Mortgage Shake-out For Law Firms
The Age
Thursday October 15, 1998
Proposed changes to lending schemes are expected to result in a shake-out of the $10billion mortgage practice market.
The sweeping changes proposed by the Australian Securities and Investments Commission would require law firms engaged in mortgage lending to be regulated like other managed investments. This is likely to result in hundreds of firms in four states closing their mortgage practices.
About 800 law firms in Victoria, New South Wales, Queensland and Tasmania are allowed to lend through commercial and residential mortgage schemes due to class order exemptions to the Corporations Law. These exemptions are administered by the law societies in each state.
But the ASIC started reviewing the system last year following the failure of several mortgage businesses, including the $33million of losses associated with the small Albury law firm Tietyens.
The proposed changes would pull mortgage practices in line with the Managed Investments Act, which came into force this year.
The changes, detailed in a paper from the ASIC and which have been released for industry and investor comment, would see mortgage investments regulated like other managed investments.
``Our analysis of the mortgage investment industry indicates that the involvement of professional associations has not necessarily been enough to ensure schemes with the benefit of the exemptions are conducted in a satisfactory way," the ASIC paper said. ``Significant industry failures, the problems identified in our analysis of the mortgage investment industry and recent changes to the legislation combine to make a change in the regulation of these schemes desirable."
Under the changes, mortgage lending practices would need to be licensed and would be required to issue investors with an approved prospectus.
They would also need to have minimum capital reserves of $50,000 or 0.5 per cent of scheme property worth more than $10million. They will need to be set up as public companies with independent directors, a compliance plan and a constitution for their lending schemes.
The establishment costs of these proposed statutory extras are expected to hit many practices, particularly the smaller ones and those in rural areas.
The Law Institute is expected to try to cushion some of the impact by negotiating a class arrangement that will provide law firms with approved documents, such as prospectus forms, licence applications, and compliance plans.
The ASIC states it will develop a policy from the paper, which is open for comment until 13 November. It says the changes would apply from 1April next year.
The Law Institute president, Mr Andrew Scott, said the move would ``take solicitors' lending into a new era of compliance".
``In spite of the fact that it is not a perfect world, of all the ways of monitoring and regulating mortgage practices, doing it through the state law societies is the most practicable," Mr Scott said. ``The fact that class orders will no longer apply simply makes it more efficient."
© 1998 The Age
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