Units of controversy
Strata market issues have been thrown into public view and the repercussions could be far-reaching
By Wendy Pugh
More than two years ago, respected consultant John Trowbridge noted during an inquiry commissioned by Steadfast that strata insurance involved “unusual and unorthodox” arrangements that lacked transparency for property owners.
This year, a furore has erupted over those remuneration issues and wider concerns. In March, the ABC exposed excessive fees charged by NSW strata management business Netstrata, and a later Four Corners program targeted cross-ownership and conflicts of interest, while turning the spotlight onto Steadfast.
The NSW government has since introduced laws that enforce transparency, give Fair Trading stronger powers and increase penalties, and it is looking to go further. Commission bans are on the table and consultations are continuing.
Demands for national action and stronger regulation have grown as insurance and other strata issues threaten to undermine confidence in a property sector that is increasingly important in meeting rising demand for housing. “It is vital that we solve this issue now,” Australian College of Strata Lawyers spokesperson Amanda Farmer tells Insurance News.
“It is estimated that in NSW alone, 50% of people will be living in strata by 2040. These people must feel confident that they are receiving a professional service, from ethical people who are focused on the best outcome for their customers, not the easiest way to improve their own bottom line.”
Steadfast, which owns strata brokers, underwriting agency CHU and premium funder IQumulate, and which recently sold a 2.1% stake in building repair services company Johns Lyng Group, has rejected Four Corners’ criticisms about market dominance and suggestions it is channelling business to its advantage.
The company notes it took the lead in commissioning the Trowbridge review, which was completed in the middle of last year and has been widely cited in the current debate. It says 69.5% of strata plans in Australia are insured by non-Steadfast underwriting agencies and 86% of intermediated strata is placed by non-Steadfast equity brokers.
“The whole DNA of insurance broking is to be competitive and to seek out competitive quotations. It is the DNA that strikes at the heart of what we do,” chief executive Robert Kelly told a Senate committee hearing following the Four Corners program.
Chairman Frank O’Halloran told the annual general meeting the company has improved disclosure practices in response to the Trowbridge report, has found no evidence of channelling of incentives between Steadfast-related entities, and senior executives are leading reviews.
Strata insurance is unusual because it features two key intermediaries and the chain of parties involved is long, extending through the individual apartment owners, their elected committee, the strata management company they employ, the broker and the underwriting agency and/or insurer.
CHU chief executive Kimberley Jonsson says the dual-intermediary model is important in enhancing service quality and ensuring property owners get comprehensive coverage and support, and says remuneration should be transparent to help committees understand the distinct value provided by both the broker and strata manager.
“Brokers play a critical role in navigating the complexities of strata insurance policies and helping clients compare options, while strata managers contribute valuable insights into the specific needs and risks associated with properties under their management and are often the first port of call when it comes to claims,” she tells Insurance News.
“People must feel confident they are receiving a professional service, from ethical people.”
Amanda Farmer, College of Strata Lawyers
CHU says modern properties, with issues such as “more complicated buildings, more buildings with defects, and combustible cladding” has necessitated a layered approach. In this environment, “strata insurance is not home insurance; it is much more complex”, involving specialised claims management and expertise to effectively navigate a limited insurance market.
The role of brokers in strata increased following NSW legislation introduced last decade that required three quotes to be provided, while Queensland mandates multiple quotes for large expenses.
Ms Jonsson says while Steadfast brokers contribute to CHU’s overall business mix, large groups such as Gallagher and Marsh are highly active in placing new business with the underwriting agency. “I can certainly guarantee there’s been no directive for the Steadfast brokers to place their business with us,” she says.
CHU often finds itself the only provider willing to meet the need for quotes and feels strongly about accessibility of insurance, Ms Jonsson says. It puts extensive effort into ensuring it can provide a quote wherever possible.
The recent NSW legislation, welcomed by groups including the National Insurance Brokers Association, Strata Community Association, Steadfast and MGA Whittles, requires timely disclosure of remuneration elements including commissions and fees, details of who is receiving what and ownership connections.
MGA Whittles has for decades provided both broker and strata management services under its umbrella. Insurance broking is offered through the MGA division, and Whittles body corporate management provides services to more than 80,000 units across Australia.
The businesses share technology and back-office resources managed by central services in Adelaide.
Group chairman John George says the remuneration breakdown is clear to property owners and outlined in documentation.
He says the company has seen overcharging elsewhere in the industry and it is a positive outcome that those issues are being addressed.
“From our point of view, I think the NSW government is probably handling it well on disclosure,” he tells Insurance News. “There is a percentage of the industry that has been doing the wrong thing.”
The spotlight on the sector is also likely to lead to self-adjustment where arrangements have fallen short, but Mr George says further action on commissions, as NSW is considering, would lead to increased strata management fees, and a focus on transparency is the better approach.
At the federal level, Assistant Treasurer Stephen Jones has shown no interest in revisiting findings from a Hayne royal commission-instigated review that last year found insurance commissions should remain alongside enhanced consent requirements.
“We accepted the recommendations of the Quality of Advice Review and that’s been reflected in what we’ve done through the parliament,” Mr Jones told the NIBA Convention in October. “There’s been no change to our position.”
Mr Jones said that, while issues have been exposed in strata that need to be addressed, he does not believe “broker commissions are the issue at the heart of that particular problem”.
“I can certainly guarantee there’s been no directive for the Steadfast brokers to place their business with us.”
CHU chief executive Kimberley Jonsson
Earlier this year, the Australian Consumers Insurance Lobby pointed to owners being shifted onto models with 20% commissions plus fees of up to 20%. The ABC’s Netstrata investigation found the use of a subsidiary led to charges reaching 64% of the base premium, and worse cases have been reported.
ACIL sees owners’ committees – comprising volunteers with little expertise in strata insurance – as essentially vulnerable clients.
The Trowbridge review made recommendations to increase remuneration transparency, while also calling for a phasing out of a commission rebate/broker fee system where conflicts of interest are inherent and arrangements were described as “perplexing, to say the least”.
“To have full disclosure would be a very good step forward and that’s where everyone is going at the moment, but that doesn’t avoid the existence of conflicted remuneration,” Mr Trowbridge tells Insurance News.
In the rebate/broker fee system, the broker passes on all or most of their commission to the strata manager and then agrees with the manager an additional broker fee to cover cost of services.
The Owners Corporation Network says strata managers should be paid only by the owner clients. It supports ending commissions and says increasing transparency is not enough.
“Disclosure is a mere ‘apology after the fact’ approach that seems to put the strata manager’s interests above their client, and if that happens, legally it does not meet the standards required of fiduciaries,” chief executive Shari Driver tells Insurance News.
“Insurance is one of the largest expenses borne by owners’ corporations. OCN has been horrified to discover the extent of financial abuse and unethical practices within the strata sector.”
Kerin Benson Lawyers principal Christopher Kerin told a Look Up Strata webinar that strata management fees for overall services have not kept pace with inflation and barriers to entry are low.
“Some strata managers rely quite heavily on commissions in order to just simply stay afloat,” he said. “There are constantly new people coming into the industry … and it’s the standard practice for new entrants to undercut their competitors quite significantly, and that just has an effect of depressing the management fees that can be charged and would be acceptable via the general public.”
Apartment blocks in Melbourne. Demand for strata property is tipped to surge over the next decade, adding to the pressure for an overhaul of insurance practices
Strata Community Association Australasia has this year fast-tracked implementation of a best practice disclosure guide, modelled off the Trowbridge phase one report, and has condemned “rogue operators” that are not reflective of the industry.
It has appointed experienced executive Stephen Phillips as independent chair of its professional standards and membership board, and it has supported an SCA NSW independent review triggered after Netstrata MD Stephen Brell resigned as branch president following the ABC program.
In September, NIBA released additional code of practice guidance, addressing areas such as transparency and accountability, conflicts of interest and remuneration disclosure.
ACIL chairman Tyrone Shandiman says the guidance does not spell out what is an unmanageable conflict of interest or go far enough in calling out unethical practices and does not address processes by which brokers are appointed by strata managers.
“There are some things that are just not addressed in this guidance,” he tells Insurance News. “We do believe there could be greater updates to the code of conduct.”
Preparations have begun for the next regular review of the broker code, with former Australian Securities and Investments Commission general manager Phil Koury appointed to lead the process.
Australian Financial Complaints Authority chief executive and chief ombudsman David Locke has urged brokers to draw a line in the sand on opaque and damaging practices in the review, warning at the NIBA Convention of reputational risks extending beyond strata.
“AFCA would like to see a stronger commitment in your code to transparency of remuneration and conflicts of interest,” he said. “A hard lesson on the value of transparency was learnt by the banking industry, which is still, to some degree, dealing with the repercussions of the royal commission.”
In February, ACIL referred to the corporate regulator and the Australian Competition and Consumer Commission 146 instances of “questionable practices”, while consumer and strata owner groups wrote to Treasurer Jim Chalmers in September after the Four Corners report urging an inquiry led by the ACCC or the Productivity Commission.
Some industry participants anticipate other states will follow NSW’s disclosure reforms, while Kerin Benson principal Mr Kerin suggests other jurisdictions may wait to see to how the issues play out in that state before acting themselves.
NSW still has strata regulation high on its agenda. The government will consider findings from a Netstrata review undertaken by McGrathNicol for NSW Fair Trading as it contemplates further reforms.
NSW Better Regulation and Fair Trading Minister Anoulack Chanthivong told the SCA conference in October that changes made so far aim to ensure a trustworthy industry. “The stronger disclosure requirements for strata managing agents and more severe consequences for breaching agent responsibilities are commonsense reforms, but also point to the need for stronger government-led regulation where industry self-regulation isn’t working,” he said.
