“Unnecessary” notaries. How one percent of price regulation blocked competition

11-10-2016

notariusy

The abolition of state price regulation will liberalize the market of notarial services, and therefore decrease the cost of real estate property.

Regulatory system of Ukraine have been formed through the accumulation of illogical and paradoxical decisions for almost 25 years.

We mechanically accept some of them without analyzing them and thinking about consequences.

But these consequences are not only ridiculous – they slow down the development of market relations.

Public services have been enforcing regulations to the business for decades having argued that there was a need to implement international obligations or protect someone’s interests – the state or the socially unprotected social groups.

The citizens have believed these ideas. Regulatory pressure seemed to them like something distant and something related only to the business and big money.

However, the system analysis of common regulatory impact on the market proves that the state regulation is generally hanging over the economy, and certain regulatory decisions even “pick the pocket” of ordinary citizens and promote more corruption.

Here is an example. In 1998,the Presidential Decree “On regulation of charging for notarial acts” was enacted.

It contains a provision about the price regulation of private notaries in transactions with the real estate property. Almost 20 years ago, the state regulator established a provision about a minimal service fee for state and private notaries – 1% of the transaction for the acquisition or sale of real estate.

It was made to ensure that state and private notaries did not have to compete, “not to offend” any of them. However, this provision cancelled the possible formation of market rules in the sector of notarial services.

How can it be harmful to the notaries?

First, private notaries are forced to offer a possibility of unofficial return of certain sum of services cost to “trusted” clients.

It means that a notary negotiates with a client that he will return him a part of costs that makes that 1% of the transaction sum back after the agreement execution. The private notary can do it because it is his earnings. In such a way, he provides himself with the “grateful” client who will come to him again.

Second, state notaries become unnecessary because it is more difficult or impossible at all for them to perform this scheme. They are obliged to take a fixed rate of the state duty regardless the sum of transaction and transfer it to the state budget.

When it comes to big sums, the clients are obliged to deal with private notaries and negotiate “market” conditions.

What will be unpleasant for the client-citizen?

It will be necessary to pay one percent of the transaction sum not only in case of buying or selling real estate property, but also in case of the gift contract and housing credit contract. It means that you borrow money for housing in a bank because you don’t have them, but you still have to pay a notary.

The result of such regulation: both sides are not interested in transparent transactions, especially in the secondary market, state notarial offices become unprofitable for the budget, and notaries initiate corruptive actions to stay in the highly competitive market of notarial services instead of providing the legitimacy of transactions.

It turns out that such state cost regulation of notaries’ services does not have any sense. It is focused on the support of certain groups through non-market methods, and that is why it is doomed to turn into the brake for the sector development.

It will lead to the fact that end consumers will not get quality services at an adequate cost. Of course, the market will find a possibility to renew the competition, but only through the violation of law and corruption.

There are many such problems in the construction sector and the real estate market. Corruption in the land allocation for the development, non-transparent calculation of share contribution for infrastructure development, extremely complex and expensive procedures to connect to infrastructure networks are among the most obvious problems.

Due to the ineffective state regulation, every such element creates a wide field for corruption and increases the housing cost: the share contribution – by 4%, connection to networks – by 5-10%, corruption in the land allocation – by 15%.

We compensate all these “overpays” when buying the real estate property at inadequate prices. At the same time, the market does not receive sufficient investments. As a result, one of the basic infrastructure sector, a construction one, had decreased its contribution to the GDP of Ukraine almost thrice for the last 20 years: from 8% in the early 1990s to 2.6% in 2015.

The abolition of state price regulation is one of the steps towards the market liberalization, and thus, towards the reduction of real estate costs and attraction of more investments to fund construction projects.

However, any reforms should be introduced through the deep analysis of consequences. This is my opinion. That is why, we invite all the sides facing with the ineffective regulation to cooperate.

We are ready to discuss all the pros and cons arguments of the preserving the cost regulation for notaries. We don’t want to repeat officials’ steps: they either regulate to madness or reject any supervision over the activity having opened a Pandora’s box of the fraud or unfair business practices.

Our aim is to create an effective regulation that liberalizes the market but first will protect citizens’ interests.

 Original text: Ekonomichna pravda

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