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Strata Reforms - CHU

Tuesday, 14th January 2014

The potential ban on paying insurance commissions to strata managers sparked a great deal of concern within the strata management industry. So we were very pleased the Government listened to the concerns raised by the relevant industry bodies and stakeholders and the NSW Strata Law Reform Position Paper, released on 14 November, has focused rightly on increased disclosure and transparency around third-party payments.

Section 1-5 of the Position Paper proposes a new regime of disclosure, accountability and regular review of commission arrangements.  We believe this focus is fitting however, in any of these elements, it will come down to the detailed requirements of commissions and quotes for certain products that will determine whether strata management businesses can remain financially viable under the proposed regime.  Looking at the high level proposals we have a few questions and suggestions on how these could be best implemented in practice.  Some of our initial comments on the proposals outline in Section 1.15 are:-

  • Requiring the managing agent to disclose at each AGM the circumstances, dollar amount and services provided in respect of any commissions received during the previous 12 months: Dollar disclosure will assist with tranparency and we think this will be instrumental in helping owners understand commission arrangements.  We also think it would be helpful for an industry template to be developed to ensure consistency and increase transparency for owners.
  • Requiring the managing agent to disclose at each AGM a best estimate of the circumstances, dollar amount and services to be provided in respect of any commissions to be received in the next 12 months: More detail is needed to understand what is required for a best estimate as well as the ramifications if the amounts vary through the year.  this could just add another layer of red tape to the process and may prove time consuming for the industry.  It is also going to be difficult to provide this estimate in relation to insurance as so many factors come into play when determining the premium in future.  Factors such as a new building valuation can increase or decrease the building sum insured, claims incurred in the future period for the scheme affecting the claims loss ration, catastrophes, reinsurance costs (also subject to catastrophes), changes to underwriting guidelines and rating models.  These will all be issues that we need to work through.
  • Requiring the managing agent to disclose at each AGM a fee for service based model (fee of commissions), outlining the costs of services to be provided in the next 12 months.  Again the detail or what this means will be vital.  It may be relevant to how commission vs fees when negotiating the management agreement or where requested at the AGM so an informed choice can be made.  However to provide this annually may be both onerous and of little value if the OC is happy with the commission arrangement.
  • Requiring Owners Corporations to decide at each AGM whether the managing agent is allowed to receive commissions (including in which circumstances) for the next 12 months:  If this was to be enforced, it would be important for the strata management agreement to have provision to adjust fees in place of commission.  Often the strata management agreements extend for longer than 12 months so the remunerations arrangements would need to be renegotiated or a mechanism to adjust fees would be needed if a key change like this was to occur.  Otherwise this would create problems with contract certainty and would also likely have financial implications for the strata management business.

  • Requiring the managing agent to get at least three quotes for certain products (for example, insurance) to ensure competition and choices for the Owners Corporation.  The parameters for multiple quotes are not clear.  Is the proposal to obtain these yearly or every three years and is the size of the scheme relevant?  It is of great concern if the focus becomes purely 'price' rather than product cover and consideration of additional risk exposure that changing policies may have for the OC.

We are pleased with the proposals to see improved transparency in the quote and renewal phase of the insurance process.  We consider it is very important however that insurance information does not get simplified to limits and price, with no account for scope of cover, reputation, insurer credit risk, claims payment track records and so on.

The Government's aim for greater transparency to increase trust between strata managers and the OC is an honourable one.  To achieve this aim it will be important to continue to engage with the industry to ensure there is clarity around the requirements and that practical solutions are realised and translated in the new world of strata.

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