A presentation by Gavin McCosker, Chief Operating Officer and Registrar of Personal Property Securities, Australian Financial Security Authority, to the Conference on Accounts Receivable Finance Platform, Beijing, China.
Mr McCosker was invited by the People’s Bank of China (PBOC) and the International Finance Corporation to speak on AFSA’s experience with the Personal Property Securities reforms and the impact on the SME sector
19 November 2015
Thank you for your warm welcome.
It is a great privilege and an honour to have an opportunity to talk to such a distinguished group about the Personal Property Securities system in Australia.
Compared to a number of other countries, the Australian system is a relatively new one. So I will use the opportunity today to talk about the reform process, as well as touch on some of the implementation and transitional issues we experienced. I will then finish with an overview of how the system is operating now.
Before I do that I will just spend a moment telling you a bit about Australia.
Compared to China we have a small population of around 23 million people.
We are a multi-cultural country—the main driver of population growth over the last 50 years has been immigration.
We do have quite a large land area—6th largest in the world—but most of our population is concentrated in cities, such as Sydney, Melbourne and Brisbane.
The Personal Property Securities system in Australia, is one of the key programmes administered by the Australian Financial Security Authority—or AFSA for short. As the Registrar of Personal Property Securities, I have ultimate responsibility for the operation of this programme within the agency. The other key programme that AFSA is responsible for is Australia’s personal insolvency system.
Our vision as an agency is to operate these programmes in a manner that supports the Australian economy.
We seek to do that by facilitating certainty, confidence and fairness in the programmes we are responsible for. Through this, we seek to promote the efficient flow of capital in the economy and protect consumers.
Both the personal insolvency and personal property securities systems provide the certainty required to support lending, while providing individuals with a means to protect themselves from unmanageable debt and from unintentionally purchasing encumbered goods.
I will now spend a few moments talking about the reform process that led to the Personal Property Securities Act being passed—and the creation of the Personal Property Securities Register or PPSR for short.
To explain the reform process will require a very brief explanation of Australia’s constitutional structure.
Australia is a federation, made up of six states, two territories and a federal government. Under the Commonwealth constitution, the Australian parliament is only able to legislate under defined heads of power. The states and territories hold all other powers.
Sometimes the state, territory and federal governments collaborate to progress reforms for the federation, where the required power to undertake a particular reform is the responsibility of the states and territories. This occurs through a forum known as the Council of Australian Governments.
A number of years ago the Council of Australian Governments identified secured transactions as one area that would be best administered centrally by the Federal Government.
Although secured transactions arrangements were reasonably and comprehensively regulated within Australia prior to the reform, the system operated in a very decentralised and fragmented manner. For example, there were over 70 different Acts and 40 registers dealing with a wide range of secured collateral, making it challenging for even the legal profession to navigate.
In addition to this, there were a number of common law rules and equitable principles that operated in parallel.
This made the system complex and costly to operate, acting as a barrier to the system delivering on its purpose, which is to promote the efficient flow of capital in the Australian economy by enabling:
- access to finance
- financial risk management and
- consumer protection.
To overcome this barrier, the reform sought to achieve what became known in Australia as the 4 Cs.
- Increased certainty—by having a single approach that could be relied upon regardless of where you lived in Australia.
- Increased consistency—so that the rules applied to a particular transaction could be more easily anticipated. Some of this was addressed in the reform by looking to the substance of the transaction rather than its form, reducing unnecessary confusion.
- Through this it was considered that the complexity of the system and costs would reduce.
An ancillary benefit of the reform is the additional transparency it provides within the economy in relation to transactions—and as a result of this transparency, improved confidence in risk based decisions that relate to financial transactions.
The benefit of this is that is that it can encourage a transition from the informal economy to the formal economy, resulting in increased access to finance and other protections that a formal system provides to all parties. Overall this achieves an improvement in the investment climate.
The key component of the reform in Australia was of course the register of security interests. Planning around how it would operate was a significant piece of work—as was the decision made early on, to make it an online register.
I will briefly take you through some of the issues and learnings we’ve had in relation to the development of the register.
Having an extremely high level of security over data was an essential component of the design. This required the register to maintain databases in separate locations that mirrored each other. Data had to be replicated prior to a registration being completed.
This added to the complexity of design—along with the fact that the register was developed in parallel with the policy and legislation. This meant requirements for the technology build were not settled until late in the development process.
In addition, transactional design elements needed to take into account the liability question, particularly for bulk filers, given that the PPSR is a priority system. Determining whether to process batch transactions individually or as a group in the detailed technical design of the system is one example.
The importance of having a robust test environment became clear very quickly. Our operating model incentivises private operators building an interface to the register in order to service the various market sectors as efficiently as possible, through delivering value-added services to different market segments.
Our initial test environments were not capable of handling the volume of activity. This is something that we have since invested a lot of time and resources improving.
The register relies on a number of different vendors and other government registries such as the Australian Companies Register, the Australian Business Register and Austroads. Through these links we are able to provide real time validation of entries of data and the most up to date information for search results, drawing on the latest information on these other registers—for example, confirmation that the company number entered is attached to the name expected—or information that a motor vehicle is recorded as written-off or stolen.
Considerable effort and planning was required to reach agreement between the vendors.
Stakeholder engagement / communication
One thing that we invested a lot of time in—and I cannot emphasise this enough, as the single most important aspect of this reform—is engagement with stakeholders—those affected by the paradigm shift in legal concepts and their operating models.
Given the breadth of the reform, our approach was to create a number of stakeholder forums. These forums were particularly important after the register first went live, as they provided an avenue for us to maintain visibility of emerging issues in the market, thereby giving us an opportunity to deal with them before they became big problems that undermined trust in the system.
Another transitional issue that we needed to manage flowed from the decision to migrate certain registrations from some of the 40 registers that existed prior to the PPSR going live. There were a number of problems with migrated data that created integration problems. A key learning for us was that more time needed to be expended on data cleansing activities, before data hits the live register.
Educating the public and business community about key elements of the reform is something that has also been very important. An additional consideration is that the impact of the reform depended on the industry sector that a business or individual works in.
The initial approach was a set of road shows, delivered around the country, to provide information and give people potentially affected by the reform an opportunity to have their questions answered.
This was followed by the development of a range of industry specific fact sheets, as well as brochures and videos. The most recent addition has been the development of a business guide—as we found that one of the barriers for small businesses using the system effectively, was that they lack basic awareness of how the system operates. We are hoping the business guide will be a useful tool to address that.
I mentioned earlier that stakeholder engagement has been very important to the success of the system in Australia. We have utilised a three tiered approach to discuss and progress issues. This has been very useful as it ensures the discussions occur with the right people.
For example, it is obviously much better to have technical discussions with people who are closely engaged with the technology—and policy related discussions with people who represent relevant professional and industry associations.
A key point I would like to make here is that we use this engagement structure as a ‘co-design forum’. By this I mean that we use this group to provide feedback regarding usability challenges being faced by users of the system throughout the economy. We take this feedback as an input to our ongoing, six monthly system enhancement program. These details, including the enhancement requests made by our users—and our response to them—are published on our website.
This transparent approach to user-centred design is intended to ensure that private sector operators, who are the key contributors to economic growth, have ever-improving or streamlined access to the tools they need in conducting their business.
As a result of this approach, I am proud to say we have won an award from the International Association of Commercial Administrators.
I will now spend a little bit of time talking about the PPSR operating model.
The first thing to note is that although AFSA maintains a Web User Interface, there are a range of private organisations that provide access to the register via products they have developed, using a web service we have published.
Every transaction performed, regardless of the channel used, is charged the same fee. AFSA receives no government funding, the system is 100% funded through fees and charges.
What this arrangement creates is a private—public service delivery model. We currently have around 200 private organisations that maintain a right to build interfaces with the PPSR. This model promotes innovation through competition between the different private operators.
At present, almost 80% of interactions with the PPSR are delivered via products developed by the private sector using the web service channel. These products often combine data from AFSA with data from other, usually government registers or entities in a manner which adds value to the end user’s needs.
AFSA maintains the direct website for access to basic services to ensure equity of access. At present we see continuity of the provision of the website as important to ensure fees charged in addition to the base rate remain competitive.
Before I move on to discuss register activity and statistics, I thought you might find it of interest to see the influence that mobile technology has been having on how people interact with the PPSR via our web user interface. What is clear is that there is a decline in the use of desktop computers in preference to mobile devices.
Now I will take you through some of our reporting in relation to the PPSR.
We collect a range of information through our data warehouse and publicly report PPSR statistics on a quarterly basis. Our regular release of PPSR and insolvency statistics are starting to be relied upon by a number of other organisations in Australia that undertake economic modelling.
Some statistical information that may be of interest is the break down between what is regarded as commercial collateral and consumer collateral. Commercial collateral is used in the course of business. The vast majority of collateral registered on the PPSR is used for some form of commercial purpose.
We do retain a small number of registrations that are classed as unknown—this is a by-product of data being migrated from other registers. We are actively working to address this with the relevant secured parties.
The dominant collateral class on the PPSR is motor vehicles, followed by ‘other goods’ and ‘all present and after acquired property’.
We have seen a growth in ‘other goods’, which perhaps suggests that lenders and borrowers are looking to more novel types of collateral to secure finance.
One area I am particularly interested in as Registrar, is the differential between registrations, discharges and amendments. The reason for this is that an effective register will be kept up to date by its users. Any decline in amendments and discharges compared to new registrations, poses the risk that overtime the register will become cluttered with abandoned or redundant registrations.
At present we are very pleased with the rate of discharges and amendments compared to new registrations.
Another sign of the health of the system is the rate of searches, as this demonstrates the register is being used to assess risk. Currently the PPSR is searched around 20,000 times a day.
A look at the break down of the type of searches being conducted shows that the majority of searches are by serial number. This aligns with the fact that most searches in relation to the dominant motor vehicle category, are via the vehicle identifier number.
The second highest category is by organisational grantor, which reflects that lenders and suppliers are using the register to assess risks associated with dealing with different organisations.
Something that I am also keen to keep track of is the rate of searches to new registrations. Presently we are sitting close to a 4:1 ratio.
Our interest in this ratio is that it helps us to see whether the register is being used to assess and manage risk, rather than just being the end point of a transactional process. As I am sure you are aware, this is also one of the measures that the World Bank considers when assessing the effectiveness of secured transaction regimes.
I have mentioned a couple of times, the importance of maintaining high quality data. This is very important to me as Registrar—as failing to do this can undermine the trust placed in the register.
To help manage data we have put in place a few things.
First, besides ensuring that the register is highly available and usable, I seek to use the power available to me to keep the register free of clutter.
Secondly, we work to effectively manage disputes between parties through the amendment demand process.
And thirdly, we work to identify potential misuse of the register and use available enforcement powers to dissuade others from doing something similar.
I will briefly talk about each of these.
My powers as Registrar can be divided into three parts. I have the power to remove and correct data, amend registrations where there is a dispute between the grantor and secured parties and proactively work to have registrations discharged where they appear to serve no purpose.
Aligned with these powers, and in accordance with the principle of maintaining a clutter free register, we have initiated a proactive transactional surveillance and data integrity program to identify and deal with registrations that may be seen as ineffective or redundant. We also endeavour to capture vexatious registrations at an early stage.
I have recently issued a practice statement on our approach to this which you can find on our website.
The PPS Act also provides the legislative framework for a judicial and administrative amendment demand process. AFSA is responsible for the administrative process.
The administrative process is essentially a natural justice process that relies on notices being served on relevant parties. It is not a quick process to resolve disputes, however, there is no cost involved.
Where a party wants a quick resolution of a dispute they will generally use the judicial process.
In 2013-14 there were more registrations amended by the Registrar—in response to administrative applications—than in the 2014–15 period.
What is interesting, is that even though the overall number of applications increased in 2014–15, the number of registrations needing to be amended by the Registrar decreased. We consider this reflects well on the work we are doing with secured parties to encourage collaboration with grantors to keep the register accurate and up-to-date. As a result many applications we receive are now being resolved between the parties in advance of us needing to make a formal decision under the PPS Act.
The PPS Act also contains provisions that are designed to sanction users of the register who misuse it.
In addition to these provisions, we will also consider conduct that amounts to providing false and misleading information, which is a criminal act under the Criminal Code.
We take potential misuse of the register very seriously, as collateral registers do have the potential to be misused as a form of commercial sabotage. We are therefore keen to send a clear message to anyone thinking of using it for that purpose, that they risk serious consequences.
I will finish by quickly reflecting on some of the things that have emerged for us in administering the personal property securities system—and in industry and stakeholder feedback and the recent review of the PPS Act. This is not a comprehensive list, but they are useful considerations.
Authentication is critical. We developed our authentication requirements incrementally and we have plans to enhance them, however, having a rigorous system that enables you to ‘know your user’ at the outset, is something that will provide clear benefits.
Greater transparency builds confidence in the system by enabling better transactional surveillance that helps identify potential misuse.
Our system doesn’t require a stated end date for registrations. While there are sound reasons for this, careful management will be required overtime to avoid these registrations remaining on the register beyond their useful life.
Data migration can be problematic. Although it may be hard to avoid, migrating data from pre-existing registers is complex and expensive and it can create a good deal of confusion and problems for users.
Our system originally maintained attachment functionality, which allowed users to attach additional details to a registration. However it was difficult to ensure that attachments added value to registrations. For this and other reasons the attachment functionality is under review and is not currently available.
The last issue that I will mention relates to the number and type of collateral classes available. While a larger number of collateral classes may enable more specific registrations, a smaller number of collateral classes may avoid—or reduce—the likelihood of overlap between classes, which can make the registration process more complex.
In an online environment we must also see the significant interaction between technology and policy, which if embraced, will enable policy outcomes to be achieved while delivering highly usable products. A great deal of time and expense is incurred when technology based tools are seen as servants of policy rather than facilitators of policy outcomes.
This becomes ever more important for an economy built on small businesses such as Australia, where business operators can be categorised as time poor, as they wish to focus on the running of their business.
So, taking all that into account, we are looking to the future. We recognise that technology enabled tools like the PPSR cannot stand still.
For this reason we are presently doing a lot of planning to ensure that in the future we will have the technology in place to ensure we are able to effectively and efficiently respond to changes in policy, that will inevitably impact the register, improve usability and support innovation.
This planning is being supported by an independent review of our current system, which will provide future investment options.
Ultimately our core focus is on continually improving the way we support the delivery of the purpose of the personal property securities system—which as mentioned earlier—is to ensure the efficient flow of capital within the Australian economy.
That brings me to the end of my presentation. I hope you found it useful and I am happy to take any questions that you might have.