whatwouldyouliketogrow.com.au
Regulation of
Water
Intermediaries
Department of
Sustainability,
Environment, Water,
Population and
Communities
Stage 2: Cost-benefit
analysis for the regulation
of water intermediaries
Regulation of water
intermediaries
31 August 2011
What would
you like to grow?
Contents
Disclaimer
3
1
Introduction
4
2
Regulatory measures for water intermediaries
8
3
Options for reform
12
4
Costs of options
16
5
Benefits of options
43
Appendix A
Glossary of key terminology and concepts
46
Appendix B
Requirements in comparative industries
48
Appendix C
Estimated establishment costs for the National Legal
Services Board
69
Detailed costings
72
Appendix D
Department of Sustainability, Environment, Water, Population and Communities
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Disclaimer
Disclaimer
This Report has been prepared by PricewaterhouseCoopers Australia (PwC) at the request of
the Department of Sustainability, Environment, Water, Population and Communities (the
Department) in our capacity as advisors and in accordance with the Terms of Reference and
the Terms and Conditions contained in the Consultant Agreement between the Department
and PwC.
This document is not intended to be utilised or relied upon by any persons other than the
Department, nor to be used for any purpose other than that articulated above. Accordingly,
PwC accepts no responsibility in any way whatsoever for the use of this report by any other
persons or for any other purpose.
The information, statements, statistics and commentary (together the “Information”)
contained in this report have been prepared by PwC from publicly available material and
from material provided by the Department and through the consultation process. PwC has
not sought to confirm the reliability, accuracy or completeness of this information.
PwC has prepared this report using assessment methods which PwC considers are sufficient
for the Department’s requirements, as set out in the Terms of Reference for this engagement.
Whilst the statements made in this report are given in good faith, PwC accepts no
responsibility for any errors in the information provided by the Department or other parties,
nor the effect of any such errors on our analysis, suggestions or report.
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Executive Summary
1
Executive Summary
Water market intermediaries help to reduce transaction costs for water traders by
investigating trading options on behalf of clients, matching sellers with buyers, and assisting
with administrative trading processes, such as document preparation and lodgement.
In 2010, the Australian Competition and Consumer Commission (ACCC) identified a number
of potential gaps in the legislative framework in respect of water market intermediaries and
found that existing regulation does not address some legitimate concerns.1 These include the
lack of disclosure by intermediaries of potential conflicts of interest and the potential for a
client’s funds to be lost as a result of negligence or fraud by an intermediary. Theft and
insolvency were also cited as key concerns. The ACCC recommended that government
consider a number of potential policy responses to address these concerns.
To this end, the Department of Sustainability, Environment, Water, Population and
Communities (the Department) engaged PricewaterhouseCoopers (PwC). The first stage of
this project examined the characteristics and regulatory requirements of other relevant
industries (see Appendix B). This report examines the costs and benefits of a suite of nonlegislative and legislative options, as shown in Figure 1 below.
Figure 1: Possible legislative and regulatory options
• Option 1 and 2 plus the additional
requirem ents of licensing
 Stipulated com petency requirements
 Mandatory participation in an industry
fidelity f und
• Option 1 plus the requirem ent f or
interm ediaries to register each year
Option 3:
Licensing
 Additional costs to brokers of m eeting
registration
 Additional governm ent adm inistration and
com pliance costs
Option 2:
Registration
Option 4: Voluntary Accreditation
• Mandatory trust accounts
Option 1:
Industry-specific
statutory
requirements
(baseline)
• Mandatory disclosure of conf licts of
interest
• Mandatory holding of prof essional
indem nity insurance
• Com pliance and enf orcement
• Voluntary schem e
OR
• Accredited brokers would need to m eet
any or all of the baseline statutory
requirem ents
This report seeks to identify indicative and preliminary cost ranges for each option, based on
a series of benchmarks from other industry sectors where comparable regulatory
arrangements have been adopted. The estimated costs for the different options – including
both once-off establishment costs and annual ongoing costs - are summarised in Table 1. The
costs presented in this report are indicative only, reflecting the scope of this engagement and
data limitations. Further analysis would need to be undertaken for any regulatory impact
statement that may be prepared for an identified preferred regulatory option.
1
Australian Competition and Consumer Commission (2010) Water market intermediaries – industry developments and practices,
December 2010.
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Executive Summary
Table 1: Summary of total costs ($ million)
Commonwealth
Commonwealth/State
Establishment
Ongoing annual
Establishment
Ongoing annual
Option 1
$1.672 - $2.115
$2.188
$2.221 - $3,212
$2.051
Option 2
$2.055 - $2.577
$2.354
$2.603 - $3.674
$2.199
Option 3
$2.368 - $2.969
$3.869
$2.880 - $4.030
$3.750
Lower take-up
Option 4
Higher take-up
Establishment
Ongoing annual
Establishment
Ongoing annual
$1.145 - $1.462
$1.420
$1.424 - $1.741
$1.932
Each of the options considered would cause industry and government to incur additional
costs, as compared to current (unregulated) arrangements.
In terms of benefits, mandatory trust accounts may help to protect clients against losses in
the event that an intermediary becomes insolvent, and may deter theft and fraud by
intermediaries by imposing a range of restrictions and safeguards around monies provided
by clients to intermediaries.
In addition to the benefits from Option 1, Option 2 would see additional benefits from
registration; for instance, notifying the regulator of the intention to practice as a water
intermediary via registration can provide information that may complement other policy
measures. Although it does not directly minimise problems, it can help facilitate the
regulator’s enforcement and compliance role.
Competency requirements typically seek to address problems stemming from inadequate
information on ’product’ quality, and consequent impacts on market confidence. They do
this by increasing the proficiency and competency of licensed parties.
Participation in an industry fidelity fund would provide a means for consumers to be
insulated from losses, whether they are caused by negligence or wrongdoing.
A voluntary scheme would provide a means of signalling to consumers that the benefits
associated with Option 1 are available to those that use the services of accredited
intermediaries. It would be expected to impose lesser costs on industry because participants
could choose whether it was worth incurring these costs.
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Introduction
2
Introduction
2.1
Background
Water market intermediaries help to reduce transaction costs for water traders by
investigating trading options on behalf of clients, matching sellers with buyers, and assisting
with administrative trading processes, such as document preparation and lodgement. This
report covers both water market brokers and exchanges (although not all requirements
considered in this report may be applied to water exchanges).
There is a view held by some market participants that water market intermediaries need to
be regulated to reduce the risk of misconduct and/or to address the risk of poor behaviour;
both of which have the potential to undermine confidence in the market. These concerns
partly stem from perceptions that water traders and the market in general are exposed to
heightened risks due to the increasing number and value of water transactions over the past
few years and the size of the deposits held by intermediaries prior to settlement of a trade.
The Australian Competition and Consumer Commission in its 2010 report2 on water market
intermediaries identified a number of potential gaps in the legislative landscape and found
that existing regulation does not address some legitimate concerns. These include the lack of
disclosure by intermediaries of potential conflicts of interest and the potential for a client’s
funds to be lost as a result of negligence or fraud by an intermediary. Theft and insolvency
were also listed as key concerns. The Australian Competition and Consumer Commission
recommended government consider a number of potential policy responses, including:

the use of trust accounts, professional indemnity insurance and/or fidelity funds

a requirement for intermediaries to disclose their potential conflicts of interest

measures to address conflicts of interest that can arise where a water intermediary
owns/operates a trade approval authority.
The benefits of implementing these policy measures, in terms of increased market
confidence and reduced risk to water traders, must be assessed relative to the costs.
This report has been undertaken as a result of the Australian Competition and Consumer
Commission report and does not take into consideration of any potential future involvement
from agencies such as Australian Securities and Investment Commission through the
potential evolution of the water market.
2.2
Project objectives
The purpose of this project is to assess the likely costs and benefits of various policy options
for the regulation of water market intermediaries. The Department of Sustainability,
Environment, Water, Population and Communities (the Department) has engaged
PricewaterhouseCoopers (PwC) to examine a suite of non-legislative and legislative options
that are set out in the project terms of reference.
2
Australian Competition and Consumer Commission (2010) Water market intermediaries – industry developments and practices,
December 2010.
Department of Sustainability, Environment, Water, Population and Communities
PwC
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Introduction
Specific aims of the project are as follows:

To provide an overview of the regulatory measures used in other, comparable,
professional service industries and the characteristics of these industries that have
given rise to the need for industry-specific regulation.

To quantify the costs that would be imposed on water intermediaries, water traders
and government of the various regulatory options identified by the Department.

To highlight any options to reduce the cost of these measures by using the
capabilities and functions provided by existing government agencies to implement
the industry-specific regulations for water intermediaries.

To provide a qualitative assessment of the benefits of the various options.
The project has been undertaken in two stages.
Stage 1
In Stage 1, a review was undertaken of the characteristics and regulatory requirements of
other relevant industries, including:

real estate agents

stock and station agents

lawyers

the financial services sector.
The review identified the legislative requirements and policy instruments that have been
adopted by each of these professional service industries. Particular attention was paid to the
use of trust accounts, professional indemnity insurance and/or fidelity funds.
The Stage 1 report examined a cross-section of regulatory arrangements between a sample of
States and Territories, and where these requirements vary between jurisdictions. The
objective was to provide an understanding of the type and nature of regulatory arrangements
applied in other ’comparable’ sectors, and an examination of the costs of applying similar
mechanisms to the water market intermediary sector. The Stage 1 report is contained in
Appendix B of this report.
Stage 2
Stage 2, which is the focus of this report, describes the various legislative and non-legislative
options identified by the Department and provides cost estimates of each option. That is, this
report only focuses on the options nominated by the Department, rather than any other
potential reforms that may be introduced by other parts of government. Costs to government
and intermediaries are estimated separately, and potential opportunities for minimising
these costs are examined.
Stage 2 also involves a qualitative assessment of the benefits of the options, which assists to
compare the relative merits of the options.
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Regulatory measures for water intermediaries
3
Regulatory measures for water intermediaries
The Department has identified a number of potential legislative and non-legislative options
for regulating water market intermediaries. These options have been developed with
reference to the Australian Competition and Consumer Commission’s investigations into the
conduct of water market intermediaries as part of its advice to the Murray Darling Basin
Authority on trading rules (report published in March 2010) and subsequent research which
was released by the Australian Competition and Consumer Commission on 15 December
2010.
This chapter summarises the options and policy instruments that have been proposed as
possible candidates for regulating water market intermediaries.
Policy gaps identified by the Australian Competition and
Consumer Commission
In 2010, the Australian Competition and Consumer Commission examined broader water
market intermediary industry developments and practices. The report was prepared to assist
governments as well as industry participants when considering what, if any, specific
regulation should be applied to water market intermediaries.3
The Australian Competition and Consumer Commission found that many stakeholder
concerns – including misleading and deceptive conduct, theft, fraud and insolvency – are
addressed to a certain extent through existing general regulation, such as Australian
competition and consumer protection legislation. In January 2011, the Competition and
Consumer Act 2010 replaced the consumer protection and fair trading provisions of the Trade
Practices Act 1974 and state and territory laws which applied previously. Additionally, the
Corporations Act 2001 and Bankruptcy Act 1966 provide certain protection to customers of
water market intermediaries.
The Australian Competition and Consumer Commission found, however, that potential gaps
remain and some concerns are not addressed by existing regulation. The Australian
Competition and Consumer Commission recommended that the following policy instruments
be considered by government for application to water market intermediaries:
Use of trust accounts, professional indemnity insurance and/or fidelity fund
4

Trust accounts – may protect clients against losses in the event that an intermediary
becomes insolvent and may deter theft or fraud by intermediaries.

Professional indemnity insurance – may assist in protecting the interests of
intermediaries’ clients from negligence.

Fidelity funds – may assist in protecting clients in the event of theft or fraud by an
intermediary by compensating persons who suffer pecuniary loss as a result.
Disclosure of potential conflicts of interest
Stakeholder consultation undertaken by the Australian Competition and Consumer
Commission found there was concern that intermediaries could act for both parties in a
3
4
Australian Competition and Consumer Commission (2010) Water market intermediaries – industry developments and practices,
December 2010.
More information on trust accounts, professional indemnity insurance and/or fidelity funds including explanations and
requirements can be found in Appendix A and Appendix B.
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Regulatory measures for water intermediaries
transaction or have personal interest in the trades they are brokering (acting as buyer or
seller and broker). The Australian Competition and Consumer Commission considered it
may be reasonable that conflicts of interest (or potential conflicts of interest) be disclosed by
intermediaries to all relevant parties in advance of making a trade. This may bolster
confidence in the market and reduce the incidence of intermediaries failing to serve the best
interests of their clients.
Disclosure of potential conflict of interest where an intermediary is owned or
operated by a trade approval authority
It is common for water infrastructure operators (whose core business is to supply water to
customers) to also have regulatory trade approval functions and market intermediary
functions (usually an exchange).
The Australian Competition and Consumer Commission identified that where the approval
authority owns or operates an intermediary, the authority has the ability, and possibly the
incentive, to use its competitive advantage (through having both the operating and approval
functions of an intermediary) as a regulator to discriminate against rival, independent
intermediaries that do not have trade approval functions. There may be an incentive for the
authority to give preferential treatment to customers of its exchange, for example faster
processing of trades or more lenient assessments.
Given these circumstances, there may be a financial incentive for the authority to bundle
water delivery services with the intermediary service in such a way that it limits customers’
choice of an independent intermediary. To the extent that this situation occurs, there may be
a reduction in the competition in the market for intermediary services which could
potentially lead to higher costs for certain market participants such as water traders.
The Australian Competition and Consumer Commission provided advice to the Murray
Darling Basin Authority on proposed trading rules. These rules, subsequently adopted by the
Murray Darling Basin Authority are designed to help reduce the risk of conflicts of interests
5
arising, and/or addressing perceptions in the market that a conflict exists. The rule requires
that an approval authority must not approve an application to trade a water access right
unless it has first informed all other parties to the trade of any interest (and if so, the nature
of the interest) that it or a related party has in:

that water access right, or

a water market intermediary that brokered or facilitated the trade in return for a
commission or fee.
The draft trading rules also propose that approval authorities be required to inform the
market of any trade of a water access right to which they have been a buyer, seller, lessee or
lessor (noting that many water infrastructure operators with approval functions also own
and trade water access rights).
3.1
Requirements in comparative professions
A number of other service professions use trust accounts, fidelity funds and professional
indemnity insurance.
In Stage 1 of this project, a review was undertaken of such requirements in comparative
professions including the legal profession, real estate agents, financial services, and stock
and station agents. The review focused on New South Wales, Victoria and Queensland (and
Commonwealth requirements, where applicable). The complete findings of this review are
3
Murray–Darling Basin Authority (2010), Guide to the proposed Basin Plan: Technical background, Murray–Darling Basin
Authority, Canberra.
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Regulatory measures for water intermediaries
documented in Appendix B. The following provides a summary of how widely trust accounts
and other instruments are used in the four service industries.
For more information about trust accounts, refer to Appendix A for a definition, and
Appendix B which provides further information on trust account requirements in the
comparative professions, particularly:

trust account requirements for the legal profession in New South Wales, Victoria and
Queensland

trust account requirements for real estate agents in New South Wales, Victoria and
Queensland, and

trust account requirements for stock and station agents in New South Wales.
Table 2: Summary of selected jurisdictional requirements in comparable sectors
Trust accounts
Fidelity fund
Professional
indemnity insurance
Legal
profession
Mandatory use of trust
accounts. Funds must be
held by an authorised
deposit-taking
institution.
Mandatory contribution
to a fidelity fund for
monetary loss because of
misappropriation.
Mandatory professional
indemnity insurance
cover level of $2 million.
Real estate
agents
Mandatory use of trust
accounts. Funds must be
held by an authorised
deposit-taking
institution.
Mandatory contribution
to a fidelity fund for
monetary loss because of
misappropriation.
N/A
Financial
services
profession
N/A
N/A
Mandatory professional
indemnity insurance
cover level of $2 million.
Stock and
station agents
Mandatory use of trust
accounts in NSW. Funds
must be held by an
authorised deposittaking institution.
Mandatory contribution
to a fidelity fund for
monetary loss because of
misappropriation in
NSW.
N/A
Trust accounts
A law practice or real estate agency in New South Wales, Victoria or Queensland that receives
funds to be held in trust is required to establish and maintain a trust account at an
authorised deposit-taking institution.
Stock and station agents in New South Wales are also required to hold money in trust
accounts – identical to the requirements in that jurisdiction for real estate agents.
The money held in trust must be used exclusively for the person on whose behalf it is
received, and trust money can only be disbursed in accordance with direction given by that
person.
Trust accounts provide greater protection from creditors during insolvency– that is, this
money is not available for the payment of debts of estate agents or legal practitioners.
Financial services licensees are not required to have trust accounts. If they do hold funds in
trust, however, certain requirements apply.
With regard to statutory trust accounts, these accounts do not provide any credit interest to
the trust holder. Any interest is paid by the financial institution to a government or industry
body in accordance with the relevant legislation.
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Regulatory measures for water intermediaries
Fidelity Funds
Legal practitioners and real estate agents in New South Wales, Queensland and Victoria
(including stock and station agents in NSW) must contribute to a fidelity fund. Fidelity funds
are funded through contributions from licensees (via a levy or licence fees) and in some
instances can be supplemented from interest earned on statutory deposits or trust accounts.
In the legal profession, claims are processed by the law society or legal services board. For
real estate agents claims are administered by the regulator.
The funds (partially) cover people who suffer monetary loss because of the misappropriation
by a legal practitioner or estate agent. Some jurisdictions include caps on compensation
payments, while others allow claimants to cover the full cost of the claimant’s monetary loss.
Financial services licensees are not required to contribute to a fidelity fund.
Professional indemnity insurance
Legal practitioners are required to obtain and maintain a minimum level of professional
indemnity insurance (known as the ‘compulsory layer’). In addition many law practices
obtain additional levels of coverage over and above the compulsory layer (known as ‘top-up
insurance’). Professional indemnity insurance must be provided by an approved provider.
The minimum level of compulsory cover in Victoria, New South Wales and Queensland is
$2 million per law practice.
Financial service licensees are required to hold professional indemnity insurance to protect
the insured (the licensee) against certain risks; it is not designed to protect consumers and is
not a guarantee that compensation will be paid. A financial services licensee must have
professional indemnity insurance that is adequate having regard to certain factors of their
business and potential liability. Currently, the Australian Securities and Investments
Commission requires a professional indemnity insurance policy that must have a limit of at
least $2 million for any one claim.
In most jurisdictions across Australia, estate agents are not required to hold professional
indemnity insurance. In New South Wales, stock and station agents are also not required to
hold professional indemnity insurance.
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Options for reform
4
Options for reform
The Department has identified three regulatory options and one voluntary option for
evaluation in this study. The options are illustrated in Figure 2.
Figure 2: Possible legislative and regulatory options
• Option 1 and 2 plus the additional
requirem ents of licensing
 Stipulated com petency requirements
 Mandatory participation in an industry
fidelity f und
• Option 1 plus the requirem ent f or
interm ediaries to register each year
Option 3:
Licensing
 Additional costs to brokers of m eeting
registration
 Additional governm ent adm inistration and
com pliance costs
Option 2:
Registration
Option 4: Voluntary Accreditation
• Mandatory trust accounts
Option 1:
Industry-specific
statutory
requirements
(baseline)
• Mandatory disclosure of conf licts of
interest
• Mandatory holding of prof essional
indem nity insurance
• Com pliance and enf orcement
• Voluntary schem e
OR
• Accredited brokers would need to m eet
any or all of the baseline statutory
requirem ents
Option 1 represents a baseline ‘package’ of requirements for water intermediaries. Options 2
and 3 represent progressively more stringent (and costly) forms of regulation. For example,
the annual registration option (option 2) includes one or more of the mandatory baseline
requirements, plus the cost of administering and enforcing a formal registration scheme. The
licensing option (option 3) includes all the baseline requirements and the administrative costs
of managing a registration/licensing system, plus the cost of minimum competency standards
prior to licence approval and ongoing standards, and the requirement for all licensees to
participate in an industry fidelity fund.
Option 4 is a voluntary accreditation scheme. It sits to one side of Figure 1 because, although
all the baseline measures are included in the scheme, none of the measures would be
mandatory. Owing to the voluntary status of this option, it would be expected that there
would be less than complete uptake of the measures by industry. Nevertheless, there would
be compliance costs for those brokers that choose to participate in the scheme and the
government would incur some cost in managing the scheme.
The requirements outlined above would be applied to water exchanges in a different manner.
For example, exchanges do not hold funds for clients on trust and would not be required to
have a trust account. The primary focus of this analysis is water brokers. The requirements for
water exchanges would differ and have yet to be determined.
Option 1 Baseline: Industry-specific statutory requirements
This option would require water market intermediaries to use trust accounts, have
professional indemnity insurance and disclose conflicts of interest. These measures would be
statutory requirements prescribed by legislation.
Use of trust accounts
Trust accounts would be used as a risk management issue and to provide confidence in the
internal financial processes of the water intermediaries for their customers. The use of trust
accounts may protect clients against losses in the event that an intermediary becomes
insolvent. By increasing transparency, the use of trust accounts may also deter theft or fraud
by intermediaries.
Professional indemnity insurance
In the legal profession, each licensed practitioner must have a minimum cover of $2 million
of professional indemnity insurance. In New South Wales and Victoria professional
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Options for reform
indemnity insurance must cover the practitioner’s civil liability. Each jurisdiction has an
approved policy provider who provides professional indemnity insurance to legal practices in
accordance with the legislative requirements in that jurisdiction. This has helped reduce the
costs of professional indemnity insurance compared to increases suffered by other
professions who obtain cover from the insurance market – such as the medical profession.
Under the Corporations Act 2007, Australian financial services licensees must hold
professional indemnity insurance that is ‘adequate’ having regard to certain factors of their
business and potential liability. According to the Australian Securities and Investments
Commission, to be ‘adequate’, a professional indemnity insurance policy must have a limit of
at least $2 million for any one claim. The professional indemnity insurance must cover losses
caused by negligent, fraudulent or dishonest conduct that amounts to a breach of the Act and
gives rise to liability to retail clients.
It is assumed that professional indemnity insurance for water intermediaries would also
require at least $2 million cover for civil liability caused by negligent, fraudulent or dishonest
conduct of a water intermediary.
Disclosure of conflicts of interest
Where an intermediary’s failure to disclose a conflict of interest has the effect of misleading
or deceiving a customer, this would be a breach of the relevant legislation. While existing
legislation provides protection in the form of proscribing certain conduct, industry specific
regulation (either through self-regulation or legislation) typically imposes positive
obligations to disclose / avoid conflicts of interest.6
There could be a number of mechanisms to assist disclosure including:
1.
provisions set out in an industry Code of Conduct
2. the adoption of standard contracts of engagement between water brokers and their
clients with a mandatory clause to disclose conflicts of interest
3. notification of instances when an intermediary has multiple interests in a transaction
(however specified in the Code of Conduct)
4. through the publication of notices by the intermediary that would allow the market
to assess performance and detect any conflicts.
The precise nature of the requirements would need to be determined. For the purpose of this
analysis, we have assumed the simplest and most direct type of disclosure – direct
notification when a possible conflict of interest is present.
Option 2: Annual registration
This option would require intermediaries to adopt the baseline requirements defined in
option 1. In addition, it would require all intermediaries to register annually in order to
operate.
Registration would require all water market intermediaries to notify of their intent to operate
before commencing operation. A registration scheme would allow government to monitor
who is operating in the market and actively enforce any other regulatory provisions.
This option would require a regulator to manage registration, monitor compliance and
enforce the requirements. Intermediaries would incur the costs of applying for registration
and annually renewing their registration. This study estimates the additional cost of a
registration scheme to intermediaries and government, over and above what would be
incurred in the absence of registration.
6
Australian Competition and Consumer Commission (2010) Water market intermediaries – industry developments and practices,
December 2010, page 40.
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Options for reform
Option 3: Licensing scheme
This option includes the requirements under option 2 with the addition of mandatory
licensing of all water intermediaries. This option would include:

stipulated competency requirements prior to entry – proven skills and knowledge to
perform functions

a commitment to ongoing training and professional development

mandatory participation in an industry fidelity fund.
Licensing would require licensees to comply with mandatory conditions of participation in
the occupation including notification and registration requirements, minimum competency
standards, conduct and disclosure restrictions, reporting requirements, monitoring and
oversight by the regulator.
Specific requirements for licensing and competency requirements
Under this option people who want to practice as a water intermediary would have to
demonstrate that they possess knowledge that is judged to be the equivalent of specified
formal courses of education, or complete specified courses provided by a registered
education and training organisation, and a period of work experience, before they could be
licensed as a water intermediary.
Existing water intermediaries with sufficient work experience and knowledge would not be
required to undertake formal education. The extent to which the work experience or
work-related and on the job training of these water intermediaries matches the skills and
knowledge reflected in the core competencies would be independently assessed.
Specific requirements for mandatory contribution to a fidelity fund
Legal practitioners must contribute to a fidelity fund in New South Wales, Victoria and
Queensland. These funds compensate people who suffer financial loss in the event of a
dishonest failure to account or a dishonest default by a legal practice.
Most jurisdictions in Australia require real estate agents to contribute to fidelity funds. These
property funds compensate individuals or corporations that suffer monetary loss because of
the misappropriation by a licensed estate agent, or an employee of a licensed estate agent.
It is assumed that these requirements for fidelity funds would apply to water intermediaries.
Option 4: Voluntary accreditation scheme for water intermediaries
Under this option, brokers seeking to be accredited would voluntarily incur the costs of
compliance; while government would incur the costs of managing the scheme. Accredited
brokers would need to meet any or all of the baseline statutory requirements specified in
option 1.
Under this option each requirement would have the same costs as estimated under the
baseline option. The costs however, would not be borne by all in the sector – rather, they
would only be borne by those water intermediaries who wish to be ‘accredited’ by the
regulator.
It is assumed the compliance rate will be less than 100 per cent of the industry – due to the
voluntary nature of the scheme.
Analysis of options
Each policy measure is considered separately in this analysis. This ensures that each policy
measure is considered based on merit (rather than as a package of measures). As per the
project Terms of Reference, we also aggregate the costs of these policy measures under the
four options identified by the Department.
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Options for reform
The costs of each option are estimated at chapter 4. The relative benefits of each option are
considered in chapter 5.
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What would you like to grow?
Costs of options
5
Costs of options
The cost to industry and government of each option outlined in chapter 3 is explored in this
chapter.
For this analysis we are utilising the cost benchmarks collected in stage 1 of this work as well
as further information gathered since then to identify indicative and preliminary cost ranges.
Cost benchmarks for comparable industries were collated from publicly available reports,
impact assessments and regulatory cost-benefit analyses. Data was only obtained from
public sources which limited the level of information that was available.
Although informative, the direct comparability of cost benchmarks from other industry
sectors is problematic given the scale and compositional difference between the water
broking sector and other industries. This led us in some cases either to seek more relevant
data or to make adjustments, where required.
There is a scarcity of relevant and reliable cost benchmarks for this sector, particularly given
the characteristics of the water broking industry, which differs from those of other
professional service industries in some respects, including the relatively small size of the
water intermediaries sector. We have endeavoured to make transparent assumptions about
how transferable these cost estimates may be to the water intermediaries sector. We have
generally taken a conservative approach to the estimates.
The key points to be borne in mind when considering the estimates set out in this chapter are
as follows:

It is outside the scope of this project to provide detailed, ground-up costs for the
establishment of a new regulator or adding functions to existing regulators. Instead,
we have taken cost estimates for the national legal services regulator and used these
with some adjustment where it seemed – in our professional judgement – to be
reasonable (for example, staff levels and salary were converted to the relevant
Australian Public Service levels). We then held a workshop with the Department on
these adjustments. More detailed information about these costs is not available –
that is, the costs for the national legal services regulator are replicated in full in the
appendix and the adjustments are made clear in this chapter. Ultimately, more
detailed costing would be undertaken in any regulatory impact statement prepared
subsequent to this report.

Consultation with State or Territory departments to provide detailed costings to
develop legislation was outside the scope of this engagement. The report does note
that these costs are rarely estimated publicly, which makes it difficult to avoid
assumptions completely. That said, the report does draw on the one estimate we
were able to identify and uses that as the basis of the estimates that follow (although,
given the size of the reform underpinning the published estimate we then had to
make assumptions using professional judgement about the likely scale of the task
here, which were then tested with the Department). The report also contains
sensitivity analysis around these estimates as agreed with the Department.

In many cases Victorian information is drawn upon – this is because Victoria
typically produces much more detailed, quantitative analysis in its Regulatory
Impact Statements.

Further information on the estimates presented in the tables is contained in the
relevant appendices.

The costings are based on there being 100 brokers and six exchanges (discussed
below).
Department of Sustainability, Environment, Water, Population and Communities
PwC
16
What would you like to grow?
Costs of options
Approach to evaluating costs
In line with discussions with the Department (and reflecting data that is available), this
report focuses on estimating the cost of:

creating a new Commonwealth agency to undertake all functions (which is, we
understand, a somewhat unlikely and – as shown here – expensive option), or

creating a new Commonwealth agency to undertake policy and coordination and
working with the States and Territories to undertake compliance and enforcement by
using existing State/Territory agencies.
The analysis in this chapter outlines different costs for both of these approaches for each of
the options. There is also a discussion at the end of this chapter on opportunities to reduce
costs to government by, for example, using existing functions and capabilities.
For the costs to government of each option, under the Commonwealth approach, we have not
identified variable costs for the different regulatory functions as the new agency would need
to employ staff to perform certain functions. Under the Commonwealth/State approach, we
have highlighted what the variable cost would be for existing State/Territory regulatory
bodies to undertake these regulatory functions using existing State/Territory agencies.
Relevant characteristics of the water intermediary
industry
Number of businesses
Water market intermediaries refer to water brokers and water exchanges. Brokers perform a
similar function to mortgage brokers, as they investigate trading options on behalf of their
clients and arrange the necessary paperwork. Water exchanges operate as a trading platform.
From recent work PwC has undertaken for the National Water Commission, we understand
that most water access entitlement trades (90-95 per cent) are submitted to approval
authorities by lawyers or conveyancers (who may be considered as intermediaries when they
are facilitating water trades). This is due to both the complexity of the transaction, and
because this type of trade involves a transfer of an ongoing entitlement to water that must be
registered. A water access entitlement trade may commonly occur in conjunction with a land
transfer.7
The National Water Commission commissioned an internet-based, voluntary survey of
Australian Water Brokers Association members as well as other known water brokers. The
aim of the survey was to identify key characteristics of water trading businesses, particularly
those operating in the Murray–Darling Basin. The survey was distributed to 44 brokers and
15 responses were received.
The survey responses highlight several key characteristics of broker businesses in Australia.
The average brokerage operation makes a relatively small amount of their revenue from
water sales. Approximately 60 per cent of respondents indicated that they received less than
$500,000 in gross revenue from water trades in 2009-10. This was further reinforced by the
fact that two-thirds of respondents indicated that they combined water trading with other
services, particularly real estate related services. Dedicated brokers typically had larger
revenue than those with mixed business offerings. Businesses exclusively operating as water
brokers were some of the largest operators in the market, all with annual turnover in excess
of $1,000,000. On average, however, the mixed business brokers had larger numbers of
7
Australian Competition and Consumer Commission (2010) Water market intermediaries – industry developments and practices,
December 2010, page 9.
Department of Sustainability, Environment, Water, Population and Communities
PwC
17
What would you like to grow?
Costs of options
employees, particularly those offering civil engineering and irrigation services. This most
likely reflects the nature of engineering firms rather than the nature of water brokerage. Just
over half of the brokers (54 per cent) who responded to the survey indicated that they had
used a trading platform to facilitate trades in water entitlements.8
Brokers
Based on unpublished work we have undertaken for the National Water Commission and
related research by other agencies such as the Australian Competition and Consumer
Commission, we estimate that there are up to 100 water intermediaries currently operating
in Australia (this number can vary depending on the market conditions).
A more precise estimate of the number of industry participants is not available as brokers are
not currently required to register with a regulating authority. Our recent work involved
asking trade approval authorities about the brokers they know of that are operating in the
industry and from whom trade applications have been received.
A large proportion of water allocation trades are facilitated by water brokers, which include
specialised water brokers and firms that that provide water brokering services in
combination with other business activities such as real estate agency or stock and station
agency services.
The most complete and reliable information appears to come from Victoria, where the
Department of Sustainability and Environment maintains records of lodging parties on the
water register. Victoria wide statistics for 2009-10 are reproduced in Table 3.
Table 3: Broker involvement with water trades in Victoria
Allocation trades
Entitlement
trades
Trades executed without a broker
44%
8%
Broker-assisted trades
56%
92%
Large broker
28%
1%
Freelance broker (i.e. a small broker or some
not easily identifiable as belonging to any of
the other categories)
15%
15%
Lawyer or conveyancer
4%
74%
Real estate agent
9%
2%
Source: Data supplied by the Department of Sustainability and Environment, Victoria.
This data shows that 56 per cent of allocation trades were facilitated by brokers, and the
majority of these were handled by the larger, established broker firms or by brokers affiliated
with one of the exchanges (predominantly Water Exchange and Watermove). Freelance
brokers managed a material proportion of trades (15 per cent), while real estate agents
brokered only 9 per cent.
Most water entitlement trades in Victoria (92 per cent) involve an intermediary – and most
are facilitated by a lawyer, solicitor or conveyancer. Only 15 per cent are brokered by
freelance brokers and a negligible number are brokered by the large brokers/exchanges.
Exchanges
The other form of intermediary service is the provision of a trading platform or exchange.
There are various exchanges currently operating in Australia including:
8
Recent (unpublished) research undertaken by PwC for the National W ater Commission.
Department of Sustainability, Environment, Water, Population and Communities
PwC
18
What would you like to grow?
Costs of options

Waterexchange

Watermove

Murrumbidgee Water Exchange

Murray Irrigation Exchange

Waterfind.
In 2009-10, a total of 9,087 allocation trades were conducted on the four major exchanges,
equating to approximately 387,000 megalitres. This represents 45 per cent, by number, of
total trades in the New South Wales, Victorian and South Australian markets. In terms of
volume, it represents 17 per cent of the market.9 If allowance is made for additional trades
through some of the smaller exchanges, the true proportion is probably somewhere closer to
25 to 30 per cent by volume, or 50 per cent by number.
Number of transactions
Table 3 outlines the total number of water trades that occurred in 2009-10 (both those
facilitated by a broker and those classified as unassisted trades).
Table 4: Number of water trades in 2009-10
Water allocation trades
Water access entitlement
trades
NSW
10,004
1,943
VIC
8,676
3,245
SA
1,513
1,335
QLD
1,729
538
Total
21,922
7,061
Source: Australian Water Markets Report 2009-10, National Water Commission. 10
Based on research undertaken by PwC for the National Water Commission, the following
estimates of facilitated trades are used for the purpose of this analysis:

approximately 60 to 70 per cent of allocation trades are facilitated by a broker

approximately 90 to 95 per cent of water access entitlement trades are facilitated by
a broker

approximately 45 to 50 per cent of allocation trades are executed through one of the
exchanges (sometimes in conjunction with a broker).
It is important to note that the number of trades fluctuates widely from year to year,
depending on seasonal and economic conditions. Currently, there is limited comprehensive
time series data available. It is expected, however, that 2010-11 figures will show fewer trades
in the financial year due to seasonal weather conditions.
For the purpose of this report it is assumed that there are:
9

14,250 water allocation trades facilitated by a broker (that is, 65 per cent of all
allocation trades)

6,700 water entitlement trades facilitated by a broker (that is, 95 per cent of all
allocation trades).
Based on a total of 20,193 allocation trades (2,264,000 ML) within and between South Australia, Victoria and New South W ales
– as reported in the Australian W ater Markets Report 2009-10.
10 Trade statistics for only four states are shown because no brokers service the markets in W A and Tasmania. The ACT and NT
have negligible trading.
Department of Sustainability, Environment, Water, Population and Communities
PwC
19
What would you like to grow?
Costs of options
Based on these assumptions there are a total of 20,950 trades undertaken by water brokers
each year.11
Degree of self regulation in the industry
An Australian Bureau of Agricultural and Resource Economics (ABARE, now known as
Australian Bureau of Agricultural and Resource Economics and Sciences – ABARES) survey
of farms that participated in water trading during 2008-09 found that there is a degree of
self regulation in the industry.12 The survey found that 13 per cent of respondents believed
that their intermediary used a trust account and 11 per cent that their intermediary had
professional indemnity insurance. Some 14 per cent of respondents also cited that their
intermediary was a member of the Australian Water Brokers Association,13 which has
requirements around disclosing conflicts of interest and the holding of funds.
In another example of self-regulation, Waterfind has developed a ‘Waterfind Code of
Practice’, which (in its entirety) states that:

All water transfer activities are conducted through an independently audited trust
account.

Waterfind precludes water brokers from being involved in the buying and re-selling
of water rights.

Procedures are in place to protect the rights and interests of clients and ensure the
delivery of consistent and quality service with every water trade

Waterfind water brokers undergo continuous training.14
To be conservative (and reflecting questions around whether there would be a direct
correlation around current self regulation and potential legislative options), this report does
not adjust its cost estimates to account for the extent to which intermediaries may already
partly, or wholly, comply with underlying requirements. To the extent that this occurs
though would suggest somewhat lower costs to industry than estimated here.
The following sections outline the estimated costs under each of the options described in
chapter 3. Further details of the costs of these options are outlined in Appendix D.
11 This data is based on 2009-10 figures.
12 326 farms that had participated in water trading during 2008-09 were selected to participate in the survey.
13 326 farms that had participated in water trading during 2008-09 were selected to participate in the survey.
14 Australian Competition and Consumer Commission (2010) Water market intermediaries – industry developments and practices,
December 2010, page 15.
Department of Sustainability, Environment, Water, Population and Communities
PwC
20
What would you like to grow?
Costs of options
5.1
Option 1: Baseline statutory requirements
Costs to Government
New Commonwealth Agency
The first approach to assessing the baseline option involves the set-up of a Commonwealth
agency to administer the compliance and enforcement requirements. The following
considers the costs that we expect the government to incur.
Develop legislation
The costs of developing legislation are rarely estimated. A United Kingdom study estimated
that it would take four employees to draft up a legislative package for a regulator (we note,
however, that this legislation was for a much larger agency with establishment costs of
15
approximately AUD$15 million and annual ongoing costs of AUD$25 million). In this case,
we have assumed that between two and four employees are required at the Commonwealth
level (one/two policy officer/s and one/two legal drafting officer/s) over a period of
12 months (the section at the end of this chapter also shows the impact of employing more
officers to develop legislation). This period of time reflects the level of consultation that
would be required. We expect that there would also be a small amount of consultation with
policy officers in each jurisdiction, representing approximately one month for each
jurisdiction. An on-cost multiplier of 1.75 has been applied to these labour costs to reflect
16
salary on-costs and overheads for these departmental employees. This is the rate
recommended by the Victorian Guide to Regulation. In this instance where an estimate of
the additional corporate costs is not known, we have used the on-cost multiplier that
includes corporate overheads. In other areas of the report, where we have an estimate of the
associated corporate overheads, we have applied a salary on-cost multiplier that does not
include corporate overheads.
In addition to this, a regulatory impact statement would be required. The Victorian
Competition and Efficiency Commission has estimated that, in Victoria the average cost of
undertaking a regulatory impact statement between 2005-06 and 2009-10 ranged from
$52,000 to $92,000 (which, in the absence of better information, is the range used in this
17
analysis). The cost of a regulatory impact statement will depend on a number of factors –
including, for example, the number of options analysed, the extent of stakeholder
consultation and specific regulatory review office requirements. National regulatory impact
statement processes are often more extensive reflecting the extent of consultation.
Establish agency
Analysis was undertaken of the cost to establish the national legal services regulator in
Australia. As these are relevant estimates (ie, from a comparator sector identified in our
Stage 1 report at the level of detail required), our report has drawn on these costs to estimate
the cost of establishing an agency for water intermediaries. In particular, the establishment
of the regulator is assumed to take six months and involve:

the creation of a Board and Chief Executive Officer to oversee the establishment
process (at a cost of $125,000 and $137,500 respectively)
15 Department of Trade and Industry (UK) (1998), Implementation of the Regulations on European Works. Councils — Regulatory
Impact Assessment, London, page 10.
16
The on-cost multiplier of 1.75 is added to direct labour costs to capture additional on-costs (non-earning labour costs borne by
employees) and overhead costs (ie building costs, equipment, administrative support and corporate overheads). The Victorian
Guide to Regulation recommends that on-costs and overhead costs multipliers of 1.165 and 1.5 respectively may be used in the
absence of reliable data. This gives a total on-cost and overhead multiplier of 1.75.
17 Victorian Competition and Efficiency Commission (2011), Cost effectiveness of regulatory impact assessment in Victoria,
February 2011, page 28.
Department of Sustainability, Environment, Water, Population and Communities
PwC
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What would you like to grow?
Costs of options

two consultants to help set-up the agency

one policy officer to assist with drafting policies around enforcement.
A salary on-cost of 1.165 has been used for these estimates, consistent with the Victorian
18
Guide to Regulation. This multiplier reflects additional on-costs such as payroll tax,
workers compensation and fringe benefits. We have used the salary on-cost multiplier of
1.165 and the estimated cost of overheads per employee ($58,741) that has been devised from
19
information in the same report. As stated earlier, we have used a salary on-cost multiplier
where we have an estimated cost of the associated corporate overheads.
A Board and Chief Executive Officer were established to oversee the creation of the legal
services regulator. We note, however, that other approaches (such as the use of a taskforce)
could also be used. We would not expect the use of a different approach such as a taskforce to
impose a significantly different cost from that outlined above for the Board and Chief
Executive Officer.
The analysis for the legal services regulator also estimated associated overhead costs for
establishing the agency. A number of these costs would generally depend on the number of
employees within the agency. We therefore calculated the average overhead cost per staff
member at the legal services regulator and multiplied that by the expected number of staff
under the baseline option. The estimated cost per employee from this approach was $58,741.
One cost that does not vary depending on the employees is the cost of a website, which we
have estimated to be $50,000. This estimate was derived from technology services costs for
the national legal services regulator which included not only the cost of a website but also
20
hardware and setup, and the cost of a register.
Minimum permanent staff
As with the estimates of establishment costs, we have drawn on estimates for the creation of
a national legal services regulator to estimate the required minimum number of ongoing
staff. We have used the roles that were required in creating the legal services regulator
(which were based on Victorian Public Sector levels) and converted those into Australian
Public Sector levels based on discussions with Departmental staff. The salaries used were the
mid-point of the range for that Australian Public Sector level. The following table outlines
the conversions used.
Table 5: Conversion of staff costs
VPS Level
APS Level
Salary estimate
VPS 3
APS 4
$68,693
VPS 5
APS 6
$85,455
VPS 6
EL 1
$105,540
The costs for the minimum permanent staff relate to:

Board and Chief Executive Officer

corporate services manager (APS EL1)
18 Department of Treasury and Finance (2007), Victorian Guide to Regulation, April 2007, page C-4. A 1.165 multiplier is used to
reflect salary on-costs (payroll tax, workers compensation, fringe benefits etc).
19 The costs for legal services were reduced by 40 per cent as these were considered excessive for what is required in this
process based on professional judgement.
20
More detailed information is not available, and so this would be something to be costed further in any regulatory impact
statement prepared subsequent to this report.
Department of Sustainability, Environment, Water, Population and Communities
PwC
22
What would you like to grow?
Costs of options

IT support/finance officer (APS 6)

personal assistant/receptionist (APS 4)

enforcement officer (APS 6)
The enforcement officer that would be employed by the regulator would be an FTE
responsible for compliance and enforcement. The cost of this officer would be fixed as they
would require a resource to ensure that the statutory requirements are being met, regardless
of how many checks were undertaken by this resource.
The following table provides a breakdown of the estimated costs to government of
establishing a new Commonwealth agency to regulate water intermediaries based on the
assumptions discussed above. For additional detail, see Appendix D.
Table 6: Cost to Government of the baseline option under the Commonwealth
approach ($m)
21
Establishment
Ongoing
annual
Developmental
Develop legislation
$0.403 - $0.805
Undertake regulatory impact statement
$0.052 - $0.092
Establish agency
$0.660
Fixed
Minimum permanent staff
TOTAL
$1.164
$1.114 - $1.557
$1.164
Commonwealth/State model
The cost differentials between this approach and the Commonwealth approach outlined
above is the:

increased cost in developing legislation.

fewer costs in respect of compliance and enforcement.
Develop legislation
We have assumed that an additional two to four policy officers from each State would be
required to work for 3 months in order to develop legislation for this approach to be
implemented. This is in addition to the policy officers required under the Commonwealth
model.
The regulatory impact statement would be done once nationally, and there would be a single
agency at the Commonwealth level providing coordination and policy. As outlined earlier, we
have used a range of the average cost of from the Victorian Competition and Efficiency
Commission of $52,000 to $92,000.
Compliance and enforcement
The variable costs are relatively marginal and relate to the cost of enforcing the statutory
requirements at the state level. Rather than employing an additional FTE (as was expected to
21
Note that under this approach a separate enforcement and compliance category is not required (in comparison to table 5 –
Commonwealth / State approach) as there is an additional staff member to undertake this role and is therefore covered in the
minimum permanent staff.
Department of Sustainability, Environment, Water, Population and Communities
PwC
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What would you like to grow?
Costs of options
be the case if the Commonwealth were to establish an agency and undertake enforcement) it
is expected that these duties would be given to existing resources.
22
23
In this case, the cost of inspecting a legal trust account ($960) is used , plus 10 per cent to
reflect the cost of ensuring current professional indemnity insurance is held, and a further
20 per cent to reflect the cost of checking the number of instances of conflict disclosures. In
the absence of any better information, the 10 and 20 percent assumptions are just that,
reflecting professional judgement as to the relative effort involved in ensuring compliance
(with trust accounts being the most resource intensive, followed by disclosures, and the
professional indemnity insurance). Ultimately, the associated estimate is extremely low
(around $7,000) so even significant upward revisions to these assumptions does not
materially change the overall costs associated with this option. This could be tested further in
any regulatory impact statement prepared subsequent to this report.
24
One study estimated that fewer than 5 per cent of regulated businesses are inspected.
Without any further information we have used professional judgement and assumed that
5 per cent of intermediaries are inspected each year.
Table 7 provides a breakdown of the estimated costs to government of undertaking this
approach to regulate water intermediaries based on the assumptions discussed above. For
additional detail, see Appendix D.
Table 7: Cost to Government of the baseline option under the
Commonwealth/State model ($m)
Establishment
Ongoing
annual
Developmental
Develop legislation
$1.003 - $1.994
Undertake regulatory impact statement
$0.052 - $0.092
Establish agency
$0.660
Fixed
Minimum permanent staff
$1.020
Variable
Enforcement and compliance
TOTAL
$0.006
$1.663 - $2.654
$1.026
22 ACIL Tasman (2010), Cost Benefit Analysis of Proposed Reforms to National Legal Profession Regulation, March 2010,
page 32.
23 As this is in one of the comparator sectors examined in Stage 1, and relates to one of the requirements considered here, being
trust accounts. Further, we have not identified any other more relevant estimates at the level of detail required.
24 Hampton, P. (2005), Reducing Administrative Burdens: Effective Inspection and Enforcement, March 2005, page 5.
Department of Sustainability, Environment, Water, Population and Communities
PwC
24
What would you like to grow?
Costs of options
The estimates for the compliance and enforcement assume that all elements of the baseline
are required. If the Department were to implement each element in isolation we would expect
the only costs to be affected would be the variable costs. The cost of inspecting all the
elements of the baseline is estimated above. If only trust accounts were inspected, then the
estimate cost outlined above would apply (ie, the estimate for inspecting trust accounts for
lawyers). If only disclosures were inspected, this is assumed to take less time than inspecting
a trust account (and so represents 60% of the cost). If only professional indemnity insurance
were inspected, this is assumed to be the most straightforward (and so represents 50% of the
25
cost).

Trust accounts
$960

Professional indemnity insurance
$480

Disclosure of conflicts
$576
Costs to industry
The costs to industry would be based on the costs of:

establishing a trust account

disclosing of conflicts of interest

obtaining professional indemnity insurance.
Establishing a trust account
The mandatory use of trust accounts in comparable professions is often costly to industry.
Typically these costs include:

opening a trust account with an approved deposit-taking institution

transaction costs associated with account

annual audit costs.
Opening of account
Following discussions with financial institutions we have assumed that there is no financial
costs associated with opening trust accounts, and that the application process for a trust
account would require approximately two hours with an additional two hours in gathering
documentation (again, based on advice from the institutions contacted). In estimating a cost
for this time, we have used an hourly rate of $55.45 which is the suggested hourly rate from
26
the Victorian Guide to Regulation.
Transaction costs
The costs of transactions for trust accounts can vary depending on the type of transaction
and the financial institution. Some financial institutions provide fee-free transactions, while
others have higher costs for certain transactions such as those conducted in-person. Based on
our analysis of the fees for transactions, we have assumed an average cost per transaction of
$0.40. Given that there would be two transactions for each trade, and our previous
assumption of 20,950 trades for the year (outlined earlier in this section), there would be
41,900 transactions through the accounts.
25
These assumptions have been made using professional judgement based on the best available information at this stage, we
expect that more detailed costings would be completed and reflected in any subsequent regulatory impact statement.
26 Department of Treasury and Finance (2007), Victorian Guide to Regulation, April 2007, p.C-5.
Department of Sustainability, Environment, Water, Population and Communities
PwC
25
What would you like to grow?
Costs of options
Based on discussions with trust account holders we have also assumed that there would be a
time cost of five minutes per transaction for the water intermediary in terms of internal
administration of the trust account. This reflects the additional time that is required above
that which would be incurred through the use of a regular bank account (relating to
authorisations for example). These five minutes equates to $4.55 using a $54.55/hour rate.
As with the transaction costs, we would expect that this administration would happen on
both sides of the transaction and would therefore be incurred 41,900 times. This results in a
cost to industry of $190,470.
Audit costs
We were advised by a regional accounting firm that a reasonable range for undertaking an
audit would be between $200 and $300 an hour. Given there would be varying degrees of
complexities for these accounts, it also advised that a range of a half a day and two days is
reasonably appropriate to undertake an audit of this nature. We have assumed that the
majority of the accounts would be of a more simple nature and have used one day as an
average.
Disclosing of conflicts of interest
Complying with disclosure requirements for conflicts of interests would require:

staff training and internal processes to identify potential conflicts

informing potential clients (verbally or in writing).
We attempted to use costs associated with the disclosure of conflicts through water
authorities and financial planners. We were unable, however, to obtain suitable information
to be used in these estimates. Consultation with the Australian Securities and Investment
Commission was also unable to identify any relevant costings undertaken by the
Commission.
The best available estimate relates to certain establishment costs for insurance brokers. In
particular, one estimate suggests that it costs $8,000 for a new insurance broker to
undertake all the required compliance training in Australia in order to be established, and
$5,000 to assemble required documentation for compliance (which is taken to incorporate
27
developing policies). In the absence of better information, we have used professional
judgement and assumed that each water intermediary would incur establishment costs of
approximately $5,000 in order to establish disclosure policies and undertake staff training.
With each intermediary incurring this cost, the overall cost to the industry would be
$530,000. This would be an area to be costed further with better information in any
regulatory impact statement.
In addition to this, there would be a time cost each time that the water intermediary would
need to consider whether a conflict exists and disclose information. In the absence of better
information and using professional judgement, it is assumed that this would take
approximately 10 minutes per disclosure. Given that the disclosure would need to occur on
both sides of the trade, it would need to happen 41,900 times and would result in a total cost
28
to the industry of $380,941.
Obtaining professional indemnity insurance
The main costs associated with obtaining professional indemnity insurance are the time cost
in obtaining the insurance and the on-going premiums associated with the insurance cover.
27
28
Australian Securities and Investments Commission (2007), A Report on Costs of Financial Services, December 2007.
In the absence of better information we have used professional judgement and assumed that the process of considering whether
there is a conflict and disclosing whether or not one exists takes ten minutes on average.
Department of Sustainability, Environment, Water, Population and Communities
PwC
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What would you like to grow?
Costs of options
Obtaining insurance
In discussions with insurance brokers, we were advised that it would only require about one
hour of time to obtain a standard professional indemnity insurance cover. Using the hourly
rate of $55.45 (as recommended by the Victorian Guide to Regulation), this equates to a cost
of $5,782 to the industry.
Premiums
Based on discussions with insurance brokers, the average premium would be around $4,000
for those that did not already hold some form of professional indemnity insurance. If the
intermediary already had some form of professional indemnity insurance, the cost would be
much smaller, potentially around $1,000.
In the absence of any specific data on the level of existing indemnity insurance cover, given
29
that a previous National Water Commission-funded survey found that around 50 per cent
of brokers also provided financial services (and AFS licensees are required to have
professional indemnity insurance), it is assumed that 50 per cent of intermediaries already
hold some form of insurance and pay the smaller incremental amount, while the other
50 per cent do not hold any form of insurance and so pay the higher amount.
Table 8 provides a breakdown of the expected cost to industry under the baseline option
given the assumptions discussed above. For further details, see Appendix D.
Table 8: Cost to industry of the baseline option ($m)
Establishment
Ongoing annual
Trust accounts
$0.022
$0.379
Disclosure of conflicts
$0.530
$0.381
Professional indemnity insurance
$0.006
$0.265
Total cost of option 1
Table 9 provides an overview of the total cost of the baseline option for the regulation of
water intermediaries.
Table 9: Total cost of the baseline option ($m)
Commonwealth
Government
Industry
Total
29
Commonwealth/State
Establishment
Ongoing annual
Establishment
Ongoing annual
$1.114 - $1.557
$1.164
$1.663 - $2.654
$1.026
$0.558
$1.025
$0.558
$1.025
$1.672 - $2.115
$2.188
$2.221 - $3.212
$2.051
The survey of water brokers was conducted as part of a study that we undertook for the National W ater Commission titled
‘Strengthening Australia’s W ater Markets’. This report has now been published. The survey was sent to 45 brokers, including all
Australian W ater Brokers Association members plus approximately 20 brokers operating independently of the Australian W ater
Brokers Association in Victoria.
Department of Sustainability, Environment, Water, Population and Communities
PwC
27
What would you like to grow?
Costs of options
5.2
Option 2: Registration
Costs to Government
New Commonwealth Agency
In analysing the costs of establishing a new Commonwealth agency to undertake registration
and enforcement, we have used the costs for the baseline option (outlined above) as the basis
for the estimates and built on those as required.
Develop legislation
Based on discussions with the Department, we have assumed that the costs of developing
legislation are greater than that required under the baseline option given the legislation
would cover more matters. Rather than between two and four policy officers being used for
12 months to develop the legislation, they would be required for approximately 15 months.
This reflects the additional work that would be required in developing a registration scheme
and a potential increase in the complexity of consultations. As with the baseline option, we
expect that there would also be a small amount of consultation with policy officers in each
jurisdiction, representing approximately one month for each jurisdiction. An on-cost
multiplier of 1.75 (discussed earlier) has been applied to these labour costs to reflect both
30
salary on-costs and overheads for these departmental employees. This multiplier is
recommended in the Victorian Guide to Regulation.
As with the baseline option, a regulatory impact statement would be required for this option.
The range for the cost of the regulatory impact statement is the range outlined earlier of the
average cost estimated by the Victorian Competition and Efficiency Commission of $52,000
to $92,000.
Establish agency
The cost to establish an agency under the registration option will be largely similar to that
under the baseline. The only differences that we have assumed is that an additional policy
officer would be required to assist in developing the registration processes and an electronic
registry would need to be developed. The estimated cost of this electronic registry
31
($214,000) is based on the estimated cost of establishing a national lawyer register.
Minimum permanent staff
The fixed ongoing costs for the registration option would be the same as the baseline option,
except for an additional FTE required to undertake registration of intermediaries.
The following table provides a breakdown of the estimated costs to government of
undertaking this approach to regulate water intermediaries based on the assumptions
discussed above. For additional detail, see Appendix D.
30 Department of Treasury and Finance (2007), Victorian Guide to Regulation, April 2007, p.C-4.
31 ACIL Tasman (2010), Cost Benefit Analysis of Proposed Reforms to National Legal Profession Regulation, March 2010,
page 32.
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What would you like to grow?
Costs of options
Table 10: Cost to Government of the registration option under the
Commonwealth agency ($m)
Establishment
Ongoing
annual
Developmental
Develop legislation
$0.482 – $0.964
Undertake regulatory impact statement
$0.052 - $0.092
Establish agency
$0.963
Fixed
Minimum permanent staff
TOTAL
$1.328
$1.497 - $2.019
$1.328
Commonwealth/State model
As with the baseline option we have assumed that a Commonwealth agency would be set-up
to provide coordination and policy, and in this case host the register, while the
implementation and enforcement would be undertaken by State agencies. The cost
differential between this approach and the Commonwealth agency approach outlined above,
is the:

increased cost in developing legislation.

lower number of permanent staff and variable costs for compliance and enforcement
Develop legislation
We have assumed that, in comparison to the Commonwealth approach, an additional two to
four policy officers from each State would be required to work for 3 months in order to
develop legislation for this approach to be implemented (the legislation would adopt the
Commonwealth Act by reference). The regulatory impact statement would be done once
nationally, and there would be a single agency at the Commonwealth level providing
coordination and policy.
As outlined earlier, we have adopted a range for the estimated cost of the regulatory impact
statement of $52,000 to $92,000.
Minimum permanent staff and compliance and enforcement
We have assumed that the resources that were costed under the baseline for compliance and
enforcement of the statutory requirements would be redirected to policing for unregistered
industry participants. In addition to this there would be a cost of the registration process. We
have used the fees for registering a business name and used this as a reasonable proxy for the
32
cost associated with providing this service. The cost of registering a business name is $30.
As with the baseline option, the variable costs associated with this registration option are
marginal.
The following table provides a breakdown of the estimated costs to government of
undertaking this approach to regulate water intermediaries based on the assumptions
discussed above. For additional detail, see Appendix D.
32 Department of Innovation, Industry, Science and Research (2011), Business Name Registration (Fees) Regulations 2011,
page 5.
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What would you like to grow?
Costs of options
Table 11: Cost to Government of the registration option under the
Commonwealth/State model ($m)
Establishment
Ongoing
annual
Developmental
Develop legislation
$1.030 - $2.061
Undertake regulatory impact statement
$0.052 - $0.92
Establish agency
$0.963
Fixed
Minimum permanent staff
$1.164
Variable
Policing unregistered parties
$0.007
Registration
$0.003
TOTAL
$2.045 - $3.116
$1.174
Cost to industry
Industry would still incur the costs outlined under the baseline option as it would still need
to comply with requirements around trust accounts, professional indemnity insurance and
disclosures of conflicts.
In addition to this, there would be a cost to industry of undertaking the registration process.
This cost is primarily the time taken by industry participants to complete the process. We
have assumed that the time required would be similar to that required to registering a
business name. The Productivity Commission (PC) estimated that it would take
33
approximately 10 minutes for a business to register its name. Based on an hourly rate of
$54.55, this works out to be $9.09 per registration and a total cost to the industry of only
$964. We have assumed that the registration process is an annual process.
The following table provides a breakdown of the expected cost to industry under the
registration option given the assumptions discussed above. For further details, see
Appendix D.
Table 12: Cost to industry of the registration option ($m)
Establishment
Ongoing annual
Trust accounts
$0.022
$0.379
Disclosure of conflicts
$0.530
$0.381
Professional indemnity insurance
$0.006
$0.265
Registration
$0.001
Total cost of option 2
Table 13 provides an overview of the total cost of the baseline option for the regulation of
water intermediaries.
33 Productivity Commission (2008), Cost of Business Regulations: Research Report, December 2008, page 86
Department of Sustainability, Environment, Water, Population and Communities
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What would you like to grow?
Costs of options
Table 13: Total cost of the registration option ($m)
Commonwealth
Government
Industry
TOTAL
5.3
Commonwealth/State
Establishment
Ongoing annual
Establishment
Ongoing annual
$1.497 - $2.019
$1.328
$2.045 - $3.116
$1.174
$0.558
$1.026
$0.558
$1.026
$2.055 - $2.577
$2.354
$2.603 - $3.674
$2.199
Option 3: Licensing scheme
This option includes the requirements under option 2 with the addition of:

stipulated competency requirements – proven skills and knowledge to perform
functions and a commitment to ongoing training and professional development

mandatory participation in an industry fidelity fund.
Costs to Government
New Commonwealth Agency
Develop legislation
We have assumed that this option would require the most amount of time to develop the
legislation. We assumed that it would take two to four policy officers 18 months to develop
the legislation. This increase in time is due to the increased complexity of the option
compared to the earlier options. We expect that there would also be a small amount of
consultation with policy officers in each jurisdiction, representing approximately one month
for each jurisdiction. An on-cost multiplier of 1.75 has been applied to these labour costs to
reflect salary on-costs and overheads for these departmental employees.
As with the other options, a regulatory impact statement would be required for this option.
The range for the cost of the regulatory impact statement is the range outlined earlier of the
average cost estimated by the Victorian Competition and Efficiency Commission of $52,000
to $92,000.
Establish agency
The costs in establishing the agency would be the same as those for the registration option
except for the addition of the fidelity fund. Previous discussions with the Department
indicate that the fund would be administered by government. In discussions with industry
participants that had previously established a fidelity fund, it was advised that the cost in
setting up a fidelity fund is relatively straightforward. Time would be needed, however, to
establish policies around the operation of the fidelity fund. Therefore we have assumed that a
policy officer would be required for three months during the establishment of the agency to
set up the fidelity fund and develop the appropriate policies for the fund.
Minimum permanent staff
The fixed ongoing costs under this option would be the same as that under the registration
option. An additional officer would be required, however, due to the additional competency
requirements and operation of the fidelity fund.
The following table provides a breakdown of the estimated costs to government of
undertaking this approach to regulate water intermediaries based on the assumptions
discussed above. For additional detail, see Appendix D.
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What would you like to grow?
Costs of options
Table 14: Cost to Government of the licensing option under the Commonwealth
agency ($m)
34
Establishment
Ongoing
annual
Developmental
Develop legislation
$0.561 - $1.122
Undertake regulatory impact statement
$0.052 - $0.092
Establish agency
$1.035
Establish fidelity fund
$0.026
Fixed
Minimum permanent staff
TOTAL
$1.472
$1.675 - $2.276
$1.472
Commonwealth/State model
We have assumed that a Commonwealth agency would be set-up to provide coordination and
policy, host a national register, and host the fidelity fund, while the implementation and
enforcement would be undertaken by state agencies. The cost differential between this
approach and the Commonwealth agency approach outlined above, is the:

increased cost in developing legislation

costs associated with compliance and enforcement and licensing.
Develop legislation
Based on discussions with the Department we have assumed that an additional two to four
policy officers from each State (additional to those officers already required under the
Commonwealth approach) would be required to work for 3 months in order to develop
legislation for this approach to be implemented (the legislation would adopt the
Commonwealth Act by reference). Given the uncertainty of the costs of developing the
legislation, we have created a range. The upper bound of this range is based on a doubling of
the required staff (and the related on-costs) to ensure that we have a conservative estimate
that accounts for the uncertainty.
The regulatory impact statement would be done once nationally, and there would be a single
agency at the Commonwealth level providing coordination and policy. As outlined in other
options, the estimated cost for the regulatory impact statement would be between $52,000
and $92,000.
Compliance and enforcement
As with the registration option, it is assumed that the resources from the baseline option for
compliance and enforcement have been reallocated to police unlicensed operators within the
industry and rather than employing an FTE (which is expected to occur if the
Commonwealth were to create an agency to undertake enforcement) these duties would be
given to existing resources at the State/Territory level.
34
If the current training market is unable to provide suitable training courses, and the government has to facilitate the development
of accredited courses, there would be additional costs to government.
Department of Sustainability, Environment, Water, Population and Communities
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What would you like to grow?
Costs of options
Licensing and competency requirements
The regulatory impact statement for the Conveyancing Regulations 2007 considered the
costs to the regulator of mandatory licensing of conveyancers and requiring them to
demonstrate their competency level.
The direct costs incurred by the regulator (Consumer Affairs Victoria) for licensing each
conveyancer were estimated based on the time it takes to perform each task, multiplied by
the average salary relevant to the level or position of the people who would be expected to
undertake the tasks. For example, the stages involved in processing an application under the
Conveyancers Act 2006 included:

initial assessment and data entry of applications

eligibility checks for the individual, their company and whether they have the
appropriate qualifications and experience

background checks including with the police, the Australian Securities and
Investments Commission and internally with the regulator

follow-up calls with applicants

detailed assessment of the applications including consultations with other regulators
if required

data entry and notification associated with approving the application.
Consumer Affairs Victoria estimated that the cost of completing the steps detailed for each
application was $377 (this equates to $420 in present dollar value), based on estimates of the
level of staff undertaking each step, the amount of time spent completing each step, and the
average salary for staff at that level.35
We have assumed that the rate of checks on the licensing and competency requirements
would be the same as discussed earlier under the baseline option (5 per cent).
Fidelity fund
We have assumed a policy officer would be required for three months during the
establishment of the agency to set up the fidelity fund and develop the appropriate policies
for the fund.
The water market has previously had a fidelity fund which was operated by the Australian
Water Brokers Association. The fund operated for allocation trades and was established to
cover losses incurred by brokers’ customers through no fault of the customer (including
through broker fraud, theft or negligence). Even though the fund is no longer in operation,
for the purposes of deriving potential costs associated with establishing a fidelity fund, we
have relied on information arising from this previous fidelity fund. We understand that the
fidelity fund will be replaced with a requirement from Waterexchange for water brokers to
hold professional indemnity insurance in order to trade on the exchange.
The fidelity fund was funded by a levy on each commission paid to the brokers and was
managed by a trustee who is a solicitor. Where a claim was made on the fund, the trustee
investigated, and if the claim met the requirements, the fund paid the money to the claimant.
Payments from this fidelity fund were capped at $25,000. The Australian Competition and
35 Consumer Affairs Victoria (2007), Regulatory Impact Statement for the Conveyancing Regulations 2007, December 2007,
page 40.
Department of Sustainability, Environment, Water, Population and Communities
PwC
33
What would you like to grow?
Costs of options
Consumer Commission also noted that the fund could pursue a broker who causes a claim to
be made on the fund for payment of the amount claimed (eg, through court action). 36
Over the four years of the funds operation, only four claims have been made from the fund
(mostly in the peak season of 2008). With the capped claim amount of $25,000 the maximum
paid out from the fidelity fund was $100,000 over four years. It is not known what the actual
payout was, or how many complaints were investigated but no payout was made.
The fidelity fund was administered by a Board which assessed each of the claims. Based on
discussions with Waterexchange, reviewing and processing claims against the fund took
approximately two weeks of staff time. Other costs of administering the fund, such as
receiving contributions from bankers were marginal. Based on the average hourly earnings
rate of $54.55 the total cost of administering the fund was $4,146 per claim, 37 which is the
estimate used here to represent the cost to government of processing a claim. This cost does
not include an allowance for overheads as this has already been incorporated within the
other cost estimates.
As mentioned previously, there were four claims made over a four year period, therefore on
average they processed one claim per year. Given that at the time Waterexchange
represented approximately one quarter of the total market (by number of trades), we have
extrapolated these results to estimate that four claims on the fidelity fund would be received
industry-wide. We note, however, that Waterexchange only handles allocation trades and
these do not reflect the entire market and can also be less complex and problematic than
permanent trades. We have therefore ‘grossed’ up the estimate to reflect the allocation share
of the trading market.
Given that allocation trades undertaken by brokers would be approximately 68 per cent of
38
the total number of trades, we have inflated our estimated number of claims per year by
47 per cent (1/0.68) to account for this larger market. This now results in an average of six
claims on the fidelity fund per year.
The following table provides a breakdown of the estimated costs to government of
undertaking this approach to regulate water intermediaries based on the assumptions
discussed above. For additional detail, see Appendix D.
36 Australian Competition and Consumer Commission (2010) Water market intermediaries – industry developments and practices,
December 2010, page 32.
37 This estimate is based on a 38 hour week and includes on-costs and overheads.
38
14,250 allocation trades and 6,700 entitlement trades.
Department of Sustainability, Environment, Water, Population and Communities
PwC
34
What would you like to grow?
Costs of options
Table 15: Cost to Government of the licensing option under the
Commonwealth/State model
Establishment
Ongoing
annual
Developmental
Develop legislation
$1.110 - $2.220
Undertake regulatory impact statement
$0.052 - $0.092
Establish agency
$0.999
Establish fidelity fund
$0.026
Fixed
Minimum permanent staff
$1.328
Variable
Policing unlicensed parties
$0.007
Licensing and competency requirements
$0.002
Fidelity fund
$0.017
TOTAL
$2.187 - $3.337
$1.354
Cost to industry
Industry would still incur the costs outlined under the previous option. In addition to this,
industry would also incur costs in complying with competency requirements and costs
associated with maintaining a fidelity fund for the industry.
Competency requirements
In imposing competency requirements on the industry, it is assumed that those
intermediaries currently operating within the market would not be required to obtain
additional competencies in order to continue operating as an intermediary. Instead, there
would be costs for them to have their existing skills assessed (this is consistent with the
approach taken in for example, conveyancing reforms in Victoria which allowed existing
conveyancers to demonstrate proficiency or prior knowledge equivalent to completion of
formal education). Based on information in the Victorian conveyancing regulatory impact
statement, the time cost to have skills assessed was estimated to be $784 (based on it taking
16 hours in total), while the assessment fee was $490 per applicant. This equates to $1,274
per intermediary and a total, once-off cost to the industry of $135,044.
Time cost
In addition to this, there is a time cost associated with filling out forms and obtaining a
licence. This is more time consuming than registration as competencies are also involved. We
have used as a proxy the time cost for real estate agents to be licensed from the Productivity
39
Commission of approximately 1.5 hours. Using an hourly rate of $54.55, this equates to
$82 per licensed intermediary and an overall cost of $8,673 to the industry.
Continual professional development
Licensed parties would be required to undertake continual professional development to
ensure that the required professional competencies are being met. We have used an estimate
of the cost for the continual professional development of real estate agents of $635 per
39 Productivity Commission (2008), Cost of Business Regulations: Research Report, December 2008, pages 148 – 150.
Department of Sustainability, Environment, Water, Population and Communities
PwC
35
What would you like to grow?
Costs of options
40
course. We have assumed that one staff member from each water intermediary would
41
undergo this training each year. Therefore the total cost to the industry is $67,310.
Fidelity fund
It is difficult to estimate the level of funds that would be required to be held by the fidelity
fund without knowing the potential number of claims on the fund. As outlined above, by
extrapolating the Waterexchange experience, we have assumed that six claims per year
would be received on the fidelity fund.
The average value of the trades within the market for 2009-10 was:

Allocation trade – $6,000

Entitlement trade – $324,000.
42
As discussed earlier we have assumed that there would be four claims per year on average for
the entire industry, at most the fidelity fund would need to have sufficient funds to cover four
claims on an average entitlement trade. While Waterexchange placed a cap on the size of the
payout from its fidelity fund, through discussions with Department staff we would expect
that an industry fidelity fund would not have a cap on the size of the payout. This therefore
43
equates to an annual value within the fidelity fund of $1,296,000 that is required.
This cost estimate should, however, be treated with some caution. It is very sensitive to
changes in key assumptions, including the average size of claims (based on average
entitlement transaction values) and the average frequency of claims. At this point we do not
have sufficient information to know whether average claims against the fidelity fund might be
lower than the average transaction value – as might occur where misfeasance tends to be
more prevalent amongst smaller brokers handling smaller trades – or indeed the reverse.
Further, our extrapolation of the expected number of claims may be inaccurate; perhaps
because the frequency of claims decreases with improvements in broker competency and the
level of regulatory oversight envisaged under the reform options considered in this report.
The following table provides a breakdown of the expected cost to industry under the
licensing option given the assumptions discussed above. For further details, see Appendix D.
40
41
42
43
In NSW , all real estate agents are required to complete 12 points of Continuing Professional Development (CPD) each year. The
Real Estate Institute of NSW provides a one-day course for real estate agents which allows them to complete all 12 points over
an 8-hour period. The course fees start at $199 (depending on which subjects are selected). Taking into consideration the
opportunity cost of time spent at the course (8 hours) the total cost of CPD requirements is $635 (based on an average hourly
earnings rate of $54.55).
In the absence of better information we have used professional judgement and assumed that at least one person per
intermediary would incur continuing professional development costs. To the extent that more staff undertake continuing
professional development then costs would be higher than shown here.
We have used a single year of 2009-10 because the longer time-series data is generally not available in a consistent format and
given the immature nature of the water market, a snapshot of the most recent period is not necessarily less representative of the
market compared to a historical average.
On the basis of our analysis the annual value of the fidelity fund has been calculated at 4 times the entitlement trade of
$324,000, so is equal to $1,296,000. Analysis of potential ways of structuring the fund would be something for any regulatory
impact statement prepared subsequent to this report.
Department of Sustainability, Environment, Water, Population and Communities
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36
What would you like to grow?
Costs of options
Table 16: Cost to industry of the licensing option ($m)
Establishment
Ongoing annual
Trust accounts
$0.022
$0.379
Disclosure of conflicts
$0.530
$0.381
Professional indemnity insurance
$0.006
$0.265
Licensing and competency requirements
$0.135
$0.076
Fidelity fund
$1.296
Total cost of option 3
Table 17 provides an overview of the total cost of the baseline option for the regulation of
water intermediaries.
Table 17: Total cost of the licensing option ($m)
Commonwealth
Government
Industry
TOTAL
5.4
Commonwealth/State
Establishment
Ongoing annual
Establishment
Ongoing annual
$1.675 - $2.276
$1.472
$2.187 - $3.337
$1.354
$0.693
$2.397
$0.693
$2.397
$2.368 - $2.969
$3.869
$2.880 - $4.030
$3.750
Option 4: Voluntary accreditation scheme
This option includes the voluntary take-up of any or all of the requirements under the
baseline option. Under this option, brokers seeking to be ‘accredited’ would voluntarily incur
the costs of compliance.
This voluntary accreditation option would require the establishment of an industry agency to
administer the accreditation of intermediaries.
Costs to Government
As this is a voluntary accreditation process, we have assumed that the costs in the setting up
of such an agency would be borne largely by industry participants. However, we do note that
government would most likely incur some costs in the development of any required
legislation. On the basis of discussions with the Department we have assumed that this cost
would be between two and four policy officers over twelve months. There would probably not
be a need for any regulatory impact statement or interaction with other jurisdictions as with
44
the other options.
44
The uncertainty surrounding this assumption will be taken into account through sensitivity testing in the model. W ithout further
details regarding the scheme we have assumed no monitoring costs, if government monitors the scheme this would represent
additional costs to our analysis.
Department of Sustainability, Environment, Water, Population and Communities
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37
What would you like to grow?
Costs of options
Table 18: Cost to Government of the voluntary accreditation option under the
Commonwealth agency ($m)
Establishment
Develop legislation
Ongoing
annual
$0.317 - $0.634
Cost to industry
The cost of establishing an accreditation agency would be expected to be incurred by
industry rather than government. This section estimates these costs. It is outside the scope of
this report to consider cost recovery arrangements in respect of an accreditation agency
except to say that fewer participants suggests a higher shared cost per participant all else
being equal, and that such costs could be significant.
Establish agency
The cost of establishing the agency would be similar to that expected under the baseline
option. We have assumed that the same level of staffing would be required to establish the
agency, however we have assumed that an accreditation agency would be required to pay
commercial rates for their overheads and have therefore increased the overhead costs by
45
20 per cent to reflect this.
Minimum permanent staff
The fixed ongoing costs under the voluntary accreditation option would be the same as that
under the baseline option. As these are fixed, the voluntary nature of the scheme does not
reduce the costs that would be incurred.
As with the government approach under the baseline option, one policy officer would be
required as a resource to undertake the compliance and enforcement requirements of the
agency. This resource would be required to be employed by the agency regardless of the level
of take-up by the industry.
Cost of trust accounts, disclosure and insurance
The direct costs to industry of complying with the voluntary requirements would vary
depending on the level of take-up. These costs are directly related to the variable costs that
were outlined earlier under the baseline option.
Information about the estimated compliance rate of a voluntary scheme is not available.
Therefore in order to provide analysis of the costs for this option we have assumed that the
take-up rate for accreditation would vary between 25 and 75 per cent, reflecting the expected
influence of exchanges that would be expected to require brokers to be accredited.
As the cost of this option is directly related to the baseline costs and the take-up rate for
accreditation, we have used the baseline costs and developed a range based on the lower
take-up of 25 per cent and the higher take-up of 75 per cent.
The following table provides a breakdown of the expected cost to industry under the
voluntary option given the assumptions discussed above. For further details, see Appendix D.
45
Without further information we have used professional judgement and assumed a 20 per cent increase in overhead costs.
Further detail to compare commercial property rent, wages, etc, would be undertaken as part of any subsequent regulatory
impact analysis.
Department of Sustainability, Environment, Water, Population and Communities
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38
What would you like to grow?
Costs of options
Table 19: Cost to industry of the voluntary accreditation option under the lower
take-up rate ($m)
Establishment
Ongoing annual
Developmental
Establish agency
$0.689
Fixed
Minimum permanent staff
$1.164
Intermediary variable
Trust accounts
$0.005
$0.095
Disclosure of conflicts
$0.133
$0.095
Professional indemnity insurance
$0.001
$0.066
Table 20: Cost to industry of the voluntary accreditation option under the higher
take-up rate ($m)
Establishment
Ongoing annual
Developmental
Establish agency
$0.689
Fixed
Minimum permanent staff
$1.164
Intermediary variable
Trust accounts
$0.016
$0.284
Disclosure of conflicts
$0.398
$0.286
Professional indemnity insurance
$0.004
$0.199
Total cost of option 4
Table 21 provides an overview of the total cost of the baseline option for the regulation of
water intermediaries.
Table 21: Total cost of the voluntary accreditation option ($m)
Lower take-up
Establishment
Government
Industry
TOTAL
Ongoing annual
$0.317 - $0.634
Higher take-up
Establishment
Ongoing annual
$0.317 - $0.634
$0.828
$1.420
$1.107
$1.932
$1.145 - $1.462
$1.420
$1.424 - $1.741
$1.932
Department of Sustainability, Environment, Water, Population and Communities
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39
What would you like to grow?
Costs of options
5.5
Summary of options
Table 22 provides a summary of the estimated costs for the different options on the basis of
once-off and annual ongoing costs.
Table 22: Summary of total costs ($m)
Commonwealth
Option 1
Commonwealth/State
Establishment
Ongoing annual
Establishment
Ongoing annual
$1.672 - $2.115
$2.188
$2.221 - $3,212
$2.051
Option 2
$2.055 - $2.577
$2.354
$2.603 - $3.674
$2.199
Option 3
$2.368 - $2.969
$3.869
$2.880 - $4.030
$3.750
Lower take-up
Option 4
Higher take-up
Establishment
Ongoing annual
Establishment
Ongoing annual
$1.145 - $1.462
$1.420
$1.424 - $1.741
$1.932
In addition to this, the following tables provide a summary of the costs per water trade and
per intermediary.
Table 23: Summary of total costs per trade ($)
Commonwealth
Option 1
Commonwealth/State
Establishment
Ongoing annual
Establishment
Ongoing annual
$80-$101
$104
$106-$153
$98
Option 2
$98-$123
$112
$124-$175
$105
Option 3
$113-$142
$293
$137-$192
$179
Lower take-up
Option 4
Higher take-up
Establishment
Ongoing annual
Establishment
Ongoing annual
$55 - $70
$68
$68 - $83
$92
Table 24: Summary of total costs per intermediary ($’000s)
Commonwealth
Option 1
Commonwealth/State
Establishment
Ongoing annual
Establishment
Ongoing annual
$15.8 - $20.0
$20.7
$21.0 - $30.3
$19.4
Option 2
$19.4 - $24.3
$22.2
$24.6 - $34.7
$20.8
Option 3
$22.3 - $28.0
$58.0
$27.2 - $38.0
$35.5
Lower take-up
Option 4
Higher take-up
Establishment
Ongoing annual
Establishment
Ongoing annual
$10.8 - $13.8
$13.4
$13.4 - $16.4
$18.2
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Costs of options
5.6
Opportunities to reduce costs
There appears to be a variety of ways in which to potentially reduce costs to government
associated with the options, as estimated above.
Using trust account interest
For real estate agents the interest earned on trust accounts goes towards covering some of
the costs of the regulatory functions as well as things like fidelity funds and educational
programs. In this case, it is estimated that trust accounts would accrue approximately
$5.7 million in interest each year from just entitlement trades based on the following
assumptions:

6,700 water entitlement trades

average value of water entitlement trade of $324,000

settlement period of 20 days

an interest rate equal to the RBA cash rate (4.75 per cent)

100 per cent is held for the 20 days.
46
47
The level of interest received would subsequently vary depending on the deposit
requirements of the intermediaries – the lower the deposit required, the lower interest
received. For example, if the requirements were 5 per cent, this would equate to just under
$300,000.
The higher level of interest revenue would more than cover the cost of establishing a
regulatory agency. It would, however, represent a re-distribution away from those that
currently benefit from that interest.
Given the scale of this offset estimate, we would suggest that it be examined further by the
Department. Areas for further investigation should include:

further precision on the relationship between the value of transactions and the
settlement period - if higher value trades tend to take longer to settle, then the
interest amount could be higher, and vice versa, and

the tax treatment of any interest accrual, and particularly if this amount is intended
to be used to offset costs incurred elsewhere.
Using existing government functions
Rather than creating new agencies, functions could be given to existing agencies. For
example, at the Commonwealth level, it may be that a body such as the National
Occupational Licensing Authority is tasked with also regulating water intermediaries. The
'Commonwealth/State' model that we have set out in this report effectively describes a body
much like NOLA at the Commonwealth level anyway (although our costing is based on it
being a new body).
46 Within the Murray-Darling Basin, 90 per cent of entitlement trades are required to be completed within 20 business days. Some
jurisdictions’ performance is better than this target, while others have worse performance, however the overall average time for
the trades is less than 20 business days. W e have used an average processing time of 20 days which equates to around
14/15 working days which is similar to the average for the jurisdictions.
National W ater Commission (2010), Australian Water Markets Report 2009-10, page 238 -248.
47 This assumption is based on discussions with Departmental staff.
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Costs of options
If (to take the NOLA example) that body were tasked with providing policy and coordination
around the regulation of water intermediaries (but with compliance and enforcement done at
the state level), we would expect this would decrease some costs compared to those
estimated here. For example, there could be fewer costs associated with:

the Board and CEO (given NOLA would already have governance arrangements in
place there could conceivably be no additional costs here) - if there were no
additional costs associated with the Board and CEO, then this would save options 1,
2 and 3 (both Commonwealth, and Commonwealth/State models) $262,500 in
terms of establishment costs, and $525,000 in ongoing annual costs

developing legislation (given how much work has been done in respect of regulating
other occupations already coming under the National Occupational Licensing
System) – given the significant uncertainty around how many staff would be
required to develop legislation in the first instance and the fact that a range is used
in the body of this report, it is difficult to predict the extent of any savings here with
confidence

the minimum necessary permanent staff (given some of these would already be in
place, although it may be that adding another occupation necessitates additional staff
on an ongoing basis) – if, for example, there was no need to employ a corporate
services manager, IT/finance support, or a PA/project support, this would save
options 1, 2, and 3 (both Commonwealth and Commonwealth/State models)
$108,391 in terms of establishment costs, and $318,429 in ongoing annual costs.
The table below shows the impact of these savings on the cost estimates provided above.
Table 254: Summary of total costs ($m) using existing government functions
Commonwealth
Commonwealth/State
Establishment
Ongoing annual
Establishment
Ongoing annual
Option 1
$1.301 - $1.744
$1.345
$1.850 - $2.841
$1.208
Option 2
$1.684 - $2.206
$1.511
$2.232 - $3.303
$1.356
Option 3
$1.997 - $2.598
$3.026
$2.509 - $3.659
$2.907
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Benefits of options
6
Benefits of options
For the purpose of this analysis, benefits are discussed in qualitative terms.
Option 1: Baseline statutory requirements
The baseline ‘package’ of statutory, mandatory requirements for water intermediaries
incorporates mandatory trust accounts, mandatory holding of professional indemnity
insurance, and mandatory disclosure of conflicts of interest.
Mandatory trust accounts may help to protect clients against losses in the event that an
intermediary becomes insolvent, and may deter theft and fraud by intermediaries. Trust
accounts do so by imposing a range of restrictions and safeguards around monies provided
by clients to intermediaries.
Professional indemnity insurance is designed to protect the insured (which in this case
would be intermediaries) against certain risks – it is not designed to protect consumers and
it is not a guarantee that compensation will be paid. Professional indemnity insurance is a
way of reinforcing a licensee’s ability to meet any consumer losses caused by negligence or a
breach of a duty by the licensee or its representatives by making funds available to the
licensee under the terms of the insurance policy. Consumers generally have no direct right of
access to these insurance policies.
Requiring intermediaries to disclose conflicts of interest better informs consumers and
allows consumers to judge whether such conflicts are significant enough so as to influence
the service they receive from the intermediary. Consumers can either proceed with an
intermediary despite a conflict of interest, or choose another where no such conflict exists.
More broadly, a requirement to disclose could influence the behaviour of intermediaries.
That is, intermediaries may reduce the extent to which they take on clients that would trigger
an actual or perceived conflict.
Options 2: Annual registration
As the annual registration option would incorporate the baseline provisions, the benefits of
option one also apply to this option. There are, however, additional benefits from
registration.
In particular, notifying the regulator of the intention to practice as a water intermediary can
act as a complementary tool to other policy measures. Although it does not directly minimise
problems, it can help facilitate the regulator’s enforcement and compliance role by
providing:

an up to date list of regulated parties and their contact details – this can facilitate
easier identification of an intermediary in the event that a potential or actual breach
of the legislation is identified

a means of prohibiting intermediaries from operating in the market if they breach
the legislation, that is, the risk of deregistration provides added ‘teeth’ to the other,
substantive, legislative requirement.
Option 3: Licensing scheme
Competency requirements
Competency requirements typically seek to address problems around inadequate
information and negative spillovers by increasing the proficiency and competency of licensed
parties. For example:

Consumers may find themselves at an information disadvantage when purchasing
the services of an intermediary because the quality of such services may be hard for
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What would you like to grow?
Benefits of options
the consumer to assess, either before or after they are purchased. This is particularly
the case if services are purchased infrequently.

A transaction between a consumer and their intermediary may cause harm to a third
party, for example if there is a loss of money, or delays in settling the transaction.
More generally, problems may cause both buyers and sellers to lose confidence in
the system that underpins the smooth functioning of the water markets.
Competency requirements can help to reduce the risk of problems occurring to the extent
that such problems are caused by inadequate proficiency or competence.
Participation in an industry fidelity fund
Participation in an industry fidelity fund would provide a means for consumers to be
insulated from losses, whether they are caused by negligence or wrongdoing.
Mandatory contributions to fidelity funds may instil a level of confidence in suppliers (or
intermediaries) as they would provide consumers a means of recovering losses in the event of
misappropriation, theft, incompetency or insolvency by a water intermediary. The existence of
these remedies may make traders feel more comfortable about enlisting the services of a water
intermediary for their water trades.
Option 4: Voluntary accreditation scheme
A voluntary scheme would provide a means of signalling to consumers that the benefits
associated with option 1 are available to those that use the services of accredited
intermediaries. It would be expected to impose fewer costs on industry because participants
could choose whether it was worth voluntarily incurring these costs.
Other considerations
These benefit categories could be considered separately for water allocation trades and water
entitlement trades, as these are two completely different products/markets. For example, the
risk of entitlement trades 'going wrong' through incompetency of misconduct carries a much
larger financial damage cost than an allocation trade. However, the risk to the industry in
loss of confidence or information provided to consumers can cause equal damage to the both
products in the industry. The risk of an entitlement trade going wrong may be overstated to
the extent that these trades are now facilitated by solicitors, all of which have trust accounts
and professional indemnity insurance.
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What would you like to grow?
Appendices
Appendix A
Glossary of key terminology and concepts
46
Appendix B
Requirements in comparative industries
48
Appendix C
Estimated establishment costs for the National Legal
Services Board
69
Detailed costings
72
Appendix D
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Appendices
Appendix A
Glossary of key terminology and
concepts
Term
Definition
Best practice
guidelines
Best practice guidelines in the case of regulation govern the process by which
decisions are made as to whether - and how - to best identify and implement
regulation.
Code of
Conduct
A code of conduct is a set of rules governing the activity of a sector or group of
businesses. When adopted voluntarily by an industry, codes of conduct are typically
seen as alternatives to regulation.
Fidelity Fund
A fund for the purpose of compensating consumers that suffer financial loss in the
event of their agent’s wrongdoing/dishonesty
Licensing
Licences, permits and registrations are among the most pervasive instruments of
business regulation. These instruments are created under government authority
and are used by governments to exercise their regulatory functions more effectively,
and provide a ‘gatekeeper’ function for approved licence applicants to conduct their
affairs within the context of the legal framework. Licences, permits and
registrations can be applicable for general business operations as well as specific
business activities.
Licences and permits can be issued by governments, industry associations (under
co-regulation) or by private certifiers authorised by law. Licensing typically involves
meeting minimum requirements which are not necessarily uniform between
business types and jurisdictions. Therefore, the burdens imposed can reflect
differences in the circumstances of individual businesses. Registrations, on the
other hand, can be implemented to reduce the costs of identifying and locating
48
businesses, and are not activity related.
Professional
Indemnity
Insurance
A contract of insurance between the insurer and insured whereby a pool of funds is
available to the insured to meet the financial consequences of a breach of his or her
professional duty, which includes acts or omissions of professional negligence
Registration
Registration (of, for example, businesses) can encompass a number of procedures
that depend, among other factors, on the legal structure and nature of a business.
Most jurisdictions require a registration as a condition of starting a business
operation in general or operating in a particular area of business activities.
Examples of the former are registrations related to establishing a business identity
and registering for taxes. Examples of the latter relate to obtaining a licence or
permit to operate in a particular business or an industry.
Standard
48
49
For regulators, business registration can provide:
 Knowledge about the ownership and location of businesses, and the nature
of the business activity (for example, the sale of food or provision of
building services). This knowledge facilitates the targeting and
enforcement of regulatory activities applicable to those registered
businesses (for example, food safety inspections).
 A mechanism for ensuring compliance with regulations that might apply
to the business (via the threat of cancellation of registration or nonrenewal of registration).
 Registration fees to recover the cost of regulatory activities and
49
oversight.
Compulsory product and service standards can take three forms:
 information provision standards, which seek to ensure that a minimum
Bureau of Industry Economics (1996), Business Licences: International benchmarking, June 1996
Productivity Commission (2008), Performance Benchmarking of Australian Business Regulations: Cost of Business Regulations,
February 2006
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What would you like to grow?
Appendices
Trust Account
level of information about a product or service is disclosed to potential
buyers

product/service quality standards, which seek to ensure that only
products/services which meet certain minimum technical criteria are
provided in the market, and

product/service compatibility standards, which seek to ensure an
operational interface between two or more products or services (e.g.
voltage requirements for electrical appliances, common terminology in
occupational services).
A trust account holds (and is designed to protect) money provided by a consumer to
their agent, until the agent has paid relevant expenditures on behalf of the
consumer or the consumer has received the service being sought.
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What would you like to grow?
Appendices
Appendix B
Requirements in comparative
industries
In Stage 1 of this work, a review was undertaken of the characteristics and regulatory
requirements of other relevant industries, including:

the legal profession

real estate agents

the financial services sector

stock and station agents.
The review identified the legislative requirements and policy instruments that have been
adopted by each of these professional service industries. Particular attention is paid to the
use of trust accounts, professional indemnity insurance and/or fidelity funds.
The stage 1 report examined a cross-section of regulatory arrangements between a sample of
States and Territories, where these requirements vary jurisdictionally. The objective was to
provide an understanding of the type and nature of regulatory arrangements applied in other
’comparable’ sectors, for subsequent examination as to the costs of applying similar
mechanisms to the water market intermediary sector. The objective was to give a feel for the
types of requirements imposed that are the focus of this report, rather than to provide a
detailed analysis of every jurisdiction’s regulatory regime. We are not aware of any reasons
why the costs of a particular option (examined in this report) would vary jurisdictionally.
Legal profession
Legal services are categorised into the following sub-industries:

barristers

legal aid commissions

community legal centres

aboriginal legal services

government solicitors

public prosecutors

other legal services.50
The primary activities of the legal profession are:

advocate services

barrister services

conveyancing services

legal aid services

notary services

patent attorney services
50 Australian Bureau of Statistics (2008), Cat No. 8667.0 Legal Services, Australia (2007-08)
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Appendices

solicitor services.51
IBISWorld estimated that in 2010-11 there were 17,220 legal profession establishments,
employing 126,416 people. In the same period, the legal profession generated approximately
$23 billion of revenue.
New South Wales accounts for an estimated 41 per cent of legal services enterprises and 37
per cent of solicitor practices in Australia. Victoria is estimated to account for 26 per cent of
total legal services enterprises, higher than its population share (24 per cent). Queensland
accounts for an estimated 16 per cent of Australian legal service businesses, including
approximately 13 per cent of solicitor practices.
Form of regulation
The primary purpose of the regulation of lawyers is to abate or control risks. In terms of the
legal profession, regulatory risks include:

that persons not appropriately qualified and authorised to do so, provide legal
services to Australian consumers

that persons, although appropriately authorised to provide legal services, fail to meet
standards consistent with the expectations of the Australian community when
providing those legal services.
Regulation also exists to facilitate social and economic outcomes. In terms of the provision of
legal services, such regulatory outcomes include:

adequately protecting or compensating consumers when legal services provided to
them fall short of standards for consumer protection

promoting the efficient and effective administration of justice and maintaining
public confidence in the justice system

promoting healthy competition within the legal services market.
National Legal Profession Reform
In 2009, the Council of Australian Governments (COAG) agreed that work needs to be done
to nationalise regulation of the legal profession in Australia. The regulation of the legal
profession was seen as overly complex and inconsistent as a result of each State and
Territory applying different sets of rules.
The National Legal Profession Reform Taskforce was established to prepare draft legislation
to regulate the legal profession uniformly across Australia. To progress the current
regulatory reform agenda, COAG agreed in principle to settle reforms to legal profession
regulation by May 2011 (with the exception of Western Australia and South Australia). Until
that time, the jurisdictional requirements will remain in operation, and are discussed below.
General obligations
Except in certain specified circumstances, a person must not engage in legal practise unless
they are an Australian legal practitioner, i.e. the holder of a local or interstate practising
certificate. Practitioners are also generally required to:

maintain appropriate professional indemnity insurance

contribute to a fidelity fund
51 IBISW orld (2011), Industry Report: Legal Services in Australia, February 2011.
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What would you like to grow?
Appendices

comply with the relevant Act, its regulations and any applicable legal profession
rules.
Professional indemnity insurance
Legal practitioners have a strong personal and financial interest in ensuring that they hold
adequate professional indemnity insurance. There is also a significant public policy interest
in legal practitioners holding adequate professional indemnity insurance, to ensure that the
users of legal services are compensated for losses they suffer as a result of a breach of a legal
practitioner’s professional duty.
Legal practitioners are required to obtain and maintain a minimum level of professional
indemnity insurance (known as the ‘compulsory layer’). In addition many law practices
obtain additional levels of coverage over and above the compulsory layer (known as ‘top-up
insurance’).
Table 26: Current requirements for professional indemnity insurance for the legal
profession
State
NSW52
Victoria53
Queensland54
Primary
legislation
The Legal Profession Act
2004 requires insurable
solicitors to have the
benefit of an approved
professional indemnity
insurance policy.
Legal Profession Act
2007 requires every law
practice in Queensland
hold professional
indemnity insurance.
Approved
policy
provider
The approved policy is
available from LawCover
Pty Ltd. Although the
Law Society of New
South Wales is
responsible for
appointing the members
of LawCover’s Board, the
activities of LawCover are
not controlled by the Law
Society. It operates
independently to provide
a fully confidential
service to solicitors.
The minimum level of
compulsory cover is $2
million per law practice.
The Legal Profession
Act 2004 requires law
practices to obtain
professional indemnity
insurance before
commencing to engage
in legal practice in
Victoria.
Professional indemnity
insurance must be held
with the Legal
Practitioners Liability
Committee (LPLC),
unless an exemption
from holding insurance
with the LPLC is granted
by the Board.
An Australian legal
practitioner who intends
to engage in legal
practice in Victoria,
before commencing to
practise as such is
required to maintain
professional indemnity
insurance for the
primary layer of $2
million with the Legal
Practitioners' Liability
Committee
Lexon provides cover of
$2 million
Level of cover
Lexon Insurance is a
wholly owned subsidiary
of the Queensland Law
Society and is a captive
insurer providing
professional indemnity
insurance to members of
the Queensland legal
profession.
52 Law Society of NSW (2011), The Law Society of NSW, website: http://www.lawsociety.com.au, accessed June 2011.
53 Legal Services Board (2011), Legal Services Board, website: http://www.lsb.vic.gov.au, accessed June 2011.
54 Queensland Law Society (2011), Queensland Law Society, website: http://www.qls.com.au, accessed June 2011.
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Appendices
Applicability
and
exclusions
The cover includes broad
civil liability cover for
practitioners in private
legal practice and, in
turn, consumers of legal
services, and indemnity
of up to $2 million per
claim inclusive of
defence costs and
claimant’s costs.
The insurance must
cover civil liability of the
law practice and each
person who is or was a
principal or an employee
of the law practice, in
connection with the
practice’s legal practice
and administration of
trusts in Victoria.
Information not publicly
available. Neither Lexon
nor the Queensland Law
Society willing to
disclose this information
to the review team.
Estimated
policy cost
per year55
$10,400 per practitioner
$6,400 per practitioner
$9,500 per practitioner
Fidelity funds
Practising lawyers represent a category of professionals required to hold both professional
indemnity insurance and fidelity cover, seeking to provide protection to clients against
losses, whether they are caused by negligence or wrongdoing. Solicitors hold trust funds as
part of their practice and there is a risk of direct pecuniary loss to a client in the event of a
defalcation.
At present, each jurisdiction has a legislative fund (‘fidelity’ or ‘guarantee’ fund) for the
purpose of compensating people who suffer financial loss in the event of a dishonest failure
to account or the dishonest default by a law practice. The funds receive annual contributions
from practitioners as part of their practising certificate requirements and, in some
jurisdictions, from approved clerks and/or foreign-registered lawyers. In most jurisdictions,
fidelity funds are, or may be, supplemented from other sources such as trust account interest.
The fidelity fund is administered by the law society or regulator in each jurisdiction (e.g. in
Victoria, it is administered by the Legal Services Board).
Table 27: Current requirements in respect of fidelity funds for the legal
profession
State
Who
administers
the fund?
Sources of
funding
Current
contribution per
practitioner per
annum56
Total
contribution per
NSW
Law Society Council
Victoria
Legal Services Board
Contribution which may be
supplemented through a
levy on licensees or from
interest earned on
Statutory Deposits.
$25 - $50
Contributions or
levy on licences and can be
supplemented from
interest earned on
Statutory Deposits.
$80- $325
$335
$1,147,000
$2,311,866
$884,454
Queensland
Law Society
Contributions or
levy on licenses and can be
supplemented from trust
account interest.
55 Merrit, C. (2009), Overhaul of indemnity insurance: PI policies, The Australian, website:
http://www.theaustralian.com.au/business/legal-affairs/overhaul-of-indemnity-insurance-pi-policies/story-e6frg97x1225779300557, accessed June 2011. Direct comparisons with the premiums on offer in other states are complicated by the
fact that all policies are slightly different and have been designed to meet the different risk profiles of solicitors in different states.
56 National Legal Profession Reform (2009), Consultative Group Paper on Fidelity Cover, Attachment A
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Appendices
jurisdiction
(2007-08)57
What does the
fund cover?
Caps on
compensation
payments
The specific sum lost as a
result of the dishonesty,
interest, and reasonable
costs of the new solicitor.
$1 million for all claims
against a particular
solicitor or firm.
$1,000 for each dishonest
default.
Process by
which claims are
assessed and
compensation
determined
Claims must be made in
writing to the Law Society
Council. The Fidelity Fund
Management Committee
assesses claims and
determines compensation.
Amount of actual
pecuniary loss suffered
from the default,
reasonable legal costs for
making and proving the
claim, and interest.
The maximum amount a
person can claim in
relation to a default is the
amount of actual
pecuniary loss suffered
from the default.
Pecuniary loss resulting from
the default, reasonable legal
costs involved in making and
proving the claim, and
interest.
Claims are assessed and
determined by the Legal
Services Board. The Board
may require a claimant to
produce or deliver any
security, document or
statements of evidence
necessary or available to
support a claim, enable the
Board to exercise its rights
or commence criminal
proceedings against the
person who committed the
default.
Claim assessed by the Law
Society. Decision on
compensation amount made
by Committee of
Management.
$200,000 for a single claim.
$2 million for all claims made
in relation to a single law
practice.
Payments of successful claims in relation to failure to account and dishonest default may be
subject to caps (maximum aggregate amounts) determined from time to time pursuant to
relevant sections of the jurisdiction’s legal profession legislation. In some jurisdictions, there
is a discretion (vested in the Attorney-General, for example) to make payments over and
above the set cap.
The National Legal Profession Reform Taskforce proposes to recommend to the COAG that
the National Legal Services Board or relevant regulatory authorities consider establishing a
single, national fidelity fund. A single, national fund would provide uniform cover and
uniform remedies, regardless of location. The pooling of funds could also allow for a higher
cap, or no cap at all, on the quantum of compensation.
The Taskforce considers that a single, national fund is an appropriate long term goal.
However, it recognises that its establishment would involve a major restructure of existing
statutory accounts and could disrupt existing funding flows. The Taskforce therefore
proposes to retain the existing fidelity fund in each jurisdiction at this stage. Under the
national regulatory framework, each practitioner would contribute to his/her home
jurisdiction’s fund, regardless of whether the practitioner’s law practice operates in one or
multiple jurisdictions. The home jurisdiction of a practitioner would be the practitioner’s
primary place of legal practice, as evidenced by the practitioner’s practicing certificate.
Trust account requirements
A law practice that receives trust money is required to establish and maintain a statutory
trust account at an Authorised Deposit-taking Institution. In most jurisdictions, a law
practice that maintains a statutory trust account is also required to transfer a proportion of
that statutory trust money either directly to a statutory deposit account or to a regulatory
authority. This money may be reclaimed by the law practice on an at-call basis.
57 National Legal Profession Reform (2009), Consultative Group Paper on Fidelity Cover, Attachment A
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Interest that accrues to statutory trust accounts maintained by law practices, as well as on
statutory deposit accounts maintained by regulators is paid to the relevant regulatory
authority in each jurisdiction.
Each jurisdiction has specific requirements for trust accounts. Until the National Legal
Profession Reform is in place, these jurisdictional requirements continue to apply.
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Table 28: Current trust account requirements for the legal profession
State
NSW58
Victoria59
Queensland60
Overview
Under the Legal Profession
Act 2004, law practices must
comply with requirements
concerning the receipt,
holding and disbursement of
trust money.
The Legal Profession
Regulations 2005 set out how
to operate a trust account,
including requirements in
relation to the keeping of trust
records.
How trust
accounts
are
managed
Under the Legal Profession
Act 2004, the Law Society of
NSW must maintain a
‘statutory deposit’ account at
an authorised deposit-taking
institution.
The Legal Services Board has
made arrangements with the
approved deposit-taking
institutions to provide
solicitors’ trust accounts.
The Legal Profession Act 2007
includes reform in the
handling of trust money
entrusted to a law practice.
Pursuant to the Legal
Profession Act a law practice
can only keep a trust account
with an authorised deposittaking institution approved by
the Queensland Law Society.
When a law practice opens a
trust account, the law practice
must establish a statutory trust
account in Queensland with an
approved authorised deposittaking institution.
Who keeps
interest
earnings
Deficiency
in trust
accounts
Other
matters
There are various institutions
are approved to hold
statutory trust accounts in
New South Wales including
major and small banks,
credit unions and building
societies.
Law practices must deposit
an amount from their
statutory trust accounts into
the Law Society’s statutory
deposit account each year.
Any interest received on
statutory deposit
investments must be placed
into the Public Purpose
Fund, which is used to
support services to the
community, such as the Pro
Bono Referral Scheme.
Section 262 of the Act
prohibits a law practice from
causing a deficiency in any
trust account or trust ledger
account without reasonable
excuse.
The Law Society holds the
money deposited in trust for
law practices and must repay
it on demand. Until repaid,
the money in the statutory
deposit account may be
invested by the Law Society.
These banks must report daily
to the Legal Services Board on
the total deposits, withdrawals
and the balance of all trust
accounts.
Licensed legal professionals
are required to report on trust
trial balances, reconciliation
statements and trust account
statements.
The interest earned on
solicitors’ trust accounts is
paid into the Public Purpose
Fund, administered by the
Legal Services Board.
Interested earned on trust
moneys must be deposited into
the Attorney-General’s Special
Deposit accounts which is then
used for various purposes.
An Australian legal
practitioner or an approved
clerk is guilty of an offence if
he or she without reasonable
excuse, causes a deficiency in
any trust account or trust
ledger account or a failure to
pay or deliver any trust money.
All approved banks have agree
not to charge administrative or
account keeping fees; however
they do charge fees for regular
transitions and ad hoc
services.
An Australian legal
practitioner must not, without
reasonable excuse, cause a
deficiency in any trust account
or trust ledger account or a
failure to pay or deliver any
trust money
Accounting and all matters
relating to trust moneys must
be kept by the law practice for
at least seven years after the
last entry into the trust records
or after the finalisation of the
matter.
58 Law Society of NSW (2011), The Law Society of NSW , website: http://www.lawsociety.com.au, accessed June 2011
59 Legal Services Board (2011), Legal Services Board, website: http://www.lsb.vic.gov.au, accessed June 2011
60 Queensland Law Society (2011), Queensland Law Society, website: http://www.qls.com.au, accessed June 2011
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How
regularly
they are
audited
Limitations
on use of
funds
Protections
from
creditors
during
receivership
Reporting
requiremen
ts
Costs
associated
with trust
accounts
A law practice is required to
have its trust records
externally examined once in
each financial year if it has
received or held trust money.
A law practice must hold
trust money deposited in a
statutory trust account of the
practice exclusively for the
person on whose behalf it is
received, and disburse the
trust money only in
accordance with a direction
given by the person.
Money standing to the credit
of a trust account maintained
by a law practice is not
available for the payment of
debts of the practice or any
of its associates, nor is it
liable to be attached or taken
in execution for satisfying a
judgment against the
practice or any of its
associates.
The Legal Profession
Regulation 2005 requires a
number of notifications to
the Law Society Council
including the opening and
closing of accounts, external
examiners and authorised
signatories.
Law practices and approved
clerks who are required to
keep trust records must have
those records examined by an
approved external examiner n
each audit year.
Trust money must not be
dispersed without client
authority.
Each law practice that received
or held trust money during a
year is required to lodge with
the Law Society an external
examination report.
Money kept in a trust account
is protected from creditors
during receivership.
Money standing to the credit
of a trust account kept by a law
practice is not available for the
payment of debts of the
practice or any of its
associates, nor is it liable to be
attached or taken in execution
for satisfying a judgment
against the practice or any of
its associates.
Law practices must lodge a
Statement of Trust Money with
their approved external
examiner and the Legal
Services Board each year.
Each law practice that received
or held trust money during a
year is required to lodge
an external examination report
with the Law Society.
The examiner must then
prepare an examination report
and certificate, together with a
certified and signed copy of the
statement of trust money. The
practice must then lodge the
report of the external
examination with the Legal
Services Board.
Licensees are also required to
notify the Queensland Law
Society when opening and
closing accounts.
Trust money must not be
dispersed without client
authority.
Licensees are also required to
notify the Legal Services Board
when opening and closing
accounts.
In general there is little publicly available information about the costs associated with trust
accounts (over and above specific fees charged by authorised deposit taking institutions). One
report found – based on stakeholder consultations – that the cost of managing trust accounts for
firms ranges from $1 million (for large firms assumed to have more than one trust account) to
$25,000 (for small firms assumed to have only one trust account). For firms with more than one
trust account, the cost of managing trust accounts decreases by a quarter (25 per cent)
irrespective of the number of trust accounts they previously were required to hold.61
In terms of the cost to regulators, based on information provided by a large jurisdiction, it costs
approximately $960 to inspect each trust account.62
61 ACIL Tasman (2010), Cost Benefit Analysis of Proposed Reforms to National Legal Profession Regulation, March 2010, page
22
62 ACIL Tasman (2010), Cost Benefit Analysis of Proposed Reforms to National Legal Profession Regulation, March 2010, page
23
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Real estate agents
Real estate agents perform a range of functions, including:

acting on behalf of owners, buyers and tenants to arrange the sale or lease of
property including houses, buildings, factories, shops, farms, land and businesses

providing market appraisals of properties and businesses for clients

negotiating the sale or lease of properties and businesses

preparing agreements between buyers and sellers or landlords and tenants

collecting rents and managing rented properties.
IBISWorld estimates that of the 12,309 real estate agents in Australia in 2010, the majority
of establishments (82 per cent) are located in New South Wales, Victoria and Queensland. In
2010-11, real estate agents generated $8.9 billion in revenue and employed 70,342 people.63
Form of regulation
National Occupational Licensing System
In July 2008, COAG agreed to the development of a national trade licensing system for a
range of occupations, effectively aiming for nationally uniform requirements for obtaining a
licence.
The Occupational Licensing National Law Act 2010 (the National Law) was passed by
Victoria’s Parliament as host jurisdiction in September 2010, and has so far been applied in
Queensland and New South Wales. It is expected that other jurisdictions will pass the
legislation by early 2011. ‘Property agents’ are one of the first four occupation areas that will
be introduced into the National Occupational Licensing System (scheduled for July 2012).
Until then the various jurisdictional requirements apply (and it is a selection of these that are
discussed in more detail below).
The licensing process provides a screen for assessing the suitability of potential applicants
wishing to engage in work as an estate agent. In doing so, the licensing regime helps
overcome the constraints (and hence, social costs) that could otherwise be faced by
consumers due to the significant degree of information asymmetry that potentially exists
between consumers and estate agents. This raises potential for consumers to experience
problems due to the incompetence or impropriety of estate agents. Problems may also arise
because the costs for consumers to locate a competent estate agent with the appropriate
skills and experience may be significant. This can result in consumers abandoning the search
or making a sub-optimal decision.
The Standing Committee of Officials of Consumer Affairs (SCOCA) has been asked to
undertake work to progress harmonisation of specific conduct requirements for property
occupations in relation to: trust accounting, commissions, agency agreements and
auctions.64
63 IBISW orld (2011), Industry Report: Real Estate Agents in Australia, February 2011
64 National Occupational Licensing Authority (2011), National Occupational Licensing System, website: http://nola.gov.au/otherreforms, accessed June 2011
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Professional indemnity insurance
In most jurisdictions across Australia, estate agents are not required to hold professional
indemnity insurance.
In Victoria and Queensland, licensed real estate agencies and their representatives are not
required to hold professional indemnity insurance; however, professional indemnity
insurance cover is used as a way to differentiate agents (for example, members of the Real
Estate Institute of Victoria must hold professional indemnity insurance).
In New South Wales, the Property, Stock and Business Agents Act 2002 provides for the
introduction of mandatory professional indemnity insurance cover as a condition of holding
a licence. According to Fair Trading, however, given the current climate in the insurance
market, the implementation of mandatory professional indemnity insurance requirements
has been deferred for the time being.
In Tasmania, Section 142 of the Property Agents and Land Transactions Act 2005 provides
that real estate agents and general auctioneers must maintain insurance cover in the form of
professional indemnity insurance. The Property Agents Board has determined that the level
of professional indemnity insurance cover for real estate agents and property managers is
$500,000 and for general auctioneers is $250,000.65
Fidelity funds
Most jurisdictions in Australia require real estate agent licensees to contribute to a fidelity
fund.
New South Wales requires licensees to contribute to the Property Services Compensation
Fund. Victoria requires estate agent licensees to contribute to the Victorian Property Fund
under the Estate Agents Act 1980. The Queensland Office of Fair Trading administers a
claim fund for affected consumers. The jurisdictional requirements are set out in Table 29.
Table 29: Current requirements in respect of fidelity funds for real estate agents
State
Who
administers
the fund?
NSW66
The Property Services
Compensation Fund is
administered by NSW
Fair Trading.
Sources of
funding
The Fund consists of any
amounts paid by
licensees by way of levy
under the Act, any
amounts required or
permitted to be paid to
the credit of the
Compensation Fund, any
amounts payable to the
Victoria67
The Victorian Property
Fund is a trust fund
established under
the Estate Agents Act
1980 and administered by
Consumer Affairs Victoria.
Income for the fund comes
from estate agent licence
fees, fines and interest on
estate agent trust accounts.
Queensland68
A Claim Fund was
established under the
provisions of the Property
Agent and Motor Dealers
Act 2000 administered by
the Office of Fair Trading.
Income for the fund comes
from estate agent licence
fees. The Treasurer may
transfer amounts to the
fund to meet claims against
the fund, or the
remuneration and costs of
a receiver or special
investigator payable from
65 Property Agents Board (2011), Property Agents Board, website: http://www.propertyagentsboard.com.au/professionalindemnity-insurance.htm, accessed June 2011
66 Office of Fair Trading (2011), Fair Trading, website: http://www.fairtrading.nsw.gov.au, accessed June 2011
67 Consumer Affairs Victoria (2011), Consumer Affairs Victoria, website: http://www.consumer.vic.gov.au, accessed June 2011
68 Department of Justice and Attorney-General (2011), Office of Fair Trading, website: http://www.fairtrading.qld.gov.au, accessed
June 2011
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Compensation Fund from
the Statutory Interest
Account, and income
from the investment of
the Compensation Fund.
the fund, for any particular
financial year.
Current
contribution
per
practitioner
per annum
Total
contribution
per jurisdiction
$62 (payable when
applying for a licence, or
renewing a licence)
Estate agent licence fee for
individuals is $363.60 for
an application and $181.80
for an annual renewal.69
Real estate agent licence
fee is $1,091.8070
Information not publicly
available.
Information not publicly
available.
What does the
fund cover?
The Property Services
Compensation Fund was
set up to assist people
who find themselves out
of pocket because an
agent or conveyancer, in
the course of carrying on
the business of a
licensee, has failed to
account for money or
other valuable property
held in trust.
In 2009-10, CAV revenue
from the Victorian
Property Fund equated to
approximately $60 million.
This included $10 million
from interest income and
$3 million from fee
income.71
Individuals or corporations
that suffer monetary loss
because of
misappropriation by a
licensed estate agent, a
licensed conveyancer or an
employee of a licensed
estate agent or licensed
conveyancer can make a
claim.
Caps on
compensation
payments
The amount that a person
may recover from the
Compensation Fund,
cannot, in any case or in
any event, exceed
$500,000.
The claim can cover the full
amount of the client’s
monetary loss.
Process by
which claims
are assessed
and
compensation
determined
Claims must be made in
writing to the DirectorGeneral within 12
months of becoming
aware of the failure to
account, or within 2
Claims are assessed and
compensation determined
by Consumer Affairs
Victoria. Appeal to the
Victorian Civil and
Administrative Tribunal
A customer can make a
claim if they believe a real
estate agent has engaged in
misleading or
unreasonable conduct,
failed to deal properly with
trust money, made false
representations about a
property, failed to provide
written statements about
the purchase of vacant land
that cannot be used for
residential purposes before
they sign the contract,
failed to provide a written
statement identifying the
proposed lot being
purchased, or stole,
misappropriated or
misapplied property
entrusted to an agent for
someone else.
There are three types of
claims in relation to
property or land:
- minor claim ($10 000 or
less)
- major claim (more than
$10 000)
- claim relating to
unreasonable conduct
Written claims are lodged
with the Office of Fair
Trading. Major claims are
referred to the Queensland
Civil and Administrative
Tribunal for
69 Only a proportion of the licence fee amount contributes to the Victorian Property Fund.
70 Only a proportion of the licence fee amount contributes to the Property Claim Fund.
71 Consumer Affairs Victoria (2010), Annual Report 2009–10, page 44
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years of the date the
failure to account took
place, whichever period
ends first.
can be made within three
months of receiving
Consumer Affairs Victoria’s
decision.
determination.
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Trust accounts
New South Wales, Victoria and Queensland require estate agent licensees to hold their
client’s funds in trust accounts. The jurisdictional requirements are set out in Table 30.
Table 30: Current trust account requirements for real estate agents
NSW72
State
Overview
How trust
accounts are
managed
Who keeps
interest
earnings
Deficiency in
trust accounts
Licensees under the Property,
Stock & Business Agents Act
2002 are required to hold
clients’ funds in a trust account
kept at an authorised deposittaking institution in New South
Wales and approved by the
Director General.
Queensland74
Real estate agent licensees
require a trust account if they
receive trust money from
clients for money received with
a direction for use from a
client, money from property
sales (including deposits) and
property rentals, or money
from consignment sales.
The Director General has
Trust accounts must show the Trust accounts must be opened
approved various banks, credit agency’s true position of all
with approved authorised
unions and building societies
money received, held and paid. deposit-taking institutions
as authorised deposit-taking
The Estate Agents (General,
including various banks, credit
institutions for the purposes of Accounts and Audit)
unions and building societies.
holding licensed agents’ trust
Regulations 2008 set out the
funds.
required accounting
documents, procedures and
details to be kept.
Interest is paid to the
Interest earned from trust
Interest earned from trust
Director-General for
accounts is contributed to the accounts is contributed to the
crediting to the Statutory
Victorian Property Fund.
Property Claim Fund.
Interest Account.
The Director-General may
A principal agent, or officer in Deficient trust accounts can
freeze licensee's trust if they
effective control or auditor
lead to the immediate
have, or may have, stolen,
must notify Consumer Affairs suspension and cancellation
misappropriated or
Victoria within three business of registration certificates.
misapplied trust money.
days of becoming aware of a
deficiency in their trust
account
Annually
How regularly
they are audited
Limitations on
use of funds
Victoria73
Money received for or on
behalf of any person by a
licensee is to be held by the
licensee exclusively for that
An estate agency must have a
trust account in an
authorised financial
institution before any trust
money is received, such as a
sales deposit, rent or money
paid in advance by a client for
advertising or maintenance.
Deficiencies that do not need
to be reported are those that
are caused by an error by an
authorised financial
institution or which can be
corrected within two business
days of becoming aware of
the deficiency.
Trust accounts must be
audited by an approved
auditor annually.
Trust accounts must be
audited by an approved
auditor annually.
All trust money must be held in Trust money cannot be
a trust account in an
dispersed without the client’s
authority.
authorised financial
institution. It must be paid into
72 Office of Fair Trading (2011), Fair Trading, website: http://www.fairtrading.nsw.gov.au, accessed June 2011
73 Consumer Affairs Victoria (2011), Consumer Affairs Victoria, website: http://www.consumer.vic.gov.au, accessed June 2011
74 Department of Justice and Attorney-General (2011), Office of Fair Trading, website: http://www.fairtrading.qld.gov.au, accessed
June 2011
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person, and is to be paid to
the person or disbursed as
the person directs, and until
so paid or disbursed is to be
paid into and retained in a
trust account at an authorised
deposit-taking institution in
New South Wales and
approved by the DirectorGeneral.
Protections
from creditors
during
receivership
Reporting
requirements
Costs associated
with trust
accounts
that account within one
business day of it being
received, or three business
days if the agency is more than
16 kilometres from an
authorised financial
institution.
An agent’s representative who
receives trust money must
immediately pay it either into
the trust account or to their
principal agent or officer in
effective control.
Trust money is not available
Trust money is not available
for the payment of the debts of for the payment of the debts
of the estate agent licensee.
the licensee to any other
creditor of the licensee, or
liable to be attached or taken in
execution under the order or
process of any court at the
instance of any other creditor
of the licensee.
Licensees must submit an
Licensees must submit an
audit of their trust account to audit of their trust account to
Consumer Affairs Victoria if
the Director-General if they
they received or held trust
received or held trust money
money during the financial
during the financial year.
year.
No specific cost estimates
No specific estimates
contained in the regulatory
identified.
impact statement on the
Regulation, however a
submission from the Property
Council to the regulatory
impact statement referred to
one property firm that spent
between $200,000 and
$300,000 nationally to comply
with requirements in respect of
cheques/receipts,
collecting/banking rents, and
trust accounts.75
Trust money is not available
for the payment of the debts
of the estate agent licensee.
Licensees must submit an
audit of their trust account to
the Office of Fair Trading if
they received or held trust
money during the financial
year.
It was previously estimated
that it cost Queensland real
estate agencies $168,930 in
total per annum to establish a
trust account, and
$37,850,829 per annum in
total for established agencies
to operate trust accounts. In
the absence of any other
information, if it is assumed
for illustrative purposes that
there are approximately 500
new agencies established
each year, this equates to
$337 for each to establish a
trust account. In relation to
established businesses, in
December 2007 there were
6,751 principal real estate
licence holders; however this
figure does not equate to the
number of agencies as there
can be multiple principal
licence holders at an agency.
Assuming, on average, each
agency has three principal
licence holders, then the cost
of operating a trust account
75 Property Council of Australia (2003), Submission on the Regulatory Impact Statement for the Draft Property, Stock and
Business Agents Regulations
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equates to $16,822 per
agency per annum.76
76 Queensland Government - Service Delivery and Performance Commission (2008), Report on the Review of Regulatory Reform
(Phase 2) - Property Agents and Motor Dealers Act 2000, March 2008.
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Financial services
The Corporations Act 2001 requires those who carry on a business of providing financial
services to hold an Australian Financial Services (AFS) licence. The Australian Securities and
Investments Commission is responsible for administering the Corporations Act.
An AFS licence authorises representatives to provide financial services to clients such as:

provide financial product advice

deal in a financial product

make a market for a financial product

operate a registered scheme

provide a custodial or depository service

provide traditional trustee company services.77
In 2010-11 the financial services industry generated approximately $179 billion of revenue.
The industry employed over 200,000 people in more than 36,100 establishments. The
importance of the industry is expected to increase, driven by growing household wealth,
increasing funds under management, and the provision of an increasing array of financial
services and products.78
Form of regulation
General obligations
AFS licensees have obligations under the Corporations Act requiring them to:

operate their business efficiently, honestly and fairly

maintain the organisational competence to provide the financial services covered by
their licence

ensure their representatives are competent and adequately trained to provide the
financial services

have adequate financial, technological and human resources to provide the financial
services

have risk management systems

have arrangements in place for managing conflicts of interest

have dispute resolution systems and compensation arrangements for retail clients

comply with the financial services laws and ensure their representatives comply with
them

comply with the conditions on their AFS licence.79
77 Australian Securities and Investments Commission (2009), ASIC Regulatory Guide 126: Compensation and insurance
arrangements for AFS Licensees, October 2009
78 IBISW orld (2011), Industry Report: Finance in Australia, March 2011
79 Australian Securities and Investments Commission (2010), ASIC Regulatory Guide 1: AFS Licensing Kit; Part 1 – applying for
and varying an AFS licence, May 2010
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Professional indemnity insurance
Professional indemnity insurance is designed to protect the insured (e.g. the licensee) against
certain risks; it is not designed to protect consumers and is not a guarantee that
compensation will be paid. Professional indemnity insurance is a way of reinforcing a
licensee’s ability to meet any consumer losses caused by negligence or a breach of duty by the
licensee or its representatives by making funds available to the licensee under the terms of
the insurance policy. Consumers generally have no direct right of access to these insurance
policies.
The Corporations Regulations require:

AFS licensees to have professional indemnity insurance that is adequate, having
regard to certain factors of their business and potential liability

the Australian Securities and Investments Commission to assess applications for
alternative arrangements against the same factors.80
Table 31: Current requirements for professional indemnity insurance for AFS
licensees
Commonwealth Requirements
Primary legislation
Corporations Act 2001
Approved policy
Unspecified.
provider
Level of cover
According to the Australian Securities and Investments Commission, to be
adequate, a professional indemnity insurance policy must have a limit of at
least $2 million for any one claim and in aggregate, for licensees with total
revenue from financial services provided to retail clients of $2 million or less.
For licensees with total revenue from financial services provided to retail
clients greater than $2 million, minimum cover should be approximately equal
to actual or expected revenue from financial services provided to retail clients
(up to a maximum limit of $20 million).
In 2007, approximately 21% of licensees had an indemnity level between $1
million and $1.9 million, 25% between $2 million and $4.9 million and 25%
between $5 million and $9.9 million.81
Applicability and
exclusions
Estimated policy
costs
Losses caused by negligent, fraudulent or dishonest conduct that amounts to a
breach of the Act and gives rise to liability to retail clients must be covered.
In 2007, of the AFS licensees that had PI insurance, approximately 51% had
premiums of greater than $25,000, 13% between $15,000 and $25,000 and
22% between $5,000 and $15,000.82
Fidelity funds
The Australian Securities and Investments Commission has advised that AFS licensees are
not required to contribute to a fidelity fund.
80 Australian Securities and Investments Commission (2009), ASIC Regulatory Guide 126: Compensation and insurance
arrangements for AFS Licensees, October 2009
81 Australian Securities and Investments Commission (2007), Regulation Impact Statement for Compensation and insurance
arrangements for AFS licensees, November 2007, page 9
82 Australian Securities and Investments Commission (2007), Regulation Impact Statement for Compensation and insurance
arrangements for AFS licensees, November 2007, page 9
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Trust accounts
The Australian Securities and Investments Commission has advised that AFS licensees are
not required to have trust accounts. However, if they do hold monies on trust, certain
requirements apply.83
Stock and station agents
Stock and station agents provide a support service to the agricultural community. They
advise and represent farmers and graziers in business transactions that involve livestock,
wool, fertiliser, rural property and equipment and merchandise on behalf of their clients.
The primary activities of the stock and station agents industry are:

agricultural chemicals wholesaling

veterinary drugs wholesaling

feed wholesaling

fence material wholesaling (except timber)

leather and hides wholesaling

livestock wholesaling

nursery stock and orchard supplies wholesaling

seeds, farm or garden, wholesaling

tallow wholesaling

vegetable oil meal wholesaling.84
Most operators are based in the eastern seaboard states. Together, New South Wales,
Victoria and Queensland account for 77 per cent of total industry entities. New South Wales
has the highest concentration of industry players at 32 per cent. Victoria and Queensland
account for 20 per cent and 24 per cent of operators respectively. Western Australia and
South Australia’s share of industry establishments has been growing. In 2009-10 they are
estimated to account for 10 per cent and nine per cent respectively.85
Not surprisingly, the majority of industry participants are situated in rural areas. Stock and
station agents typically are located near livestock sale yards. As a rule, most wholesalers,
especially stock and station agents are located in close proximity to their pool of customers
as demand is generated by personal contact to a significant degree.
Form of regulation
This analysis is based on the licensing requirements of ‘stock and station agents’ in New
South Wales.
83 Australian Securities and Investments Commission (2010) ASIC Regulatory Guide 166: Licensing: Financial Requirements, May
2010
84 IBISW orld (2010) Industry Report: Livestock and Other Farm Supplies Wholesaling in Australia, November 2010
85 IBISW orld (2010) Industry Report: Livestock and Other Farm Supplies Wholesaling in Australia, November 2010
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Appendices
The Property, Stock and Business Agents Act 2002 requires anyone who wishes to carry on
business as one of the following, to have a licence:

real estate agent

stock and station agent

business agent

strata/community managing agent, or

on-site residential property manager.
The Act defines a stock and station agent as any person (whether or not the person carries on
any other business) who, for reward (whether monetary or otherwise), carries on business as
an auctioneer of rural land or livestock or as an agent for:
a) performing the functions of a real estate agent in relation to rural land
b) a livestock transaction (the purchase, sale or other disposal of livestock, whether or
not an auction is involved)
c)
inducing or attempting to induce or negotiating with a view to inducing any person
to enter into, or to make or accept an offer to enter into, a livestock transaction or a
contract for a livestock transaction, or
d) providing agistment for livestock or collecting of fees for the agistment of livestock.
Professional indemnity insurance
In New South Wales, there is no requirement for stock and station agent licensees to hold
professional indemnity insurance.
Fidelity funds
New South Wales requires stock and station agent licensees to contribute to the Property
Services Compensation Fund.
Table 32: Current requirements for fidelity cover for stock and station agents in
NSW
New South Wales Requirements86
The Property Services Compensation Fund is administered by NSW Fair
Who administers
the fund?
Trading.
Sources of funding
The Property Services Compensation Fund consists of any amounts paid by
licensees by way of levy under the Act, any amounts required or permitted to be
paid to the credit of the Compensation Fund, any amounts payable to the
Compensation Fund from the Statutory Interest Account, and income from the
investment of the Compensation Fund.
Current
$62 (payable when applying for a licence, or renewing/restoring a licence)
contribution per
practitioner per
annum
Total contribution
Information is not publicly available.
per jurisdiction
86 Office of Fair Trading (2011), Fair Trading, website: http://www.fairtrading.nsw.gov.au, accessed June 2011
Department of Sustainability, Environment, Water, Population and Communities
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Appendices
What does the fund
cover?
Caps on
compensation
payments
Process by which
claims are assessed
and compensation
determined
The Property Services Compensation Fund was set up to assist people who find
themselves out of pocket because an agent or conveyancer, in the course of
carrying on the business of a licensee, has failed to account for money or other
valuable property held in trust.
The amount that a person may recover from the Compensation Fund, cannot,
in any case or in any event, exceed $500,000.
Claims must be made in writing to the Director-General within 12 months of
becoming aware of the failure to account, or within 2 years of the date the
failure to account took place, whichever period ends first.
Trust accounts
New South Wales requires stock and station agent licensees to hold their client’s funds in
trust accounts. The requirements for such trust accounts are set out below.
Table 33: Current trust account requirements for stock and station agents in
NSW
New South Wales Requirements87
Overview
Licensees under the Property, Stock & Business Agents Act 2002 are
required to hold clients’ funds in a trust account kept at an authorised
deposit-taking institution in New South Wales and approved by the Director
General.
How trust accounts
The Director General has approved various banks, credit unions and
are managed
building societies as authorised deposit-taking institutions for the purposes
of holding licensed agents’ trust funds.
Interest is paid to the Director-General for crediting to the Statutory
Who keeps interest
Interest Account.
earnings
Deficiency in trust
The Director-General may freeze licensee's trust if they have, or may have,
accounts
stolen, misappropriated or misapplied trust money.
How regularly they
Annually
are audited
Limitations on use
Money received for or on behalf of any person by a licensee is to be held by
of funds
the licensee exclusively for that person, and is to be paid to the person or
disbursed as the person directs, and until so paid or disbursed is to be paid
into and retained in a trust account at an authorised deposit-taking
institution in New South Wales and approved by the Director-General.
Protections from
creditors during
receivership
Reporting
requirements
Costs associated with
trust accounts
Trust money is not available for the payment of the debts of the licensee to
any other creditor of the licensee, or liable to be attached or taken in
execution under the order or process of any court at the instance of any
other creditor of the licensee.
Licensees must submit an audit of their trust account to the DirectorGeneral if they received or held trust money during the financial year.
No specific cost estimates contained in the regulatory impact statement on
the Regulation, however a submission from the Property Council to the
regulatory impact statement referred to one property firm that spent
between $200,000 and $300,000 nationally to comply with requirements
in respect of cheques/receipts, collecting/banking rents, and trust
accounts.88
87 Office of Fair Trading (2011), Fair Trading, website: http://www.fairtrading.nsw.gov.au, accessed June 2011
88 Property Council of Australia (2003), Submission on the Regulatory Impact Statement for the Draft Property, Stock and
Business Agents Regulations
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Appendices
Appendix C
Estimated establishment costs for
the National Legal Services Board
89
ESTIMATED START-UP COSTS OF PROPOSED NATIONAL LEGAL SERVICES BOARD (NLSB)
AND NATIONAL LEGAL SERVICES COMMISSIONER (NLSC)
Sub-total
($)
Total ($)
Comments
Salary and other payroll costs
Based on 2010-11 costs; VPS career structure and
salary scale; indexation required for future FYs
IGA will provide for lead time before
commencement of operations (6 months has
been assumed); tasks will include office fit-out,
recruitment of staff and preparation of any
additional National Rules and guidelines
Board remuneration
125,000
Remuneration of Board for 6 months; draft IGA
provides for appointment of Board 6 months
before commencement of operations
CEO/Commissioner
137,500
Salary of CEO/Commissioner for 6 months
Consultants
150,000
2 consultants to assist with setting up the
organisation
Policy/regulatory
manager
61,828
VPS 6 salary for 6 months – manager of policy
unit to provide support to the Board and work on
National Rules and guidelines
Policy/regulatory
officer
47,641
VPS 5 salary for 6 months
Personal
assistant/project
officer
33,417
VPS 3 salary for 6 months
Employee
administrative costs
20,000
Employee
establishments costs
110,000
Travel and personal expenses
Printing, stationery and other office
expenses
Postage and communication
expenses
Approximately $5,000 per employee during
start-up period (4 employees)
685,386
15,000
N/A
104,000
Approximately $5,000 per employee for basic
start-up costs including computer, chair and
OH&S assessment (22 employees)
Includes airfares, accommodation, meal
allowance, car parking, taxis and public
transport during start-up period
Host jurisdiction may assist with any initial
requirements
Includes telephone system, cabling, internet,
1800 telephone number, call diversion to local
representative, desk and mobile phones, wireless
89 Attorney-General’s Development (Australian Government) (2011), Council of Australian Government (COAG) National Legal
Profession Reform consultation package, website:
http://www.ema.gov.au/www/agd/agd.nsf/Page/Consultationsreformsandreviews_AbetterframeworkforFederalCourtsConsultation_CouncilofAustralianGovernments(COAG)NationalLegalProfessionReformconsultationpackage, accessed June
2011
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Appendices
cards and video conferencing equipment
Legal and finance expenses
N/A
Training and development costs
N/A
Motor vehicle and other operating
expenses
N/A
Technology services costs
439,000
Includes IT hardware and set-up, separate NLSB
and NLSC websites, and low-cost National
Register option using existing jurisdictional
software and IT infrastructure
Rent and property services
335,732
Includes office fit-out, project management of
office fit-out, rent during office fit-out, and cost
of setting up electronic and physical document
management systems
32,650
Includes electricity, insurance, municipal rates,
water and sewerage during the start-up period
Property utilities
Sub-total
1,611,768
Contingency
80,588
TOTAL
5% of sub-total
1,692,356
ESTIMATED ANNUAL OPERATING COSTS OF PROPOSED NATIONAL LEGAL SERVICES BOARD
AND NATIONAL LEGAL SERVICES COMMISSIONER (INCLUDING STATUTORY ADMISSIONS
COMMITTEE)
No.
of
staff
Annual
salary
($)
Oncosts
($)
Subtotal
($)
Total
($)
Comments
National Legal Services Board – salary and other payroll costs
Based on 2010-11 costs;
indexation required for
future years
Staff costs are based on VPS
career structure and salary
scale
Mid-point of salary ranges
has been used
On-cost multiplier of 1.165
from Victorian Guide to
Regulation
Board
250,000
Equivalent to remuneration
of LSB (Vic); 1 chair and 6
members
CEO/Commissioner
275,000
Equivalent to remunerations
of CEO of LSB (Vic), who is
also the LSC (Vic)
Support staff
VPS 6
VPS 5
VPS 3
1
2
2
106,142
81,787
57,368
17,513
13,495
9,466
123,655
190,564
133,667
447,887
Policy, regulatory
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Corporate services manager
IT support officer; finance
officer
Personal assistant;
receptionist/project officer
Appendices
and compliance
staff
VPS 6
VPS 5
VPS 4
Total
1
5
2
106,142
81,787
68,468
17,513
13,495
11,297
123,655
476,409
159,530
13
Manager
759,595
1,732,482
Admissions Committee – salary and other payroll costs
Admissions
Committee
157,080
Secretariat staff
VPS 6
VPS 4
VPS 3
1
1
5
Total
7
106,142
68,468
57,368
17,513
11,297
9,466
123,655
79,765
334,169
537,589
Estimated value of pro bono
contributions of members of
Admissions Committee
Manager (reports to CEO of
NLSB)
Senior administrative officer
4 administrative staff; 1
paralegal/executive assistant
694,669
Non salary related costs
Travel and personal expenses
195,250
Includes airfares, accommodation,
meal allowance, car parking, taxis
and public transport
Printing, stationery and other office expenses
199,250
Includes stationery, publications,
advertising, printing (including
annual reports) and staff amenity
expenses
67,500
Includes postage, couriers,
telephones and videoconferences
290,000
Includes legal and
internal/external audit expenses
Postage and communication expenses
Legal and finance expenses
Training and development costs
60,500
Includes training courses,
seminars, conferences, education
reimbursement, venue hire and
catering
Motor vehicle expenses
10,000
Includes hire vehicles and private
vehicle expense reimbursement
Other operating expenses
144,000
Includes professional membership
fees, temporary staff and
consultants/contractors
Technology services costs
260,000
Includes software purchases and
licences, IT support and
development, hardware
maintenance and internet services
Rent and property services
110,500
Includes rent, cleaning, security,
storage, repairs and maintenance
Property utilities
OPERATING
BUDGET
Contingency
TOTAL
71,300
Includes electricity, insurance,
municipal rates, water and
sewerage rates
3,835,451
191,773
5% of operating budget
4,027,224
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What would you like to grow?
Appendices
Appendix D
Detailed costings
The following tables provide the more detailed costings for each of the options considered in
Chapter 4.
BASELINE COST ASSUMPTIONS UNDER COMMONWEALTH AGENCY
Number
% of Year
Lower
Upper
Policy Officer (EL1)
2
1
317072
634144
Interstate Officers (APS 6)
8
0.083333
85577
171155
52000
92000
Develop Legislation
Regulatory impact statement
454,649
897,299
659,790
659,790
1,163,847
1,163,847
Establish Agency
Consultants
0.5
150000
CEO
0.5
137500
Board
0.5
125000
0.5
52770
Policy Officer (EL1)
2
1
Travel and personal expenses
3273
Communication and postage
22691
Desktop set up
38182
Office fit out
73251
Utilities
7124
Website
50000
On-going Fixed Costs
CEO
1
Board
275000
250000
Corporate Services Manager (EL1)
1
105540
IT Support/Finance officer (APS 6)
1
85455
PA/Project Support (APS 4)
1
68693
Policy Officer (APS 6)
1
85455
Overhead costs
5
293705
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What would you like to grow?
Appendices
BASELINE COST ASSUMPTIONS UNDER COMMONWEALTH/STATE MODEL
Number
% of Year
Lower
Upper
Policy Officer for Com (EL 1)
2
1
317072
634144
Policy Officer for States (EL 1)
16
0.25
634144
1268288
52000
92000
Develop Legislation
Regulatory impact statement
1,003,216
1,994,432
659,790
659,790
1,019,651
1,019,651
Establish Agency
Consultants
0.5
150000
CEO
0.5
137500
Board
0.5
125000
0.5
52770
Policy Officer (EL 1)
2
1
Travel and personal expenses
3273
Communication and postage
22691
Desktop set up
38182
Office fit out
73251
Utilities
7124
Website
50000
On-going Fixed Costs
CEO
1
275000
Board
250000
Corporate Services Manager (EL 1)
1
105540
IT Support/Finance officer (APS 6)
1
85455
PA/Project Support (APS 4)
1
68693
Overhead costs
4
234964
Variable Costs
Cost of compliance and enforcement
Instances
Unit cost
5
1248
6614
6,614
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Appendices
REGISTRATION COST ASSUMPTIONS UNDER COMMONWEALTH AGENCY
Number
% of
Year
Lower
Upper
Develop Legislation
Policy Officer (EL1)
2
1.25
396340
792680
Interstate Officers (APS 6)
8
0.083333
85577
171155
52000
92000
Regulatory impact statement
533,917
1,055,835
962,689
962,689
1,328,128
1,328,128
Establish Agency
Consultants
0.5
150000
CEO
0.5
137500
Board
0.5
125000
0.5
105540
Policy Officer (EL1)
2
2
Travel and personal expenses
4091
Communication and postage
28364
Desktop set up
47727
Office fit out
91563
Utilities
8905
Website
50000
Registry
214000
On-going Fixed Costs
CEO
1
Board
275000
250000
Corporate Services Manager (EL1)
1
105540
IT Support/Finance officer (APS 6)
1
85455
PA/Project Support (APS 4)
1
68693
Register Manager (EL1)
1
105540
Policy Officer (APS 6)
1
85455
Overhead costs
6
352445
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What would you like to grow?
Appendices
REGISTRATION COST ASSUMPTIONS UNDER COMMONWEALTH/STATE
MODEL
Number
% of Year
Lower
Upper
Develop Legislation
Policy Officer for Com (EL 1)
Policy Officer for States (EL 1)
2
1.25
396340
792680
16
0.25
634144
1268288
52000
92000
Regulatory impact statement
1,082,484
2,152,968
962,689
962,689
1,163,847
1,163,847
Establish Agency
Consultants
0.5
150000
CEO
0.5
137500
Board
0.5
125000
0.5
105540
Policy Officer (EL 1)
2
2
Travel and personal expenses
4091
Communication and postage
28364
Desktop set up
47727
Office fit out
91563
Utilities
8905
Website
50000
Registry
214000
On-going Fixed Costs
CEO
1
275000
Board
250000
Corporate Services Manager (EL 1)
1
105540
IT Support/Finance officer (APS 6)
1
85455
PA/Project Support (APS 4)
1
68693
Register Manager (APS 6)
1
85455
5
293705
Overhead costs
Variable Costs
Instances
Unit cost
Cost of spot checks
Cost of registration
6614
106
30
3180
9,794
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Appendices
LICENSING COST ASSUMPTIONS UNDER COMMONWEALTH AGENCY
Number
% of Year
Lower
Upper
Develop Legislation
Policy Officer (EL1)
2
1.5
475608
951216
Interstate Officers (APS 6)
8
0.083
85577
171155
52000
92000
Regulatory impact statement
613,185
1,214,371
1,061,334
1,061,334
1,472,324
1,472,324
Establish Agency
Consultants
0.5
150000
CEO
2
0.5
137500
Board
0.5
125000
Policy Officer (EL1)
2
0.5
105540
Policy Officer to set up Fidelity Fund (EL1)
1
0.25
26385
Travel and personal expenses
5727
Communication and postage
39709
Desktop set up
66818
Office fit out
128189
Utilities
12466
Website
50000
Registry
214000
On-going Fixed Costs
CEO
1
Board
275000
250000
Corporate Services Manager (EL1)
1
105540
IT Support/Finance officer (APS 6)
1
85455
PA/Project Support (APS 4)
1
68693
Policy Officer (EL1)
1
105540
Policy Officer (APS 6)
2
170910
Overhead costs
7
411186
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What would you like to grow?
Appendices
LICENSING COST ASSUMPTIONS UNDER COMMONWEALTH/STATE MODEL
Number
% of Year
Lower
Upper
Develop Legislation
Policy Officer for Com (EL 1)
2
1.5
475608
951216
Policy Officer for States (EL 1)
16
0.25
634144
1268288
52000
92000
Regulatory impact statement
1,161,752
2,311,504
1,025,204
1,025,204
1,328,128
1,328,128
33,716
33,716
Establish Agency
Consultants
0.5
150000
CEO
0.5
137500
Board
0.5
125000
2
0.5
105540
1
0.25
26385
Policy Officer (EL 1)
Policy Officer to set up Fidelity Fund (EL
1)
Travel and personal expenses
2
4909
Communication and postage
34036
Desktop set up
57273
Office fit out
109876
Utilities
10685
Website
50000
Registry
214000
On-going Fixed Costs
CEO
1
275000
Board
250000
Corporate Services Manager (EL 1)
1
105540
IT Support/Finance officer (APS 6)
1
85455
PA/Project Support (APS 4)
1
68693
Policy Officer (EL 1)
1
105540
Policy Officer (APS 6)
1
85455
Overhead costs
6
352445
Variable Costs
Instances
Unit cost
Cost of spot checks
6614
Competency compliance
5
420
2226
Claims on Fidelity Fund
6
4146
24876
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