20 May 2019

Innovation versus legislation

By Kylie Davis, Head of Research, REINSW

Greater collaboration between legislators, innovators and real estate is required to create a transparent regulatory framework that both protects consumers and helps the industry embrace new efficiencies through technology. 

That was one of the key lessons from the second Future of Proptech lunch held by the REINSW on 30 April 2019, where it was revealed real estate agents may carry a legal risk when they adopt some of the more disruptive technologies. 

On the panel was Sarah Bell from AIRE, which delivers AI to the residential real estate industry; Thom Richards from property management software app Managed, which negates the need for trust accounting; and Justin Butterworth from leasing platform Snug. Representing NSW Fair Trading was Bjorn Borg, while Lisa Indge from Let’s Rent provided the real estate agents' view.

Key revelations that came out of the panel discussion included:

  • Advice from NSW Fair Trading that legislative change typically takes five years, while regulatory changes can take two to three.
  • The lack of engagement and accessibility of regulators risks stifling innovation and preventing Australian proptech disruptors from being internationally competitive.
  • Proptech innovators may be best taking a ‘forgiveness not permission’ approach rather than waiting for government. Accordingly, they should structure the risks and costs of educating the market.

Exponential innovation testing regressive regulation

The audience was told that more than US$20 billion is expected to be invested in proptech globally in 2019, representing growth of over 9000 per cent since 2012. Internationally, the growth of proptech is occurring faster and with greater momentum than fintech.

Unlike fintech however, which is regulated in Australia by national legislation through ASIC, proptech must contend with different legislation across each state, providing additional challenges for local startups.

This was occurring at a time when dissatisfaction with real estate agents and the disjointed and fraught process of buying, selling and renting property was growing. 

“When you pick up your phone to use Uber, Airbnb or Uber Eats, the process is instantaneous,” said panel moderator Kylie Davis. “But when you try to buy a house or rent, it's like 1984 called and they want their process back, and suddenly you're back to handling paper and waiting for phone calls to be returned. 

“The legislation we have at the moment, while looking to protect consumers, is failing to deliver good service experiences, while the agents who do want to adopt these technologies are between a rock and a hard place.”

The panel heard that overseas governments were starting to collaborate with innovators to create a new approach to legislation that sets out frameworks to guide desired behaviour. 

“It’s the role of technology and innovation to push the boundaries, while legislation has typically reacted,” said Bell. “Legislation needs to come in at the design stage – at concept. The European Union has published guidelines for the ethical development of AI, and I don't think they're unreasonable. They embrace the hope that exists with new technology, and I think they're the best practice guidelines in development that all governments should be adopting.”

At risk of being left behind

The speed of innovation means governments that want to create reactive legislation are being left behind.

“Since the Second World War, we've been running on Moore's Theory that the speed of innovation would double every two years,” Bell said. “But you apply the connectivity of AI with network theory, which is just enabling the way that we're using technology, and the result is exponentially speeded-up change. It's impossible to leave it to reaction now.”

But Director of NSW Fair Trading, Bjorn Borg, said it is not the role of regulators to approve or endorse new technology, but to protect consumers and make sure there is legal redress when things go wrong. 

He conceded regulators need to improve their engagement with innovators, but said innovators could help regulators get up to speed more quickly by identifying the changes needed to be made that accommodated multiple market players, not just themselves. 

“We need as much background as possible, not just on what the product does, but the problem it is solving and any international trends that show how it is playing out in other jurisdictions and economies,” he said. “Without that clarity, regulators are going out there trying to find that out for ourselves, but we're not the experts in this particular field. That's where you then get even longer delays.”

Justin Butterworth from Snug said the current approach from regulators was stifling innovation and making Australian technology uncompetitive internationally.

“Here we are, two years down the track in my space of digital bonds without having effective conversation, without bringing about innovation to the market, without having learned the insights from consumers and regulators, and we'd like to see that change,” he said. 

“Just two weeks ago, the other startup in this space internationally raised $40 million at a $300 million plus valuation because they have not faced the same restraints. It's not acceptable to be two years down the track with the inability to meet and discuss progress innovation in this country.”

Taking the right steps forward

The panel identified that adopting new technology did not have to be an ‘either/or’ proposition, but could be done incrementally. For example, by identifying a small group of existing clients that you could receive informed consent from to trial new technology. 

“We'd love to see a framework which is around process and timeliness for engaging with regulators, so it's clear on what basis consumer choice and consumer protection will be measured,” said Butterworth.

“We need to create a safe harbour for the innovators in the industry to test and learn. We don’t have to make a fully-committed long-term decision, but hey, why don't we try [this] in Sydney, with REI’s chief members who are best-practice experts by saying, 'Hey, let's put digital bonds into Lisa [Indge]'s portfolio and see how they perform.'”

Indge said her office had made the decision to use digital signatures on leases, despite the grey area which meant only physically witnessed signatures were compliant.

“The advantages and convenience of the technology were so evident, that we made the decision to go ahead,” she said. “But we did it in a structured way. We only used it with existing tenants that we already had a relationship with and who were good quality tenants. And we had the permission of the landlord and the tenants. Happily it worked out.”

Let’s Rent has also been an early adopter of Managed, a property management platform that does not require a trust account. In NSW, the legislation only requires a trust account to be in place if an agent is holding monies in trust. As Managed sends funds directly from tenant to landlord, it circumvents the need for a trust. 

“The legislation isn't against us in the way we work – so for us, it's not so much a regulatory challenge but an education challenge,” said Richards. “My major issue with a lot of the states is they've all got different regulatory bodies. I've got to go and educate each state, which then has to educate their agencies that work for them. 

“For me, it's more about support around education and helping people understand what's best for their business, as opposed to us trying to change legislation, because we're now compliant in every state, and we've had the legal advice to suit.”

Same rules for all

Borg said that while legislation typically takes five years to implement, it has advantages because it delivers stability and market certainty, but the statement was met by a horrified gasp from the room. 

“A five-year turnaround is completely impractical with the speed of innovation,” said Bell. “You're suggesting that if you drive innovation in this country, if you drive employment and progress and all of those amplified economic benefits, then you will be punished by the regulator. So, it is not a workable way forward.”

She said government also needs to accept it is being disrupted and look to how technology can create better legislative outcomes. 

“One of the principles of good programming and good product development is that we need to be incredibly transparent. There is no reason why that principle of transparency shouldn't be a burden that is imposed upon regulators as well,” Bell continued.

“It's impossible to go to a regulator with a proposition for a sense check if there's no transparency or models or framework around what makes sense to regulators.”

Borg said one of the takeaways he had from the day was the need for the department to engage more closely with innovators and the industry.

Wrapping up the day, REINSW CEO, Tim McKibbin, said proptech offered the opportunity to enrich the services delivered by the property services industry.

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