New rules on property funds not safe enough

I REFER to yesterday’s report, ‘Proposed law changes to protect clients in property deals’. I doubt the proposed law changes will prevent the problem of lawyers running off with their clients’ money.

I find the new proposals time-consuming and cumbersome without getting to the root of the problem – stakeholder status of law firms. The chain of events in the new proposals creates duplication. The labyrinth of administrative procedure does not address the ‘parking bay’ of transaction proceeds right from the start.

Under the new proposals, who pays to monitor each step of withdrawals during the whole period of transaction? How to ensure no conflicts in approval between client and lawyer to hold up to $5,000 to meet many miscellaneous expenses (ME) in a short time? There could be more questions than answers.

The basic elements in property transaction equation are transaction proceeds (TP), ME, and interest of buyer and seller. Abuse can occur when proceeds are paid into the accounts of the law firm as stakeholder money, and the law firm has full control over its use. If payments for ME are separated from TP, the interest of buyer and seller will be safely protected in the transaction equation.

The key is isolating the client’s money in property transactions from law firms. Strictly speaking, the proceeds have nothing to do with the law firms. The duty of law firms is to administer the process and disbursements. Using a neutral party as stakeholder will eliminate the risk.

I think it is feasible to create a new rule that stipulates that 95 per cent of the proceeds go direct into a conveyancing account in an approved bank as stakeholder until completion, while the balance 5 per cent is administered by the law firm. Disbursements for ME are approved by both parties’ lawyers. It is neat and simple.

This way, the bulk of clients’ money is isolated and protected in the bank. The risk of running off with clients’ money is isolated. The role of the bank is to disburse payments with clear instructions from both parties’ lawyers. This simple tweak to the current procedure will effectively protect clients in property deals.

Paul Chan

Source: Straits Times, 21 Jan 2010