The digitalisation of key services in business has been expansive, to say the least. Every year there is a new emerging trend, a new ‘hot word’ or key term, and a new promise from technology vendors that these trends will change the way processes are run. And for the most part, they do.
With each new technology, concerns surrounding privacy, identity and fraud, are brought into question. This means organisations are constantly facing new legal issues, and vendors, law firms, start-ups, banks and retailers are frequently presented with new rules, regulations and administrative tasks that they must adhere to in order to remain compliant.
Enter RegTech… With the use of big data and machine learning technology, RegTech reduces the risk to a company’s compliance department by offering data on money laundering activities conducted online – activities that a traditional compliance team may not be privy to due to the increase of underground marketplaces. This assists firms with meeting their regulatory requirements.
In my years as a legal advisor to law firms, I have recommended, observed and implemented RegTech, and can vouch first-hand for its effectiveness in automating certain tasks whilst complying with the law.
However, there is one key branch of RegTech which is potentially being under utilised in the legal sector: electronic verification, which uses digital processes to authenticate identity. It does this by matching certain data to external databases (name, address and date of birth), through document verification processes or biometric checks (such as fingerprint scan and facial recognition software).
Essentially, there is wording in the UK Finance Mortgage Lenders’ Handbook that is causing problems for law firms who provide conveyancing services, by making it unclear as to whether electronic verification technology is ‘permitted’.
Before I explain this issue in more depth, let me clarify that electronic verification (EV) is not only safe, secure, legal and extremely effective in improving and streamlining identity verification processes for property law firms, but it has even been promoted by the Fifth Anti-Money Laundering Directive (5MLD). 5MLD did not make the use of EV mandatory, but it did encourage the use of it in relation to the identity and verification processes.
However, as things stand, property law firms just don’t know if EV can be used without also obtaining original documents, due to the wording of a small section in the UK Finance Mortgage Lenders’ Handbook.
In the UK Finance Mortgage Lenders’ Handbook, sections 3.1.5 and 3.1.6 of part 1 deals with mortgage fraud prevention. More specifically, it includes a specific guide to ensure that the solicitor has a document signed by the client, which can be compared to the mortgage deed, all in order to prevent impersonation fraud.
Whilst the firms can easily comply with 3.1.5 by asking for a photograph or scan of the relevant document, the wording in 3.1.6 suggests that they need to have seen the original document, or obtained a certified copy. The particular wording which causes the issue is: “You should take a copy of it”, which is taken to mean they have to have physical possession of the document and copy it.
From a legal perspective, this wording is confusing. It implies that EV on its own is not permitted as conveyancers must take a physical copy of a document for their own verification processes.
Many firms have been reluctant to use EV because it seems to be unnecessary duplication.
You could say that law firms should probably still be expected to take a physical copy of an important document when it comes to something as critical as taking out a mortgage (a form of loan which often equates to hundreds of thousands of pounds worth of debt) simply because it’s believed to be more secure.
But this is quite simply not true.
In today’s current climate, electronic verification technology is a far more robust way to detect fraud, verify identity and authenticate documents than through physical means. What’s more, EV speeds up processes and creates a more efficient end-to-end safety solution for the buyer, the seller, the lender and the law firm.
This issue is not just affecting the mortgage side of law, either. Some firms that specialise in multiple areas of law are reluctant to adopt EV technology for any of their work, simply because they are unsure whether or not it can be used for conveyancing. This leaves the firm relying on less secure methods of verification, and great risk of identity fraud.
So why is this ‘issue’ still an issue? Why hasn’t there been any clarification from UK Finance or an update of the Mortgage Lenders’ Handbook?
I don’t know… I personally have reached out to UK Finance and sought clarification, an update, and demanded action, but didn’t get very far.
They said they couldn’t address this problem centrally and, if necessary, each solicitor should contact their relevant lender for advice. However, I have heard differently from other practitioners – that they have been told that they could verify documents using EV with a copy and not the original document.
It’s this grey area between what legal firms can and can’t do that is causing so much unnecessary confusion, and it’s baffling that this has remained an issue for so long, when it could be easily rectified with a simple update or announcement.
What makes this refusal to resolve even more confusing is the fact that the Scottish version of the handbook does not have the same wording. Either it has been altered, or this specific wording was never included in Scotland (for some reason), but regardless, it should be that our handbook is be adapted, altered, or even scrapped in place of a universal (Scottish) version. After all, we are part of the UK!
Moving forward, law firms who use the UK Mortgage Lenders’ Handbook should seek clarification from lenders until this wording discrepancy is resolved.
This first appeared on Lawyer Monthly.
Amy worked for many years as a solicitor before moving into compliance and eventually launching her own firm. A leading figure helping law firms adapt to the changing legal landscape, Amy is also the author of The Law Society’s Elearning and Toolkit on the Bribery Act, and former Chair of their Anti-Money Laundering Task Force.
Connect with Amy on LinkedIn.
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