COVID-19 | Verification of identity – the need to go digital

All of the states (but not the territories) require mortgagees to undertake reasonable steps to verify the identities of mortgagors, commonly through a framework called the “Verification of Identity Standard” (VOI Standard) undertaken by specialised “Identity Agents” e.g. lawyers or other agents with professional indemnity insurance. Where they do not, and the mortgage instrument is challenged, mortgagees risk losing the benefit of their registered mortgage.

The VOI Standard essentially requires:

• a face-to-face interview to be conducted by an Identity Agent with the mortgagor
• the Identity Agent to be satisfied that the mortgagor bears a “reasonable likeness“ to the person depicted in photographs in the identification documents
• the Identity Agent to confirm that the identification documents are current originals produced by the mortgagor.

The Australian Registrars’ National Electronic Conveyancing Council (ARNECC) has been consulting on version 6 of its Model Participation Rules since December 2019.  There is a key proposed change to paragraph 6.5.2 of the Model Participation Rules which specifies that reasonable steps outside the VOI Standard (which requires a face-to-face interview) can only be used if the mortgagee is “reasonably satisfied that the Verification of Identity Standard cannot be applied”.

ARNECC has just released a statement in response to the COVID-19 pandemic which states that, while the VOI Standard:

“requires a face-to-face in person interview, compliance with the [VOI] Standard is not mandatory…A Subscriber can verify the identity of their client or customer in a way that constitutes reasonable steps… For example, in the current COVID-19 environment Subscribers might like to consider using video technology as part of the verification of identity process.”

This is a prudent retreat from the current consultation, given the circumstances.

In our view, mortgagees and their Identity Agents should consider applying the VOI Standard to the maximum extent possible in order to demonstrate that they have taken reasonable steps to verify the identity of mortgagors, however:

• they should substitute face-to-face interviews with video interviews
• the Identity Agent should confirm documents are current originals by video interviews.

The second point is a logical extension of the first. If there is to be no face-to-face interview, it is counterintuitive to maintain the need to inspect original documents in person.

There is, however, a complication of which mortgagees need to be aware; the implementation of these practices may increase the opportunity for people to attempt to scam the identity verification process, e.g. by concealing that a document’s originality by using a heavily pixelated video link.

Mortgagees and their Identity Agents who seek to adhere as closely as possible to the VOI Standard in order to obtain the benefit of its safe harbour protection of having taken “reasonable steps” to verify a mortgagor’s identity, but who will be using remote technology, need to first develop policies and procedures which will mitigate this risk.

Mortgage lenders may also decide that the time is right to adopt new technology to assist with remote verification, such as software solutions which facilitate document verification digitally against databases from state government bodies in Australia.  This public data, combined with machine learning, has been used to increase the security and reliability of identity validation.  Depending on how progressive mortgage lenders wish to be, additional features such as facial and voice recognition also allow for various types of biometrics to be verified in real time.[1]

Queensland mortgage witnessing – the need for temporary law reform

On 31 May 2019, Queensland amended its laws so as to conflate the obligations placed upon witnesses to mortgage instruments and Identity Agents undertaking verification of identity (which are separate matters); the mortgagees’ stricter verification requirements are now duplicated onto the witness.[2] The Land Title Practice Manual (Queensland) of 1 October 2019 (Manual) contains very detailed directions in this regard; you can read more about these changes in our past briefing here.

To validly witness a Queensland mortgage instrument, as stated in 61-2340 of the Manual, the witness must be physically present when the mortgagor executes the instrument with a “wet” signature. There is currently no provision in Queensland for instruments or documents to be witnessed electronically or remotely via Skype or other electronic means.  It is also noteworthy that Schedule 1 of the Electronic Transactions (Queensland) Act 2001 (Qld) excludes the following transactions from the use of digital signatures:

“A requirement or permission for a document to be attested, authenticated, verified or witnessed by a person other than the author of the document.”

Accordingly, while mortgagees can use video-conferencing facilities for the purpose of discharging their duty to reasonably identify the mortgagor, witnesses to mortgage instruments do not practically have this option. Given the extraordinary circumstances precipitated by COVID-19, there should be no reason why witnessing cannot be done remotely – after all, the witness will still visually observe the mortgagor executing the instrument!

Individuals who can qualify as a witness to a mortgage instrument are broader than those who can qualify as an “Identity Agent” in Queensland, and include solicitors, justices of the peace and notary publics.  Notwithstanding, these individuals are likely to be limited in their personal capacity to be physically present to witness mortgage instruments.  As such, for the time being, this is one area of the law which needs to be updated – subject to appropriate safeguards – in order to keep Queensland’s consumer lending moving forward as smoothly as possible.

Corporations Act – the need for more permanent reform 

The Electronic Transactions Act 1999 (Cth) (ETA) ensures that a transaction under a Commonwealth law will not be invalid simply because it was conducted through electronic communication i.e. electronically executed.  Each state and territory has its own Electronic Transactions Act, which generally mirrors the Commonwealth ETA.

Provided three main criteria are met, a transaction will be valid if it is executed electronically. These criteria are essentially:

1. 1. there is a method used to both identify the person signing and to demonstrate that person’s intention to be contractually bound (a digital signature will suffice)
   2. the method is as reliable as is proper in the circumstances of the transaction (this is a proportionality question)
   3. the recipient consents to the method of execution.

Even if these conditions are met, however, the transaction may not be valid if an exception applies.  A key exception pertains to documents which are required to be witnessed as stated above.  Critically, the Corporations Act is exempt from the ETA.  As such, there is little national guidance around the use of electronic signatures for companies.  S. 127 of the Corporations Act states that “A company may execute a document without using a common seal if the document is signed by 2 directors of the company or a director and a company secretary of the company“.

The recent case of Bendigo and Adelaide Bank Limited (ACN 068 049 178) & Ors V Kenneth Ross Pickard & Anor[3] highlights the need for reform.  In that case, the electronic signatures of the company secretary and a director were placed on a loan document by employees.  There was a board resolution which authorised electronic signatures for this purpose (which the lender had relied upon), however, the Court found that the resolution was limited to formally accepting loan applications.  The Court ultimately decided that the company secretary and director had no personal involvement in the production or authentication of the loan deed upon which their electronic signatures where placed. As such, s. 127 of the Corporations Act had not been complied with and the loan deed was found to have not been duly executed.

The judgment highlights the problem with executing documents electronically in accordance with s. 127 of the Corporations Act, being the need for further authentication i.e. that the individual whose signature appears accepts they are bound.  Without that further authentication, counterparties cannot safely assume an electronically signed document is binding.  They are unable to rely on the statutory presumption under s.129 of the Corporations Act, which provides that a document which appears to have been signed under s.127 of the Corporations Act has been duly signed and is enforceable.  In essence, they need to look behind the digital signature.

What would be a better situation, given Australia’s new social distancing obligations, and in general, is for the EFT to be extended to cover the Corporations Act.  With appropriate safeguards and built-in assumptions (it is necessary to note that there is a risk that an individual can “copy and paste” electronic signatures, though it is arguable whether that type of fraud is all that much greater than forging a wet ink signature), that reform would minimise disruption for lenders and borrowers.

Next Steps

The Morrison Government’s direction to Australians on social distancing is likely to be with us for some time, and may potentially become more draconian.  Mortgage lenders need to consider what changes they should make to their policies and procedures now.

As a start, they should take steps to facilitate electronic verification of identity for mortgagors through video-conferencing systems.  This will also require policies and procedures (and potentially new technology) to be put in place to mitigate the potential for fraud.

There also needs to be some temporary changes to witnessing laws in order to absorb the new social distancing rules.  Gadens will be writing to the Queensland Government to this end and offering our assistance to come up with a solution which minimises disruption for our clients and the broader mortgage industry.  We will also be writing to the Federal Government seeking urgent reform to facilitate the electronic execution of documents by companies.

We will keep you updated with our progress, and otherwise invite you to get in touch with your usual Gadens contact if you have any queries.

[2] s. 162 of the Land Title Act 1994 (Qld) and s. 311 of the Land Act 2004 (Qld)

[3] [2019] SASC 123

For details of all our COVID-19 tips and updates, visit the Gadens COVID-19 Hub.

Authored by:

Craig Green, Partner
Susan Forrest, Partner
Victor Asoyo, Partner