Commission crackdown creeps up the chain

Strata broker remuneration is again in focus as an inquiry calls for broad reform

By Wendy Pugh

A New South Wales inquiry has recommended going beyond banning strata manager commissions to also target broker payments, as the push to strengthen trust in a crucial source of housing supply reignites a remuneration debate.

The National Insurance Brokers Association has warned against regulatory overreach that could limit access to independent professional advice, while consumer groups have supported the inquiry’s proposals.

Last year, the state government asked the Productivity and Equality Commission to review the market impacts of banning strata managers from accepting commissions, as it considered reforms in addition to several tranches of new laws enhancing disclosure and oversight.

The seven recommendations, released in March, include prohibiting strata managers from receiving commissions – with a three-year transition period – and restricting supplier intermediaries including brokers from accepting commissions for strata-related work.

“We need to support a more transparent, competitive and sustainable strata sector as New South Wales cities continue to grow up,” Productivity and Equality Commissioner Peter Achterstraat says.

“When owners can clearly see what they’re paying for and why, then trust in strata improves and communities are stronger.”

While strata manager commissions were the focus of the review, further restricting commissions in the supply chain – “for instance, among insurance brokers and other service providers” – would have additional benefits, the inquiry found.

Extending the restriction on commissions to intermediaries was estimated to generate a net benefit to NSW of $333 million through to 2041, the largest sum among options considered.

The government, which is considering the inquiry recommendations, is expected to move ahead on the ban for state-regulated strata managers, but the step would be more complicated for brokers.

NIBA says extending restrictions to the profession conflates two fundamentally different regulatory environments, while it also rejects the “supply chain intermediaries” classification.

Brokers are licensed financial services professionals regulated under federal laws, with legal duties to act in a client’s best interests, and the framework they operate within already includes “robust disclosure obligations, conflict management requirements and independent compliance oversight”, it says.

The association points out that Michelle Levy’s 2022 Quality of Advice report supported retaining the exception to the ban on conflicted remuneration for general insurance products, and she was concerned consumers who rely on brokers may not be willing or able to pay a fee for their advice.

“NIBA welcomes the [productivity] commission’s focus on building trust, transparency and better consumer outcomes in the strata sector. These are important objectives, and we support reforms that improve disclosure and accountability where conflicts genuinely arise. But it is critical that policy responses remain targeted and proportionate,” association chief executive Richard Klipin says.

The inquiry acknowledges jurisdictional issues but suggests NSW could restrict strata managers from facilitating contracts involving commissions, regulate service providers directly and advocate for federal change, with the Australian Competition and Consumer Commission proposing action in previous reviews.

The Australian College of Strata Lawyers says the inquiry makes clear recommendations for structural reform and it supports the intent of the recommendation on supplier intermediaries.

“The commission is right to identify that conflicts of interest do not stop at the strata manager: they extend up the supply chain, including to insurance brokers,” college spokesperson Amanda Farmer tells Insurance News.

Ms Farmer says nearly half of all metropolitan Sydney homes are likely to be strata-titled by 2041 and NSW has a legitimate and powerful role as an advocate to Canberra.

The group expects NSW will first move on strata manager commissions, given they are clearly within state jurisdiction and the inquiry has provided a mandate for legislative action.

“Reform of broker commissions in the strata supply chain is likely to follow, and may well depend on federal engagement, but the commission’s report has placed that issue firmly on the agenda,” Ms Farmer says.

“What matters now is that momentum is not lost. A three-year transition period for strata managers is appropriate, but work on the broader supply chain should begin in parallel rather than be deferred indefinitely.”

Australian Consumers Insurance Lobby chair Tyrone Shandiman says the key question involves how reform is structured and whether it can operate alongside the federal regulatory framework. He says the Levy review did not necessarily support the status quo.

“The review does not endorse existing commission structures in strata – it effectively leaves the door open for further scrutiny and reform in this space,” he says.

Ms Levy’s report states she has not specifically considered arrangements for strata insurance (or strata managers), as they are not regulated under chapter 7 of the Corporations Act. She adds: “Further consideration of the remuneration arrangements for strata insurance is warranted.”

ACIL says it is important to recognise some remuneration models may not be captured by a commission ban and strata management company Netstrata, the focus of regulatory inquiries, operated with other arrangements.

“This demonstrates that while banning commissions, including upstream commissions, is a significant reform, certain structural arrangements may still fall outside its scope,” Mr Shandiman says.

“While we support the proposed changes, we remain concerned about potential loopholes that could allow conflicted outcomes to persist.”

The Owners Corporation Network of Australia and the Financial Rights Legal Centre say the Productivity and Equality Commission recommendations are overdue.

Legal centre director of casework Alexandra Kelly says conflicts of interest have plagued the sector for years and the problem goes beyond strata managers.

“Other players in this nested doll of self-interest and conflicts of interest include insurance brokers, who have played their own role in delivering poor outcomes for strata owners,” she says.

“The PEC report rightly points out that also restricting those commissions would be beneficial for consumers – and we strongly agree.”

Ms Kelly says the federal government should remove the exemption allowing conflicted remuneration for strata and review it for other general insurance products.

Owners Corporation Network managing director David Glover says the inquiry findings address long-standing concerns and recognise that conflicts occur “up and down the chain”.

“Getting rid of these conflicts is going to be fundamentally better for everyone, so we very much hope the minister will take up all the recommendations,” he tells Insurance News.

Strata Community Association (NSW) came under fire from some members last year when it moved ahead of the government and announced plans to transition away from insurance commissions from January. It later confirmed the move would be voluntary.

Some managers maintain that offsetting the loss of commission income with increased upfront fees would lead to price-sensitive owners shifting to rivals, while others argue for choice in arrangements.

President Robert Anderson says the group has held workshops attended by more than 200 participants, and some managers initially opposed to the proposal have come on board.

“We want to see everyone’s boat lifted,” he said. “This is good for the strata managers, it is also good for owners, and brokers will be thinking about their model, I think.”

An inquiry recommendation for regulatory monitoring would allay concerns that commission removal savings would not be passed on, he says, while managers and brokers support a proposal to, at the end of the transition period, remove the requirement to seek three insurance quotes.

Mr Anderson says the inquiry findings on strata manager commissions are not a surprise and the issue has been canvassed by NSW Fair Trading Commissioner Natasha Mann.

“I can’t see the government doing anything but introducing legislation to ban insurance commissions for strata managing agents. I think it’s a lay-down misere,” he says.

The inquiry report says the complexity and opacity of strata remuneration makes it harder for people to know how much they are effectively paying and to compare between managers in like-for-like terms, and “unlike supermarket shoppers”, owners may not have the expertise or level of engagement to use information provided to make good decisions.

“Although disclosure requirements exist and have been strengthened, they are not likely to adequately address owner understanding and trust,” it says.

“Information asymmetry and conflicted incentives within the sector provide a strong case for change and requirement for government regulatory intervention.”