, credit must be given for its having acknowledged that it is a problem and that new members should be informed that it could involve the commission of criminal offences. I am unaware of any similar warnings being issued by the Law Institute of Victoria or the Real Estate Institute of Victoria.
The staff
The staff of the lawyers, licensed conveyancers and estate agents should also be told about the payment-for-referrals arrangement, because such an arrangement has the potential to affect not only the integrity of the firm but also that of the staff. This is particularly so if a member of the staff should become an unsuspecting "mule" for the passing of gifts and the arranging of appointments.
The situation could be even more serious if staff members were to become parties to criminal behaviour.
Principles of fairness would dictate that staff be fully informed of the arrangements, encouraged to ask questions, and permitted to refuse to participate.
Some conclusions
Paying for referrals necessitates disclosure to a wide range of parties, all of whom are likely to take a very dim view of a practice that smacks of desperation, and casts its participants as potentially shonky.
Full and proper disclosure is also an administrative nightmare, with potentially huge costs associated with legal compliance.
Operating a payment-for-referral scheme legitimately and with full disclosure may be possible, but it is more likely to remain the refuge of those who are new to the industry, and those in the industry who are desperate and struggling.
On the other hand, operating such a scheme secretly and illegally could be highly lucrative - but not in the long term.
The race to the bottom
The use of bribery as a means of procuring clients and maintaining work volume carries with it the seeds of its own demise - those who participate inevitably engage in a race to the bottom on all fronts.
Loss of profits
Consider a bribe arrangement whereby the licensed conveyancer publicly offers real estate agents a bribe of $150 for each conveyancing client referred. Also, lets assume that there are some real estate agents near the licensed conveyancer who have known the licensed conveyancer for some time and have become friendly through dealings or over lunch from time to time.
While the licensed conveyancer will pick up new business from new real estate agents taking advantage of the $150 bribes, it is likely that the free referrals from the friendly local real estate agents will dry up, as they too demand payment for their referrals. Furthermore, as real estate agents become more attuned to the client trafficking market they will realise the advantages of bargaining and playing bribe paying conveyancers off against each other. (I was given the Richard Wood Solicitors letter mentioned above by a real estate agent who was hoping to sell referrals to the highest bidder.)
Once the bribery relationship is established, it is extremely difficult to break.
More competition
While previously it would have been very difficult for competing conveyancing businesses to gain traction in the market, the payment of bribes makes this much easier - for those who have the ability to trim their profits. There is only so much work that can be processed in a day, and if the cost of referral bribes is driven up by competition it will be necessary for the conveyancer to take less in drawings from the business, or to cut corners in service delivery.
Lower quality of service
Cash flow problems invariably lead to a reduction in quality of service and a greater preparedness to take risks. This, in turn, becomes a risk management problem. Greater risk creates greater stress, and this takes a toll on staff. I understand that a particular conveyancer who relies heavily on client trafficking also has major problems with staff competence and staff retention. These also impact on the level of service quality.
Higher PI insurance premiums
Greater exposure to risk is likely to increase PI insurance claims, which in turn will result in higher PI insurance costs.
Everyone loses
The race to the bottom does not end with a winner, or a set of winners. Rather, everyone loses.
Loose legislation
Section 49 of the Conveyancers Act
The Conveyancers Act 2006 anticipated that licensed conveyancers would use bribes as a means of attracting clients and competing with lawyers, and this can be seen in Section 49(4)(c) of the Act, which deals with conflicts of interest. Section 49(4)(c) is grossly inadequate. It deals with the obligation of the licensed conveyancer to disclose to a client the fact that the conveyancer may be in a conflict of interests through the payment of a commission to a third party. However, it does not mention the associated problem of the third party breaching Section 179 of the Crimes Act 1958 by making the referral without simultaneously disclosing that the referral is being made in expectation of a payment.
Some licensed conveyancers have assumed that compliance with Section 49(4)(c) somehow absolves all parties from the consequences of a breach of Section 179 of the Crimes Act 1958. For example, the following email containing what may amount to legal advice (I will not go into the legality of a licensed conveyancer providing such advice to real estate agents) regarding "hidden commissions", was circulated to real estate agents a couple of years ago:
"Join 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 in 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: info@goodmangroup.com.au (7 days).
All referral payments are disclosed to the client so there is no hidden commissions. Call now to find our more 1300 134 072 (7 days)."
Section 179 of the Crimes Act
The Conveyancers Act 2006 also fails consumers insofar as it does not clearly require the licensed conveyancer to remain responsible for the conduct of the real estate agent with whom a bribery relationship has been created. Instead, it is expected that the licensed conveyancer will understand his or her obligations pursuant to Section 179 of the Crimes Act 1958.
A licensed conveyancer cannot escape liability as a party to the offence committed by a real estate agent who fails to disclose the commission at the time the referral is made simply because payment is withheld until a later time. The transaction is complete when the real estate agent, motivated by the reward on offer by the licensed conveyancer, advises the client to enter into a contract for conveyancing services with the licensed conveyancer. At that moment a state of indebtedness arises as between the real estate agent and the licensed conveyancer, and the offence of receiving a secret commission is complete.
Of course, it is arguable that a client who has been referred by a real estate agent to a licensed conveyancer in such circumstances may read the fine print of the licensed conveyancer's retainer, see that the licensed conveyancer may pay a third party, realise that the friendly word-of-mouth referral by the real estate agent was no more that a cash-for-clients transaction, and take his/her business elsewhere. But what is the likelihood of that happening. And is that how this supposed consumer protection provision is really supposed to operate?
Example:
Goodman Group Pty Ltd, trading as Crest Conveyancing, provides its clients with a "Disclosure" statement, which includes the following disclosure regarding the "potential conflict of interests" associated with bribe payments:
"Pursuant to Section 49 of the Act the licensee discloses that it has a potential conflict of interest in respect of this transaction as it pays or receives, or is to pay or receive a commissions (sic) in respect of this transaction."
However, this disclosure is just one of 10 paragraphs and appears on the second page of the document. One wonders whether a client would bother to undertake the task of reading through the entire document, let alone identify this paragraph as a "we pay real estate agents for client referrals" disclosure. To read the full document:
CLICK HERE
Escaping the intent of the legislation
It is arguable that those who pay and receive bribes as part of a client trafficking arrangement may be able to dance around the effects of the legislation through manipulation of the circumstances and a little fancy footwork. For example:
- Burying the Section 49(4)(c) disclosure among a number of other clauses in a long disclosure document will, in most cases, ensure that it will be overlooked.
- Using vague or convoluted references to bribe payments lessens the likelihood that they will be identified as payments made in return for the client having been referred.
- Denying that a relationship of indebtedness arises at the time that the referral is made (i.e. asserting that the referral was made in the mere hope of reward, but not as part of a prior arrangement or contractual relationship).
- Allowing the real estate agent to satisfy the disclosure obligation verbally, so that both the real estate agent and the lawyer or conveyancer to whom the client is referred can assert that the disclosure was made, but the client forgot.
Any explanation that allows the real estate agent to deny that the making of the referral resulted in an immediate right to payment may be sufficient to defeat the legislation. An argument similar to this was used successfully by a Queensland lawyer who received 283 referrals from a real estate agency, 156 of which proceeded to settlement, but denied that a business relationship existed between his firm and that of the real estate agency. (See "Catch 32 on Solicitors' Independence")
However, there are other legal compliance matters that would assist a diligent investigator. The famous gangster Al Capone had the right answers to questions asked by investigators, except for those relating to tax. Tax claims made by lawyers or conveyancers for payments to real estate agents, tax declarations by real estate agents for payments received from lawyer and conveyancers, and GST claims and remittances would all provide avenues of enquiry for the investigator.
What's Happening Elsewhere?
In the UK conveyancing referral fees have become so entrenched that they appear to have been left off the agenda of those seeking to ban referral fees in other areas of law. (See "Government to ban referral fees in personal injury - but not conveyancing" which includes the following observation:
"On conveyancing, earlier this week in a written reply to a question in Parliament, Mr Djanogly said the government is “not currently pursuing further work specifically in relation to referral fees and estate agents”.
Speaking before news of the PI ban broke, Law Society chief executive Des Hudson said the approach on conveyancing is “short-sighted and does not recognise the clear potential for consumer detriment that exists in respect of the most important transaction most people make in their lives – buying or selling a house”.
He said the society has written to the Department for Business, Innovation & Skills asking it to reconsider this move “and will be pressing the government to include a general prohibition on referral fees throughout the legal sector”.
The Hampshire Law Society produced this report on the effects of referral fees: Review of Referral Fees November 2006, which includes some horrendous tales of the effects of referral fees.
See also "Is your estate agent taking 'bribes' from your lawyer?"
Some law firms have sought to distance themselves from real estate agents and referral fees. For example, the website of Hastie Conveyancing makes it clear that that firm does not pay referral fees:
"No estate agents referral fees
Many estate agents offer legal packages with their services and recommend that the seller instructs “their” solicitors. That is fine, however the practice is widespread for estate agents to go beyond a recommendation and simply sell your name to solicitors or conveyancers, who pay fees for the introduction. These “referral” fees can be as much as £350.00 per transaction, which is usually added to your legal fees and which ultimately comes out of your pocket. If you have been referred to a legal firm you should check to see if your bill will reflect those referral fees.
If our name has been mentioned to you as a recommendation you can count on that recommendation being genuine. It has not been made in return for any fees. We do not pay referral fees."
Consumer Affairs Victoria
Complaint to Consumer Affairs Victoria
As a real estate consumer advocate I regularly receive complaints and tip-offs, not only from consumers, but also from other industry stakeholders including lawyers, licensed conveyancers and real estate agents.
I have received numerous complaints from licensed conveyancers who have claimed that their businesses have been severely affected by widespread bribery. In fact, it was in response to information received as the result of one of these tip-offs that I was able to take David Priest, then of Rosier Real Estate, to task on the issue. (See my 2008 blog posting "Goodman Group Conveyancing Bribe Payments").
On 30 March, after receiving complaints regarding David Dawn of Victorian Property Settlements (see above) and various Harcourts Real Estate agencies being involved in "cash for referrals" arrangements, I wrote to CAV and requested that an investigation be conducted.
Consumer Affairs Victoria Responds
CAV took the part of Goodman Group Conveyancing in declaring that "the payment or receipt of a commission in relation to a conveyancing transaction is governed by section 49 of the Conveyancers Act 1980. Such payments are permitted, subject to disclosure of the payment by the conveyancer to his or her client."
I gained the impression from their response that Consumer Affairs Victoria is not interested in taking any action unless someone else investigates the matter, gathers evidence of wrongdoing, and delivers it to their office - obviously, this is never going to happen. To read CAV's response in full:
CLICK HERE
Why Consumer Affairs Victoria Refuses to Investigate Corruption
Growth of corruption under Consumer Affairs Victoria
As outlined above, client trafficking in the real estate and conveyancing industries in Victoria is underpinned by the use of cash bribes. This has led to the corruption of the entire system:
- Lawyers and licensed conveyancers must compete for client referrals from real estate agents.
- Competition for referrals has the effect of driving the quality of conveyancing services down.
- Real estate agents expect to have carte blanche in the drafting, explaining and executing of contracts for both parties.
- Clients with questions, legal or otherwise, are being routinely referred to the real estate agent by lawyers and licensed conveyancers.
- Lawyers and licensed conveyancers are reluctant to take real estate agents to task on behalf of mutual clients.
- Lawyers and licensed conveyancers allow real estate agents to control clients in circumstances of conflicting interests.
- The Australian Institute of Conveyancers (Victoria Division) accepts the need for new conveyancing businesses to resort to the use of bribes.
- The Law Institute of Victoria is silent on the issue, probably because many of its members are rely on real estate agent referrals.
In short, real estate agents have become so powerful that lawyers and licensed conveyancers are reluctant to do anything that could alienate them from this vital source of ongoing work.
Consumer Affairs Victoria's conflict of interests
CAV's role in monitoring and controlling the conduct of licensed conveyancers is at odds with its role as regulator of real estate agents, to the point that conflicts of interests arise between these two roles.
A simple example is the ridiculous state of affairs that exists in an auction situation concerning late bids. The following appears on the CAV website under the heading "Conducting a real estate auction - estate agent obligations":
"Late bids
An auctioneer must not accept a late bid (those made after a property has been knocked down to the successful bidder).
An estate agent or agent’s representative who hears a late bid must not refer the bid to the auctioneer, seller or anyone else.
If a contract is not entered into after an auction and the seller wishes to offer the property for private sale, late bids can be referred to the seller. An agent must pass on all offers, unless instructed not to do so by the seller.
If a property is passed in at auction below the reserve price, the auctioneer can decide whether to accept any late bids, subject to first negotiating with the highest bidder."
However, the CAV website does not explain what should happen if the vendor personally hears a latecomer make a higher bid after the auctioneer has knocked the property down to the highest bidder, and the real estate agent's attempts to keep this information from the vendor therefore become irrelevant. This is important, as Rule 7 of Schedule 2 of the Sale of Land Regulations applies only to the auctioneer:
"7. The auctioneer must not accept any bid or offer for a
property that is made after the property has been knocked
down to the successful bidder, unless the vendor or
successful bidder at the auction refuses to sign the contract
of sale following the auction."
Should the real estate agent offer the vendor "legal advice" to the effect that the latecomer's bid cannot be entertained? Should the real estate advise the vendor to refuse to sign the contract? Or should the real estate agent tell the vendor to seek legal advice from her licensed conveyancer? The vendor may be advised by the licensed conveyancer to instantly dismiss the real estate agent, and then to personally enter into negotiations with the new bidder.
CAV connot formulate coherent policy for real estate agents, licensed conveyancers and consumers on how such a situation should be handled.
Unwanted scrutiny of Consumer Affairs Victoria and its management
One can imagine the urgent discussions that would take place between various heads of departments within CAV if allegations of incompetence, neglect or complicity were to arise as the result of a full and proper investigation into client trafficking and related corruption. An investigation into the conduct of the regulator of the conveyancing industry pursuant to the Conveyancers Act 2006 could have extremely embarrassing implications for the regulator of the real estate industry pursuant to the Estate Agents Act 1980, as the regulator of both is CAV.
If CAV investigates licensed conveyancers and uncovers criminal behaviour on the part of licensed conveyancers, then a further investigation into the conduct of real estate agents will be warranted. Uncovering corruption on such a scale would consume enormous amounts of resources, and attract unwanted attention.
Serious questions are likely to be asked regarding the failure of CAV to properly monitor licensed conveyancers and real estate agents, with further investigations reaching back into decades of neglect.
Argument for conveyancers to be regulated by the Legal Services Commissioner
I believe that an enquiry into corruption in the real estate and conveyancing industries could well result in a call for licensed conveyancers to be regulated by the Legal Services Commissioner.
Conveyancing is a legal service, and is quite different from real estate services insofar as the latter is nothing more than the application of "salesmanship" to a real estate transaction in which each party to the transaction is assisted by a legal representative. The standards required of those who deliver legal services, particularly when those legal services are being provided to vulnerable consumers, and often in circumstances of high stress and involving complex areas of law, are much higher than those required of real estate agents who are involved in real estate transactions as mere facilitators.
Licensed conveyancers should be required to adhere to the higher standards required of legal practitioners regulated by the Legal Services Commissioner, rather than the lower standards regulated by the Director of CAV.
Instead of lawyers seeking to emulate licensed conveyancers who pay cash bribes to real estate agents, licensed conveyancers and lawyers should be required by the Legal Services Commissioner to adhere to the standards the community is entitled to expect of those providing legal services.
The investigation Consumer Affairs Victoria SHOULD have undertaken
I have been critical of CAV for refusing to investigate the problem of bribe-related corruption. So, how should the complaint have been actioned?
Investigation using powers under the Conveyancers Act 2006
Upon receiving my comprehensive complaint regarding the activities of Goodman Group Conveyancing, Victoria Property Settlements and various Harcourts Real Estate agencies, CAV should have investigated the complaint by initiating a basic compliance monitoring visit to those offices.
It should be noted that CAV does not have to wait until a complaint is received before undertaking compliance monitoring. It is part of the role of a competent regulator to be proactive, to conduct routine checks, to identify areas of potential risk, and to ensure that action is taken to prevent non-compliance. At the very least, a complaint should be regarded as an indication that compliance monitoring is needed in a specific area of community concern.
The Conveyancers Act 2006 has empowered CAV to monitor compliance with the Act and regulations. Section 154 of the Conveyancers Act 2006 provides as follows:
"For the purpose of monitoring compliance with this Act or the regulations, an inspector may, at a time and place specified by the inspector, require a licensee, specified person or other person with control over relevant documents and information-
a) to answer, orally or in writing, any questions put by the inspector relating to the licensee's conveyancing business; or
b) to supply, orally or in writing, information required by the inspector relating to that business; or
c) to produce to the inspector specified documents or documents of a specified class relating to that business."
Inspectors also have a number of supporting powers that they can call upon when monitoring compliance or investigating complaints, including:
In addition to the compliance monitoring powers, CAV inspectors also have the following powers:
The Director of CAV may also apply to VCAT, pursuant to Conveyancers Act Section 33, for the holding of any inquiry to determine whether a licensee-
- Has contravened the Act or regulations
- Has failed to comply with the Sale of Land Act 1962
- Is guilty of conduct that renders the licensee unfit to hold a licence
Establish whether an offence had been committed
When investigating any form of complaint, it is the first task of the investigator to establish whether or not the complaint is justified. By responding to my complaint with "In order for CAV to determine if any breach of the relevant legislation has occurred, CAV would require evidence that a conveyancer has not disclosed the payment or receipt of a commission in relation to a conveyancing transaction to his or her client" CAV displayed contempt for me as a complainant, and dereliction of duty as a compliance regulator.
The abovementioned powers were included in the Conveyancers Act 2006 to ensure that CAV inspectors would have the ability to act upon complaints or, in the absence of complaints, to undertake proactive compliance monitoring for the purposes of discovering any indications of non-compliance. However, CAV has chosen to ignore its powers, ignore a formal complaint, and to request that the complaint somehow gather the evidence that only CAV inspectors are empowered to gather.
Conduct a comprehensive enquiry through VCAT
It is not necessary for CAV inspectors to obtain sufficient evidence on which to base a prosecution. Section 33 of the Conveyancers Act 2006 allows the Director of CAV to apply to VCAT to hold an enquiry to determine whether there has been a contravention of the Act.
Report the matter to Victoria Police
Of course, if CAV inspectors were to discover evidence of a criminal offence, it would be appropriate to refer the matter to Victoria Police, so that a proper criminal investigation could be initiated.
Initiate enforcement proceedings
CAV is also entitled to initiate proceedings where sufficient evidence supports the taking of such action.
Conclusions
Consumer Affairs Victoria should be stripped of its role as regulator of licensed conveyancers
Failure to prevent corruption
CAV presently maintains a fertile environment in which real estate corruption can take root and grow. The failure of CAV to take corruption seriously has allowed it to flourish, resulting in a decline in ethical standards, the eroding of the quality of legal representation, and the lowering of service standards in the conveyancing industry.
Conflict of interests
CAV's role in monitoring and controlling the conduct of licensed conveyancers is at odds with its role as regulator of real estate agents, to the point that conflicts of interests arise between these two roles.
Conveyancing is, and always has been, a legal service. It is my view that licensed conveyancers who deliver this important legal service should be regulated by the Legal Services Commissioner. Indeed, the first sentence of the "Information for Consumers" on the webpage of the Legal Services Commissioner refers specifically to conveyancing: "Most of us deal with lawyers on limited occasions, for example, when buying a house or making a will." There is also mention on the same website that the Legal Services Commissioner was established in 2005 and replaced the Legal Ombudsman and three other bodies that previously dealt with complaints about lawyers. What a shame that "lawyers" (arguably, licensed conveyancers are lawyers when they provide legal advice and perform legal work), who provide conveyancing clients with legal representation and legal advice, have been divided between two different regulators, with licensed conveyancers placed under the control of CAV.
It's time for those who provide legal services to conveyancing consumers to be regulated by a more appropriate regulator - the Legal Services Commissioner. Unfortunately, this is not likely to happen in the short term and consumers must continue to look to CAV for protection.
Consumer Affairs Victoria must be proactive in monitoring the use of conveyancing bribes
If CAV is to properly protect consumers it must not simply wait for someone else to investigate the problem and to provide a carefully compiled brief of evidence. CAV must become proactive and actually monitor the "cash-for-clients" trade.
To this end CAV must:
- Recognise the effects that referral bribes have had on the real estate industry;
- Utilise the powers it has pursuant to the Conveyancers Act 2006 to monitor compliance and to conduct enquiries;
- Educate real estate agents and licensed conveyancers on their legal and ethical obligations to consumers;
- Publish clear directions and recommendations regarding the handling of client referrals;
- Prosecute those who are found to be in breach of the law;
- Gather empirical and anecdotal evidence regarding client trafficking; and
- Advise government on the merits of banning ban this disgraceful and corrupting trade.
CAV's Response Sought
I have written to CAV again, quoting CASE NUMBER C2011/04/002003, and drawing attention to this article. I will publish CAV's response in due course.
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