ARNECC has released draft Model Participation Rules (Version 6) (Draft MPRs), and is currently undertaking a consultation process.

If passed unamended, the Draft MPRs will have a significant impact on verification of identity (VOI) requirements for mortgagees.

Draft cl 6.5.2 states the Subscriber, or a mortgagee represented by the Subscriber, must apply the Verification of Identity Standard (the Standard), or, if reasonably satisfied that the Standard cannot be applied, verify the identity of a person in some other way that constitutes the taking of reasonable steps.

The current rules are that the Subscriber, or a mortgagee represented by the Subscriber can either apply the Standard, or verify the identity of a person in some other way that constitutes the taking of reasonable steps.

This proposed change is the result of an independent cyber security review, which has not, and will not, be made public given it identifies weaknesses within the current system. ARNECC have not provided any statistics in relation to fraud within the electronic lodgment network. At a panel discussion in Sydney on 11 February 2020, the NSW Office of the Registrar General told the audience no identity fraud had been uncovered by it to date.

This proposed change is problematic and undesirable for a number of reasons, including the following:

• There is uncertainty at what point a mortgagee can be reasonably satisfied that the Standard cannot be applied. What about situations where it is very inconvenient to apply the Standard, but it is possible… should mortgagees insist it is applied? 
• The Standard relies on government issued documents reminiscent of the outdated 100 point regime under the Financial Transactions Reports Act 1988 (Cth), and focuses on a face to face identification (which does not include video technology).
• It is not ‘future proofed’. For example, the Standard does not anticipate digital drivers licences, which are already available in a number of States, and it does not cater for improved technologies, which will disproportionately impact mortgagees that do not have branch networks (such as neobanks).
• The Standard as currently drafted also creates disproportionate difficulties for certain demographics of mortgagors. For example, the elderly; non-citizens and non-residents; those who have mobility challenges; those living in remote or rural areas, or overseas; and victims of natural disasters, who do not have the prescribed identity documents available. This seems at odds with the new Banking Code of Practice and the government’s general desire to make financial products more accessible to these groups.

Therefore, if the rules are to be amended so that a ‘standard’ must be used unless the mortgagee is reasonably satisfied that it cannot be applied, the existing Standard should be rewritten.

• Mortgagors are already generally subject to AML/CTF identification, and also to inquiries about their financial position. It is fundamental to mortgagees that the person they deal with has been properly identified, as failure to do so will generally result in the loss of the loan proceeds. The revised VOI requirements are an unnecessary step for mortgage fraud mitigation.

The current rules for VOI by mortgagees are therefore sufficient and preferable.

Other changes of note in the Draft MPRs are that identity agents will need to be appointed in writing by mortgagees, which will create an additional administrative burden; and ‘Subscribers’ need to conduct additional due diligence on ‘Users” which includes a background check every three years. The Draft MPRs do not make it clear what will constitute a police background check or what jurisdiction the check should come from. For example, should the check just cover Australia even if the User has not resided in Australia for the preceding three year period?

But perhaps more shocking than the proposed changes in the Draft MPRs is the ambitious timeline currently set by ARNECC, to have Version 6 published in July, and effective from August.

If, despite submissions the changes proceed, a far longer transition period will be required to comply given the significant changes industry would need to grapple with.

Written submissions are being strongly encouraged by ARNECC, and so we encourage all mortgagees to make submissions no later than close of business Monday 2 March 2020. Submissions should be sent by email to chair@arnecc.gov.au.