Lawyers and Conveyancers Bill

As I have done with the other parts, I will simply introduce the clauses. Part 10 requires both the New Zealand Law Society and the New Zealand Society of Conveyancers to each maintain a fidelity fund to compensate clients for particular forms of pecuniary loss. This is a core and important part of the consumer protection functions of the bill, and I commend the part to the Committee.

Part 10 of the Lawyers and Conveyancers Bill is also an issue that National has some difficulties with. Part 10 in itself constitutes a code and it continues forward provisions that were broadly similar in the Law Practitioners Act of 1982. National’s perspective on this issue is set out in the commentary as the bill was reported back from the Justice and Electoral Committee. It is one of our primary reservations, and it is seen by this party as a principled reservation.

I note that it seems to be the case that the Law Society is keen to continue with the fidelity fund. But I question that, and we say that no sufficient case has been shown for the continuation of the fidelity fund under the bill. Interestingly, the fund has been abolished for most other occupations, including, I would assert, occupations where there is a greater risk of loss. I refer to occupations such as chartered accountants, motor vehicle dealers, and sharebrokers. So National says that the fidelity fund had a place when lawyers were actively involved in mortgage lending, but the current range of banking products has meant that lending by lawyers is now rare.

A few years ago when I first commenced in practice it was very much part of the business of the legal profession to be involved in moneylending. That was a direct result of the shortage of money in the market, and the niche opportunity that lawyers had traditionally seen to take money from clients for investment and lend it out, generally on mortgages that were flat mortgages, not involving principal repayments, for relatively short terms. It is right to say, as Dr Mapp has said, that it was generally second-mortgage money—maybe third-mortgage or fourth-mortgage money. But that was at a time when the banking profession in New Zealand had not developed to any extent the sophistication that it now has. Although some law firms still lend money, that activity is in the descendent. For example, the middle-sized and the larger-sized firms have pretty much moved out of that market.

The reason for having a fidelity fund, one supposes, is to provide a safety net in a setting where risk of loss is real, not where risk of loss is illusory. So there has to be real risk. There has to be a real mischief to be resolved. I would say that in the case of the law profession, that risk is no longer there and the range of professional indemnity insurance covers, including fidelity extensions, that can be purchased for a reasonable price—certainly the fidelity extensions—makes it completely unnecessary for the fidelity fund to continue in its current form.

As a matter of philosophy, in a highly competitive environment it is an interesting perspective that one should be asked to subsidise one’s fraudulent competitors in business. Yet that is basically what the fidelity fund is about.

💬 Hon Lianne Dalziel: It’s a profession.

The Minister makes the comment that the legal business is a profession. She is right to say that if she is comparing the concept of a profession and a trade, but let us not be blinded to the fact that law is a business just as much as medicine is a business.

I would just like to continue developing the point that Dr Worth has been making in relation to fidelity funds. The key point here is that fidelity funds are not for negligence, primarily, as that can be insured for. They are not for accidental loss, that can be insured for. Indeed, I imagine it would be a requirement—or it should be a requirement—that lawyers hold the appropriate insurance cover for that sort of thing. Fidelity funds are actually for theft. So why did they come into being in the first place?

It is worth looking at the history of this, at least briefly. After all, if one deposits money with a bank, it could be stolen. So why do we not require banks to hold fidelity funds? The reason is that it is highly unlikely that any one theft from a bank, or even a multiple series of thefts or theft by servants within the bank, will endanger the financial stability of that bank so that it cannot recover the loss from its general assets. In the case of lawyers, of course, it is quite different. A firm might have two partners and when a partner is purchasing a house or assets the level of theft is so great that the honest partner, if I can put it that way, could not in truth cover it. Therefore, a fidelity fund is a way of spreading the prospect of theft not able to be covered from within a firm across the totality of all other members of the profession. Put like that it has a logic and I can understand why the fidelity fund exists from that origin.

However, the particular issue that I raise is that the Government has then said that the conveyancers must also have a fidelity fund, presumably on the basis of a level playing field—if it is reasonable for lawyers, it must be reasonable for conveyancers. The problem is that fidelity funds—by the description of the design that I mentioned—require a sufficiently large number of people. That is so that the contributions from any one of them to cover the defalcation of a particular person are sufficiently low that they are actually manageable. So, when there is a profession of some thousands of lawyers, and one or two of them steal, the others can cover it. We know, in practice, that it actually proved to be quite difficult a number of years ago in the case of Renshaw Edwards. Every principal at that time had to pay $10,000 for one major defalcation by one not-so-large firm. Even across thousands of people, it was a real difficulty for many practitioners.

Conveyancers will form a much, much smaller pool. Some say it might be as low as six people. Realistically, once created, the profession will increase in size, but it is highly unlikely that the spread will be broad enough to cover the defalcation by one conveyancer without effectively bankrupting the rest of them. Looking at it in that light, the role of a fidelity fund, at least for conveyancers, is moot. So if it will be hard for fidelity funds to work, in practice, for conveyancers, what is the point of retaining it for lawyers across the board—for the very reasons that Dr Worth gave. The Minister in the chair, the Hon Lianne Dalziel, said: “But we’re professionals.” I guess she would say that bankers and accountants are also professionals. Maybe the argument is then that accountants do not have large deposits of vulnerable clients’ funds, and perhaps that is, broadly speaking, true. However, in the case of purchasing a house, for many people that is their major asset, therefore they need that particular level of protection.

The fidelity fund exists in part because of the offer by the Law Society, as part of the overall package, that it should be continued. There are a lot of people in the legal profession who are unhappy with that decision, but it became something of the deal that was entered into between the profession at large, represented by the Law Society, and the relevant Ministers of the time, as the price for modernisation of the profession. National feels that the time has come when the fidelity fund is no longer appropriate. But, given that I recognise that the Government has probably got the numbers on that issue, it is not a sufficient reason to vote the bill down as a whole. However, we do wish to raise those points of principle as to why fidelity funds look increasingly inappropriate for the future. It will be particularly difficult for a fidelity fund to work in practical terms in relation to conveyancers. It is a sort of nod to ideology and the ideological idea of the level playing field, but without any real recognition of the practical reality of it, so we do raise those issues for consideration.

I note—and I do this quite deliberately—another issue raised by United Future members, who are not speaking tonight. I raise the issue because it was raised about the profession broadly—and maybe some of my colleagues will speak on it as well. It was the issue of the use of the money in existing Law Society funds for Law Society purposes. A lot of lawyers were deeply upset about that—I know that because they made representations to me personally about it. I know that in the profession it became a highly contested issue. Again, it became part of the deal. That part, however, was rather reluctantly agreed to. It is certainly there and I think it is only proper to record it as an issue that was raised—in particular by a member for United Future who is no longer in the House; by an ACT member who also is no longer in the House; and by a New Zealand First member who also is no longer in the House. I just make the point that it is a highly contentious issue, and it is a matter that needs to be put on the record.

I am somewhat surprised by the argument that has been mounted by my colleagues regarding the issue of fidelity funds. But I am also somewhat persuaded by them, having listened to the arguments that have been put forward. The profession relies very much on the quality of the advice it provides to clients, and, in the market place, the position in which our legal profession is generally held is one where that quality of advice is what people depend on before they make very serious commercial decisions. So my original position, as a layperson, was that some protection in law would have been appropriate. However, having listened to some of the arguments put forward, I can see that it is probably an issue that, over time and through an education process, we can start to move away from. In the meantime, though, the legal profession might just have to accept it. Picking up on Dr Worth’s point, I say that this might be at a cost to sales in the short term.

My real concern—and I am addressing these concerns to the Minister in the chair, the Hon Lianne Dalziel—is that we are at risk of making this law an ass before the ink is dry. In particular, I am thinking about the requirement on the conveyancing body to have a fidelity fund. In principle, I totally agree with that, but I wonder whether it can happen in practice. I wonder whether we are actually setting up this new body for failure before it even starts. To my mind, that is not sensible lawmaking. The New Zealand Law Society, when it made its submission to the Justice and Electoral Committee, was at pains to point out that it thought that only seven or eight people would be incorporated. When we start to do the maths, using the argument that Dr Mapp used, and when we start to leverage that across that number of people, we can see that it is going to be nigh on impossible for them to put funds aside to meet their obligations under the law that we are busy debating.

The point that I am making—and I do not want to take up too much of the Committee’s time making it—is that this is the opportunity and the time to agree that there will be a flaw in the legislation. Let us work collectively to address that issue and leave here tonight with a sense that we did the right thing. It is OK to have positions, but at the end of the day we, as lawmakers, are charged with making good law, and I propose that we are putting ourselves in a position where we simply will not be able to do that. I have made the point, which has been made by others and is quite right, that when this is leveraged across four, five, six or seven, eight or nine people—let us be generous and call it 20—those people will just not have the ability to pay. That will create all sorts of different pressures and might lead to some shortcuts and improprieties simply because people will have to find ways of funding this to meet their legislative requirements. That strikes me as a silly way to proceed. So I leave the Committee with that view. It is very much from a layperson’s perspective, but I see it as a possible stumbling block that I believe needs the attention of the Committee.

As a personal contributor to the Renshaw Edwards levy, I think this does have—

💬 Dr Wayne Mapp: $10,000.

KATE WILKINSON:—Yes, $10,000—some particular relevance to me. I certainly recall that at the time the thought of paying $10,000 in times, I must confess, that were somewhat commercially lean, was a bit of a burden. There were certainly philosophical arguments—probably stronger in those days than they are now—for the abolition of the fidelity fund. Under Part 10, there is provision for the establishment, maintenance, and management of the two fidelity funds, both the Lawyers Fidelity Fund and the Conveyancing Practitioners Fidelity Fund. That in itself has its own permutations, as Mr Connell pointed out. The rules, however, provide for a minimum size at which the fund is to be maintained, if it is to be held out as a protection for the clients of lawyers or conveyancing practitioners. So in effect it is capped. It fixes the maximum amount that may be paid out to any individual claimant, and it also fixes the maximum amount that may be paid out to all claimants. So it is not an unlimited guarantee; it is somewhat limited. There is also provision to pay differing amounts, depending on the classes of lawyers.

Now, there has been considerable discussion about fidelity funds. We are aware that accountants do not have a fidelity fund but that lawyers do and, yes, the philosophical argument asks why innocent lawyers should effectively give an unlimited guarantee for all other lawyers. Why should lawyers guarantee someone over whom they have no control? Why should they guarantee someone when they have not even given a written guarantee?

I think the Renshaw Edwards case really did highlight the situation. The levy at that stage was $28 million, which was quite a considerable sum to be funded by business people, at the rate of $10,000 each. One has to bear in mind, however, that the Renshaw Edwards days were the heady days of solicitors’ nominee company mortgages. I have to say that trends have changed since then, and the desire of lawyers to run their own nominee company mortgages has certainly dwindled in the last few years. I can think, for example, in Christchurch, of only one firm that runs a substantial nominee company system.

That system had its own checks and balances, of course, and was run by nominee company rules. Probably its most important feature was that if one’s client wanted to invest money, that client had to sign either a specific authority or a general authority. That specific authority asked whether the client wanted to invest with so-and-so on a particular piece of land. In those cases, the risk of running foul of the nominee company rules was slightly less than if there had been a general authority, which was usually: “I authorise you to invest x thousands of dollars at y percent over whatever security.” I believe that that is how the Renshaw Edwards money was invested, but it is less common now. The levy at the moment, I think, is something like $500 per practitioner or per partner, so it is not actually a huge amount in the scheme of things.

I would like to take up Mr Connell’s comment about the ability of such a small handful of conveyancers who would be able to contribute to a realistically funded fidelity fund. The whole idea of this Lawyers and Conveyancers Bill is to put lawyers and conveyancers on a level playing field, and if any requirements are waived for conveyancers to pay into a fidelity fund because they cannot afford it and there are not enough of them, then lawyers, who are subject to the same strict regime, cannot be reasonably expected to pay for that fidelity fund. I think that that could lead to some potential difficulties, from a practical and realistic point of view.

Those of us who were in private practice in the early 1990s well remember the Renshaw Edwards disaster that affected the profession. I know that my firm had to contribute over $600,000 to the fidelity fund. I know that Dr Worth’s firm had to do something similar, and the big firms, which were in no way associated with any kind of activity that would attract fidelity fund requirements, contributed many millions of dollars to the fund. But that is behind us, and we must move on.

Other speakers have spoken about the desirability of a fidelity fund so I will not go there, but I think that Mr Connell raised a very important point about clause 286B. I would invite the comments of the Hon Lianne Dalziel, the Minister in the chair, on it, because for the life of me I fail to understand how it is to be expected that a handful of conveyancers—and it will start off as a handful, even taking into account the grandparenting provisions in clause 346A relating to landbrokers—will provide cover for a theft of, say, $2 million soon after the fidelity fund is up and running and this new profession of conveyancing gets under way. I do not think it is an answer to say that insurance is the way through, because I doubt whether the premium would be able to be paid by members of that new conveyancing profession. The premia would be horrendous. So I would be very grateful for the Minister’s response to that.

I must say I have been very grateful to both the Attorney-General and the Minister for their occasional answers to questions, but these are important matters. The lawyers and conveyancers legislation comes before Parliament for the first time in 24 years. The last time these important matters governing the profession were debated was 1982, and for me, anyway, as a new member maybe the reality of life is that Government MPs are sitting like zombies while we Opposition members speak. I would have hoped for a better debate at the Committee stage on some of these important issues of principle, but maybe I hope in vain. I would certainly be grateful if the Minister could answer Mr Connell’s query and my query.

I raise a point of order, Madam Chairperson. I see that the Minister is conferring with officials, and I wonder whether that means she may respond to both my colleagues’ requests for a clarification of their points.

The CHAIRPERSON (Ann Hartley): No, she does not want to.

I seek leave that all the amendments in Dr Worth’s Supplementary Order Paper 344, relating to Part 10, be taken as one question.

The CHAIRPERSON (Ann Hartley): Leave is sought for that course of action. Is there any objection? There is not. First though, I draw members’ attention to the amendments to clauses 300 and 301. They are inconsistent with previous decisions, so they are ruled out of order.

The question was put that the amendments set out on Supplementary Order Paper 344 in the name of Dr Richard Worth to Part 10 be agreed to.