CPPREP5002 - Establish and Monitor Property Industry Trust Account Management Practices

Assignment Task

Assessment for this unit includes tasks to be marked by your Assessor, which may include multiple choice questions, short answer questions, case studies/scenarios, and projects.

Assessment activities for this unit are provided in a separate assessment document, which has been customised to meet the legislative requirements in your state or territory.

You may apply for assessment through Leverage’s recognition process whereby you demonstrate your current competence through prior learning (RPL) by compiling a portfolio of evidence to demonstrate your skills and knowledge. Your RPL will be supported by interview questions and / or third-party reports to confirm your skills and abilities.

Competence in this unit will be demonstrated when you are able to show that you can meet the Elements and Performance criteria, shown on the following pages. These have been extracted from the full Unit Descriptor which is available upon request.

Account Management Practices

This unit specifies the skills and knowledge required to establish and monitor management practices for property industry trust accounts.

It includes accessing, reading and interpreting regulatory controls for trust accounts in a property agency practice and establishing, monitoring and reviewing the application of agency controls for opening, operating, monitoring and closing trust accounts, including delegation of authority, security and data management.

The unit also includes the skills and knowledge to identify and control fraudulent practices that impact the trust account.

Introduction and Overview

Trust Accounts are specific forms of bank accounts that must be used by professionals who are required to hold money in ‘trust’ for their clients. Accountants, Real Estate Agents, and Solicitors are examples of professionals that may be required to operate a Trust Account in order to facilitate transactions on behalf of their clients.

Clients, whose money is held by these types of businesses, have their interests protected against fraud and mismanagement by regulatory bodies. Therefore, there are very strict rules and regulations relating to who can open and operate a trust account and how it is managed, controlled, monitored, and reviewed to ensure accountability and the protection of client money.

For Real Estate Agents in NSW, the Property and Stock Agents (PSA) Act 2002 (the Act) and Regulations 2014 stipulate the ‘who, what, how and when’ of trust account management, as well as the penalties for offences. Penalties include fines and can be as severe as loss of licence or even jail. Individual smaller parts of the Act are referred to as Sections, and of the Regulations, as Clauses, denoted as “S”, and “C” followed by a number of the section or clause.

The Office of Fair Trading (OFT) is the regulatory body that ensures the legislation is adhered to. An agent cannot open a Trust Account without being licensed, and, in order to gain a licence, the agent needs to demonstrate that they not only understand the legislation, but that they are able to apply it to their day to day operations.

This resource guide will provide you with explanations of the legislative requirements and the mechanics involved in operating a trust account to meet the legislative requirements.

Additionally, it will enable you to demonstrate your knowledge of the legislation by applying the information provided to create the systems and procedures for ensuring requirements are met in a timely fashion. You will also be required to demonstrate your ability to implement methods for record keeping and effecting accurate reports as well as monitoring, reviewing and the security measures and procedures to protect, update, and verify trust accounts on an on-going basis.

In this resource guide we will first be examining the rules, regulations, and legislative requirements surrounding trust accounts to establish systems and procedures that ensure compliance with the legislation. Then, we will be applying our knowledge of the legislation to the mechanics involved in operating and maintaining trust accounts, including cashbook entries, ledgers, trial balance, and end of month reconciliations.

Trust accounting in general terms is all about ensuring an agent properly cares for the funds entrusted to him/her by the agent’s clients.

At the outset it is important to recognise that an agency office acts for its principal first and foremost. An agent cannot commence to sell property, obtain tenants and manage a property, or strata manage a property without an agency agreement. The agreement is between the agent and his principal, that is, the owner of the property.

The agreement sets out the terms under which the agent is authorised to act for the principal to sell or to manage, including the rate at which commission can be charged, whether any other fees can be claimed and under what circumstances, and when the fees can be claimed by the agent, and when money owing to the principal and others can be paid.

Clients of the agent include the principal, purchasers, tenants, tradespeople and the like. 

“Clients” may also request information about their account and money transacted on their behalf by an agent. The legislation (S101) states that a person directly concerned in any transaction by or with a licensee may request the licensee in writing to render an itemised account of the transaction. The request can’t be for a transaction more than six months old. The request must be in writing and the licensee has fourteen days to comply.

The Licensee and Licensee in Charge

All real estate agencies are either under a company structure or run by a sole trader or partnership. If the agency is run by a company, it will usually operate as a corporation such as ABC Pty Ltd trading as 123 Real Estate. The company must have a corporation licence, at least one director, and it must have a licensee in charge who holds relevant licences to oversee the business being run. It may also employ other licence and certificate of registration holders in the office. In this case, the trust account is to be in the name of the licensee corporation, the name under which it conducts business, for example ABC Pty Ltd trading as 123 Real Estate Trust Account.

In the case of a sole trader such as Fred Smith trading as 123 Real Estate, Fred must have the necessary licence and the trust account will be in his name as licensee in charge, Fred Smith trading as 123 Real Estate Trust Account.

Licensees are responsible for supervising their staff and ensuring that they utilise the office systems and procedures developed to reflect the legislative requirements. In other words, the licensee in charge is held totally accountable for any breaches of the legislation that occur in their office.

What Are Trust Funds?

The NSW Property and Stock Agents Act 2002 (the Act), says at Section 85, that trust money is money received for, or on behalf of any person, by a licensee in connection with the licensee’s business as a licensee. This includes sales deposits, advertising, rent, rental bonds etc.

What is said in Section 86 of the Act is some of the most important things you will have to remember when dealing with principals and clients of the business. The section says that when an agent receives trust money, it is to be held by the licensee, exclusively for that person, and is to be paid to the person or disbursed as the person directs, and until the money is paid or disbursed as directed, it is to be paid into and held in a trust account, at an authorised deposit taking institution in NSW.

The Key Principles of Internal Audit Control are:

1. Policies and procedures for the employees to follow, particularly in terms of recording procedures,

2. Reliable reporting systems to measure efficiency and effectiveness, this includes clearly delineated lines of authority and responsibility,

3. The measures should be preventative,

4. The financial management system needs to be designed so that management can easily monitor the input and output,

5. The procedures and policies should be consistently followed by all staff, including management,

6. Organisational charts allow for clear lines of authority and responsibility so that any gaps in procedure can be clearly identified,

7. Performance standards and benchmarking that align with the set procedures to ensure that the system is being utilised appropriately and fulfilling requirements,

8. Careful employee selection. Staff experience must match their responsibilities. Personnel responsible for the financial management of the business must be competent and well trained. It is imperative that they are suitably qualified, have appropriate experience in the relevant software and that they undertake continuing education. Most importantly, background checks will assist in judging integrity,

9. Job rotation reduces the incidence of fraud,

10. Maintenance of accurate and adequate records,

11. Divide responsibilities for related transactions so that verification of tasks can be achieved. Responsibilities where possible should be separated between operations and recording and accounting for transactions,

12. Separate record keeping and asset control,

13. Mandatory vacations help to ensure that long term fraud and theft are minimised,

14. External audits that test the system,

15. Create and utilise an audit trail using source documents and ensure that all employees are informed and educated about the audit trail.

These are just some of the principles and mechanisms that can be used to minimise errors and fraud.

In addition, the agency’s financial management systems need to reflect the outcome of trust account transactions so that an audit is easily able to track the payment of funds from the trust to the general account and create a paper trail.

Effective internal control systems require first and foremost a commitment from the agency’s management to protecting the assets and communicating, implementing and preserving the integrity of the controls.

It is not just about good practice, the OFT Commissioner’s Guidelines require certain procedures to be in place, and an agent can be prosecuted for failing to do so.

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