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Outsourcing: Beware the Pitfalls

John Goddard refers to material published on the NSW Government Fair Trading website to highlight a looming issue that both real estate agents and regulators need to carefully consider as the trend to outsourcing trust accounting software management and/or administration of the trust account increases.

As reported on the Fair Trading website,given the large sums involved in real estate transactions, safeguards need to be provided for trust account funds to instill confidence and provide redress. Consumer risk relating to trust accounting can be associated with a lack of knowledge of trust accounting, failure to have proper financial systems in place to monitor and review trust accounts regularly, failure to monitor the actions of staff or comply with audit requirements and fraudulent conduct. Funds notionally at risk are estimated at around $1.089 billion in NSW alone. Consumer risk is clearly a significant issue, but what about the risk to the Licensee’s livelihood if they fail tests for probity?

Outsourced applications
Over the past five years over 2000 real estate business have implemented hosted sales/customer relationship systems which sometimes incorporate a hosted trust accounting module. The potential issue here for all parties concerns where the data is held, how long it’s held and its availability when the Fair Trading Officer arrives to assess the Licensee’s practices. As more businesses adopt software applications where the data is off-site and software is delivered as a service (SaaS) it is expected that the rules for managing such an environment will require review.

Outsourced trust accounting services
Today many Licensees have employed contractors to prepare their accounts and ensure that all legislated requirements and good business practices are managed by their local bookkeeper. The work is typically completed at the Licensee’s office and the data and records are held locally. This model works well for many business owners.

However, a new business model is evolving. According to the NSW Fair Trading website, there has been a suggestion that third party organisations be allowed to handle trust accounting requirements for multiple agents. Currently, section 104 of the Act requires trust account records to essentially be maintained at the licensee’s place of business. It seems unlikely that a licensee could effectively monitor their trust account records if they were being maintained by an external organisation. It would also make it more difficult for Fair Trading to conduct unannounced inspections of licensee records. Outsourcing would facilitate lack of transparency and buck passing to a third party, particularly to someone who is not licensed. It is therefore not supported.

When we became aware of this updated guideline, we contacted NSW Fair Trading to clarify the current situation. They did confirm that any organisation that outsources the responsibility for trust accounting services where the data is off site, and especially if the service provider is located in another state, could fail the regulations test and therefore put their license and business at risk.

At Rockend we see that the trend to outsource software hosting and trust accounting services will increase over time. However, we are concerned that some service providers and Licensees have put their business at risk within today’s regulatory framework.

As other industries have discovered when outsourcing technology services, sometimes the benefits offered during the sale are not realised once the transaction is complete. Be alert to the risks and check with your local office of fair trading to be sure.

John Goddard has been the CEO of Rockend since 2004. He leads a national team dedicated to helping Rockend clients grow their business and leverage technology to build profits and client success.

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John Goddard

John Goddard is the former CEO of Rockend since 2004. He is personally committed to life-long learning and encourages all Rockend staff to take control of their personal development, both through work and personal learning.