The NSW Government has renewed its focus on the strata management industry, this time looking to impose greater disclosure obligations with regard to insurance commissions and conflicts of interest to improve public confidence in apartment living.
The key changes proposed include:
- increasing the maximum penalties and penalty infringement notice amounts for existing agent obligations to disclose information about commissions
- strengthening the conflict-of-interest disclosure requirements
- banning agents from receiving a commission on insurance products when they do not play a role in finding the best deal for residents
- strengthening NSW Fair Trading's enforcement and compliance powers.
These reforms, set to be formally introduced in August, were drafted following concerns that strata management companies were receiving undisclosed kickbacks for contractors, suppliers and insurers while charging excessive fees to their clients.
The implementation of a ban on insurance commissions for "uninvolved" strata managers is likely to have a far-reaching impact on the industry, promoting a greater level of engagement by strata managers with strata insurance brokers to source insurance products for their clients.
Both strata managers and insurance brokers benefit from the process of obtaining insurance for an owners corporation. The nature of this relationship between the two parties is often entirely unknown to the owners corporations that they service, namely that:
- when an insurance policy is entered into, an insurer will pay the broker a commission (ordinarily of 20 per cent of the insurance premium)
- the broker then typically passes this onto the strata manager and charges a separate fee for their services
- the broker's fee is paid by the owners corporation through levies.
This arrangement can encourage involved parties to promote products that attract a higher premium, rather than the most suitable insurance product.
The proposed reforms will require strata managers to develop expertise in procuring insurance and to actively engage with brokers if they wish to keep their commission. It remains to be seen whether the fees for this higher level of involvement will be absorbed by the strata managers or passed onto their clients.
Under the current legislation, strata managers can be fined up to $2,200 for failing to disclose commissions they receive. The NSW Government is consulting with the strata management industry before formally increasing these penalties.
For more information, please see the NSW Government's statement on the proposed reforms here.
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