Strata conflict of interest reforms should include banning commissions for insurance brokers and managing agents, with disclosure regulation a “flawed mechanism”, a consultancy says.

Trust in the management sector has eroded to such a degree that only comprehensive legislative reform can restore the integrity of the principal-agent relationship, according to Strata Knowledge.

The report recommends an “outright ban” on commissions rather than attempting to manage conflicts through disclosure.

“Although the focus of this report has been on strata managing agents, the ban extension should include insurance brokers,” it says.

“The cross-subsidisation approach creates inherent conflicts that cannot be mitigated.” 

Report author and consultancy founder Nicole Johnston says, ultimately, owners’ corporations are paying the commissions, which are taxed, and the strata model means services and fees are not transparent.

“As a consumer, I along with my other OC members should be able to choose what services we want and know the fees charged for those services upfront,” she told insuranceNEWS.com.au. “The current structure does not allow that.” 

Strata Knowledge began researching the issue amid heightened media scrutiny and regulatory debate last year. NSW Fair Trading later joined as a partner on the project.

The report says disclosure rules often create an illusion of transparency and, even if consent is given by the customer, psychological barriers undermine its effectiveness.

“Disclosure has become a shield for unethical practices rather than a protective mechanism,’ it says.

Other recommendations include requiring independent third-party validation for related-party transactions and prohibiting the use of delegated authority when engaging affiliated entities.

Government intervention is essential given research shows voluntary reform will not succeed due to competitive pressures, it says.

The report finds it is rare for annual or committee meetings to consider the terms and conditions around engaging a broker, while appointment processes lack transparency and “arguably proper authorisation”. 

NSW rules requiring strata managers to provide owners with at least three insurance quotes contribute to process confusion.

The research included agreement reviews, strata manager interviews and discussions with lot owners, focusing on NSW, which is leading on reforms. But the report notes issues are national.

“People are watching NSW,” Dr Johnston said. “One of the dangers, however, is that some states think this is a NSW problem. It is not. All states need to look at this.” 

The report is available here. 

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