Hong Kong to scrap middleman role of law firms in mortgage transactions to protect homebuyers
- A new rule will allow a bank to pay the mortgage loan secured by a homebuyer directly into the bank account of the seller electronically
- The move aims to protect buyers who find themselves out of pocket when the law firm handling their transaction goes bust
The new rule, put forward by the Hong Kong Monetary Authority on Wednesday, is aimed at protecting buyers who find themselves out of pocket when the law firm handling their transaction goes bust or gets into difficulties.
It will change the current practice in which both bank and customer first pay the money to a law firm which then passes it on to the lawyer of the seller.
“The Hong Kong Monetary Authority strongly supports this initiative to better protect bank customers in property transactions and to reduce the credit and operations risks of [banks] in their mortgage business,” said Arthur Yuen Kwok-hang, deputy chief executive of the HKMA, in a circular sent to all banks.
During a 10-year period to April 2021, more than 1,500 homebuyers found a combined HK$530 million (HK$67.98 million) trapped in the frozen bank accounts of 25 troubled law firms, according a Legislative Council document and court papers.
On average, the homebuyers spent more than two years getting their money back. Many did not get refunded in full, putting their home buying plans in jeopardy.
The risk caught the public’s attention after a high profile case in December 2020. The Law Society, which regulates some 120,000 solicitors and 900 law firms, closed down Wong, Fung & Co and froze its bank accounts after discovering a former clerk at the company had misappropriated an unspecified sum from clients. The company handled 4.9 per cent of the city’s second-hand property transactions in 2019.
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A total of 637 homebuyers complained that their money, totalling HK$368 million, was trapped in the defunct law firm’s bank accounts as a result.
Some of the buyers were forced to declare bankruptcy or needed to get other bank loans to complete their transaction.
The Hong Kong Association of Banks (HKAB), the local industry body, supports the change of rules announced today.
“Over the years, HKAB has been discussing with the relevant regulators, the Law Society of Hong Kong and different stakeholders to come up with a new payment arrangement for residential property transactions relating to customers with mortgage loan,” a spokeswoman said.
“Customer protection is always the priority of banks. We aim to protect the interests of the parties involved to ensure relevant transactions will be processed smoothly.”
