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Strata practices report unleashes torrent of criticism 

Allegations that a major NSW strata management firm has been charging excessive fees for insurance services without full disclosure of the arrangements have touched a nerve and triggered a torrent of criticism directed at practices within the sector. 

The Australian Consumers Insurance Lobby (ACIL), a strong advocate on strata issues, last week joined with the Owners Corporation Network of Australia (OCN) and the Unit Owners Association of Queensland in writing to regulators to seek an inquiry into Netstrata’s practices. 

The issues raised in the ABC news report focus on one company, but the groups say they have far-reaching implications and are clearly part of wider problems. 

“We see this as an invaluable moment to advocate for the necessary changes that will ensure the safety and rights of strata residents,” OCN Executive Director Karen Stiles said. 

Weir Legal and Consulting MD Bronwyn Weir, and the co-author of a high-profile report on strata sector construction problems, says issues raised by the ABC investigation will be the tip of the iceberg. 

“Sunlight is the best disinfectant. Regulation of the strata industry needs reform Australia wide,” she says on LinkedIn. 

Insurtech Gateway MD Simon O’Dell also posted on LinkedIn that strata managers are acting as a PO Box and are charging ridiculous fees. 

“The price gouging from strata managers took a long time to hit the national headlines. Yet another example of crazy high distribution costs,” he says. “The value strata managers create in the insurance value chain would have to be 5% max of the friction cost they represent.” 

ACIL last month lodged 146 examples of poor behaviour with the Australian Securities and Investments Commission and the Australian Competition and Consumer Commission, and now wants those regulators and the NSW Strata and Property Services Commissioner to look at Netstrata specifically. 

Concerns over arrangements involving two intermediaries, a strata manager and a broker, have been a simmering for some time, but inflation, cost of living pressures and rising apartment insurance expenses have helped bring them to the boil. 

Steadfast in early 2022 commissioned an independent review by consultant John Trowbridge into remuneration and the delivery of services in strata. 

“Steadfast believes that the market is to some extent dysfunctional through its value chain from customer (lot owners) to strata managers to brokers to underwriting agencies to insurers. Most of the issues under question have arisen gradually through the historical evolution of the market,” Group CEO Robert Kelly said in the forward to the review. 

The overriding goal of the review, he said, was “to identify meaningful initiatives aimed at overcoming the structural issues that are of concern to both the Steadfast Group and many other participants in this market”. 

 The first phase recommended improved disclosure of remuneration arrangements to owners committees, who are often left in the dark about who is receiving what payments, despite the fact they are paying the fees and are the clients. 

The second paper proposed an overhaul of the way brokers and strata managers are sharing the remuneration in order to manage conflicts of interest. The paper is also critical of opaque arrangements where a third party is owned by the strata manager, broker or both. 

Mr Trowbridge’s transparency recommendations have gained some traction and have helped inform a Strata Community Association disclosure best practice guide, which will feed into the code of practice next year. 

But ACIL has said it doesn’t go far enough, while Mr Trowbridge’s plan for a “structural alignment” and phasing out of certain practices to address underlying potential conflicts of interest was not enthusiastically received in the industry. 

“This view is not widely supported by strata managers or brokers as many of them wish to maintain existing practices despite the issues identified,” the final paper, released last year, says. 

In the absence of regulation of intermediary charges, it becomes a matter for owners and strata committees to challenge or negotiate with their strata manager and broker over the remuneration, the paper says, with improved disclosure potentially meaning they are in a stronger position to do so. 

But ACIL says strata committees are essentially vulnerable consumers, as they are made up of regularly changing volunteers, often don’t fully understand strata insurance, and delegate the buying decision to the strata manager. 

The Australian College of Strata Lawyers says disclosure is not “the panacea” and strata managers must “act strictly in their role as fiduciaries” of the owners corporations they manage. 

ACIL has been putting the spotlight on the way in which strata managers appoint brokers, their use of delegated authorities in entering into insurance contracts, informed consent, conflicts of interest, and the role of commissions. It has suggested that some practices may be breaching laws such as the Trade Practices Act. 

The report on Netstrata has fanned the flames of a fire that had already been lit and it remains to be seen whether regulators will take a more active role, and how the industry will respond.