Northern Territory Second Reading Speeches

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LEGAL PRACTITIONERS (MORTGAGE PRACTICES) BILL 2002

Madam Speaker, I move that the bill now be read a second time, and I would like to assure you that this is a shorter speech.

The purpose of this bill is to amend the Legal Practitioners Act, so that there cannot be any claims against Legal Practitioners Fidelity Fund of the Northern Territory, (the Fidelity Fund), in respect of losses suffered by clients because of the activities of legal practitioners when providing financial services such as mortgage broking.

Honourable members would be aware that a legal practitioner may at times arrange for funds to be directly lent by a client to another person, secured by a mortgage. In some of these transactions, the legal practitioner acts as a nominee for a number of clients and pools clients’ funds in what as known as a contributor mortgage. Traditionally such monies have been invested very conservatively, however, in the past 20 years there have been numerous examples in other jurisdictions where these monies have been invested either less cautiously or fraudulently. For example, the monies may have been invested in speculative land developments or may have been invested with inadequate security having been taken. Sometimes the affected investors have been in a position to make claims against the relevant fidelity fund. Such claims may result in the insolvency of the fidelity fund and a consequential levying of the members of the legal profession for the amounts necessary to pay the claims.

It is generally understood that the Northern Territory legal practitioners do not usually provide such mortgage broking services. However, the creation of the national legal services market and the recognition of interstate practicing certificates means that is now more likely that legal practitioners who practice from time to time in the Northern Territory will be persons who may engage in such mortgage broking services.

The fidelity fund established under the Legal Practitioners Act exists to compensate clients of legal practitioners for thefts committed by his or her legal practitioner. It should only be available in respect of monies being handled by legal practitioners consequential to their roles as legal practitioners. There is no particular reason why the fund should protect clients who choose to use a legal practitioner as a financial broker, that is those clients who hand over the funds for the purposes of investment.

The training and background of most legal practitioners should not lead clients to assume that they will have any particular expertise in investing monies. There is a practical need to impose various regulatory controls on mortgage broking legal practitioners in order to ensure that basic consumer protection measures are in place. The bill makes it clear that the conduct of mortgage practices and management investment schemes are not part of the practice of a legal practitioner. As such the bill will prevent claims from being made of the fidelity fund if a client sustains losses from a dishonest or fraudulent act of a legal practitioner arising from mortgage practice.

However, the bill will ensure that the clients of legal practitioners who conduct a mortgage practice continue to receive protection from such losses by requiring legal practitioners to hold a policy of fidelity insurance which is in terms approved by the Attorney-General. It should be noted that the innocent clients of legal practitioners who fail to comply with the new requirement set out in the bill will be permitted to make a claim on the fidelity fund.

The bill also establishes supervisory arrangements for legal practitioners who conduct mortgage practices. The bill will prevent a legal practitioner from conducting a mortgage practice unless the mortgage complies with the regulatory framework set out in the bill or the mortgage is a run-out mortgage, that is a mortgage entered into before the commencement of these provisions.

A legal practitioner will be required to notify the Law Society of the Northern Territory if he or she conducts a mortgage practice and will be required to comply with rules which will be detailed in the regulations. The legal practitioner will be required to notify any client of a mortgage transaction about the fidelity insurance arrangement and other matters. The bill also deals with the status of a legal practitioner who has an interest in a managed investment scheme, including a mortgage practice, which is regulated by the Commonwealth’s Corporations Act and regulated by the Australian Securities and Investment Commission.

The bill provides that if a legal practitioner has a certain kind of interest in a managed investment scheme and the legal practitioner accepts money from a client to be invested in the scheme, the legal practitioner will be required to notify the client that he or she has an interest in the scheme and that the managed investment scheme is not part of his or her practice as a legal practitioner.

Under these circumstances the client will not be able to make a claim against the fidelity fund for any losses incurred. These amendments recognise the managed investment activities which are supervised by ASIC are not part of legal practice and ensures that the community appreciates that the special supervisory arrangements which apply to legal practitioners are not applicable to large investment schemes. These arrangements will ensure that the clients of legal practitioners who conduct managed investment schemes are aware of their rights.

The amendments proposed in the bill arose from a request from the Law Society Northern Territory that the Territory consider amendments to the Legal Practitioners Act which were consistent with amendments to the equivalent New South Wales, Victoria and Queensland legislation. The Law Society Northern Territory has been provided with a copy of the draft bill and are happy with it.

I commend the bill to honourable members.


 

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