Owners Corporations Act Review
Regulation & Policy Division, Consumer Affairs Victoria
GPO Box 123
Melbourne VIC 3001
26th November 2013
Dear Sirs
I refer to the Victorian Government’s review of the regulation of owners corporation managers, and
in particular, section 2.4 on Managers’ conflicts of interest.
I am a lot owner in a small, medium and large scheme in NSW. I write to you using this and my 30+
years’ experience in general insurance, and seven years working within the strata industry across all
jurisdictions in Australia. I also have been actively involved in the NSW strata law reform debate, and
written a number of articles on this topic.
There are a number of key issues that have not in my view received enough consideration, and are
difficult to isolate from the perceived conflict of interests discussion (payment of insurance
commissions). For example, conflicted revenue such as insurance commissions now has a statutory
definition under the Corporations Act, and general insurance products such as Strata Insurance is
NOT by definition conflicted revenue. My experience is that the general awareness around the fact
that insurance activities of Strata Managers are regulated under the Corporations Act 2001 is low, as
are the many consumer benefits (protections) that compliance with the financial services provisions
of the Corporations Act brings. These provisions need to be well understood before forming policy in
this area.
My points will be brief, and I will preface them with some important background information.
Background:
Why do insurance companies pay insurance intermediaries such as insurance brokers or agents
(e.g. strata managers) a commission?
Insurance companies traditionally employed large teams of sales and distribution staff to go out and
sell their insurance offering. Over time, Insurers recognised that Insurance Brokers and Agents were
in a better position to distribute their product. Brokers and Agents had better relationships with
their clients, understood the risks well, and having them sell the insurer’s offerings and paying them
a commission was far cheaper than employing teams of staff. Most administrative functions could
also be taken care of. So this form of distribution still dominates most product lines apart from basic
household insurances where the internet (direct sales) is increasing in popularity for domestic
purchases.
What does a commission payment cover?
It covers all advocacy and administrative time in quoting, transacting and servicing an insurance
contract for a scheme. For a lot of schemes, the commission also covers time spent on claims which if otherwise set as a fee-based arrangement - can be very costly due to the many hours of work
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performed in managing unexpected claims. The Agent or Broker only gets paid if the contract
completes, so there can be a lot of time given to quoting and preparing an insurance contract for a
scheme for no reward. For most small to medium sized schemes, receiving the insurance services of
an Agent or Broker is extremely attractive, because there is no separate cost imposed, with the
insurer only paying the commission to the successful Agent or Broker. There is no additional cost to
budget for.
What else should I know about what this commission payment can cover?

Training - Under financial services laws, in order to provide financial services (providing advice
and arranging or otherwise dealing in insurances) Strata Managers need to be trained and then
appointed as a representative (distributor or authorised representative) by an Australian
Financial Services (AFS) Licensee. The Owners Corporation is the beneficiary of the knowledge
gained through this process.

Supervision - Once appointed, and depending on the level of authorisation, Strata Managers are
then subject to ongoing training, monitoring and supervision (including audits). This provides a
direct benefit to Owners Corporations because the AFS Licensee cannot abrogate responsibility
through the provisions within the Corporations Act.

Disclosure – AFS Licensee and their representatives (Strata Managers) must provide a Financial
Services Guide which outlines many of the activities the representative will undertake, and also
must detail remuneration arrangements, both financial and non-financial benefits.

Insurance - AFS Licensees must provide professional indemnity (PI) insurance protection for the
activities of Strata Managers they have appointed as representatives where they are acting
within the authority provided by the Licensee. This provides a significant consumer protection
benefit to Owners Corporations through having the AFS Licensee business and assets standing
behind the Strata Manager in the event of any acts, errors or omissions.

Advocacy – Strata Managers have a fiduciary responsibility to owners, so they need to give
general advice to effectively meet owners’ expectations. They can only do this if they are trained
and properly appointed in accordance with legal requirements. Importantly, in times of
adversity, they need to collaborate with many insurance representatives.

Data & Transactions – Strata Managers need to collect, hold and present the data of a building
to insurance markets, whether via a Broker, or direct to Insurers or specialist Underwriting
Agencies. These activities include:
 Maintaining risk data and claims histories to negotiate best options;
 Maintaining a schedule of business activities for commercial premises;
 Organising/updating insurance valuations;
 Completion and lodgement of documentation;
 Collection and payment of premiums;
 Receipt of certificates;
 Assistance with obtaining certificates of currency;
 Coordination of repairs and administrative activities in the event of a claim.
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
Repairs - Strata Managers will perform work when damaged common property needs repair.
The cause of damage is not always obvious, and any issues around causation – i.e. accidental
damage (covered by insurance) or maintenance-related (a scheme cost) are generally sorted out
after all the work has been completed. The Strata Manager is in the best position to quickly act
on such matters, which is efficient and cost effective for owners.
With this background in mind, I would like to make the following brief points:
Observations:
1. Consumers do have choice – Remuneration arrangements must be disclosed, and Owners
Corporations are free to choose/negotiate to have their Strata Manager to work on either a (i)
fee and commissions basis, or (ii) fee only basis. Owners Corporations are also free to change
these arrangements at the next contract renewal. So choice exists now for consumers.
2. Commissions v Fiduciary responsibilities - there is no conflict – In the case of Real Estate Service
Council v Alliance Strata Management Ltd (1994 NSWCA), Meagher JA reinforced that the law at
that time and went onto say “…if the fiduciary, before embarking on his fiduciary occupation,
stipulates for the retention of commissions as the price of his occupancy, the rules governing
fiduciaries have got nothing to do with the receipt of commissions.” This position has not been
challenged since, that is there is nothing improper with a fiduciary receiving commissions. This is
exactly how Insurance Brokers get remunerated, and they are also in a fiduciary relationship
with the Owners Corporation.
3. Commissions are not Conflicted Remuneration – The activities of Strata Managers (as Insurance
Agents) are governed federally by financial services laws that are now embedded within the
Corporations Act 2001 (Cth) (the Act). The issue of conflicted remuneration and commissions
was most recently dealt with by the Federal Government as a part of the Future of Financial
Advice (FoFA) reforms following losses sustained by investors as a part of the GFC. Effective from
1st July 2013, Section 963A of the Act defines “Conflicted Remuneration”, and Section 963B
makes it clear that commissions paid in connection with general insurance products such as
Strata Insurance fall outside that definition. Commissions are not conflicted revenue.
4. Insurance activities covered by Corporations Act 2001 – good consumer benefits – The
activities that a Strata Manager undertakes in assisting with preparation of insurance proposals,
valuations, arranging for quotations, and paying for insurance, fall within the definition of
“dealing” in a financial service - Section 766(C) of the Act. As such, Strata Managers need to be
properly appointed by an AFS Licensee as an Authorised representative, or a Distributor.
Subjecting Strata Managers to the financial services provisions within the Corporations Act has
many consumer benefits as outlined earlier, including training, supervision, disclosure,
compliance, and insurance.
5. Proper authorisation - severe penalties apply to Strata Managers –The most concerning
practice that exists in our market at present is not about insurance commissions arrangements,
but rather Strata Managers/Strata Management Companies not being properly authorised by an
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AFS Licensee for arranging or dealing in insurance with them and their Owners Corporations –
Section 911B. Severe penalties apply, ranging up to $22,000 for an individual, or $110,000 for a
corporation, and up to 2 years imprisonment. Many AFS licensees simply refuse to authorise a
Strata Manager under their licence, which means they are unlikely to have professional
indemnity insurance (PI) protection from the AFS Licensee, and exposing themselves to these
penalties. In this situation, the Strata Manager would not have provided an FSG, so additional
penalties may also apply (see 6. below). Either way, this is not good for consumers.
Importantly, the appointment of an insurance broker by the Owners Corporation, or by the
Strata Manager on their behalf, does not alleviate the need for that Strata Manager to have
appropriate authorisations from that Broker. This in practice can be very difficult to achieve,
exposing the Strata Manager and the Owners Corporation to reduced protection.
6. Remuneration disclosure - severe penalties apply –The financial services reforms embedded
the principles of remuneration disclosure in connection with general insurance products by
introducing the requirement for a Financial Services Guide (FSG) - Section 941B & 941C. A FSG
must be given to all Owners Corporations by those providing a financial service to it, and it must
contain - amongst many prescribed items of information - details on remuneration from AFS
Licensees and their representatives. Remuneration includes all benefits, financial and nonfinancial. Severe penalties may apply for failing to provide an FSG – ranging up to $11,000 for an
individual, or $55,000 for a corporation, and up to 2 years imprisonment. This is quite a strong
remuneration disclosure regime for Strata Managers to comply with, and it should be embraced.
7. Risk - Strata Managers distancing themselves (financial service) if there is no reward – If
commissions are prohibited, Strata Managers (and/or their AFS Licensees) will try and distance
themselves from the onerous provisions of the Corporations Act. Why as a Strata Manager
would you exposure yourself? The payment of an insurance commission to a Strata Manager on
its own does not dictate the need for authorisation under the Act (the activities performed is
generally regarded as the measure). However, if the current regime is retained, it would be
almost impossible for Strata Managers to distance themselves from their obligations under the
Corporations Act (good for consumers). Why not use this opportunity to fully embrace the
provisions within the Corporations Act?
8. Other distribution points – Strata Managers form only one way insurers distribute insurance
product in this sector. Insurance brokers for example are also in a fiduciary relationship with the
Owners Corporation, and will continue to be paid commissions by insurers. Should Strata
Managers decide to avoid insurance related activities completely, which is not a good consumer
outcome, then it is probable that other professionals such as building managers could be
appointed as Insurance Agents (representatives) in place of the Strata Managers. The result will
not address the perceived concerns in your paper, nor will the consumer experience be
improved.
9. Remuneration models v Value (advice) – There is a low level of advice within the sector. Even
professionals like insurance brokers rarely give advice unless specifically asked to do so. Let’s
encourage advice, set an industry standard for minimum information to be given to the
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executive committee (other than just limits and price). But ultimately, unless Strata Managers,
Insurance Brokers, or other financial services representatives demonstrate ongoing value for the
Owners Corporation, irrespective if they are remunerated by fees or commissions or a
combination of both, the relationship with the Owners Corporation is unlikely to be enduring.
2.4.5 - Consultation questions:
18. This questions needs to be considered in conjunction with the obligations under the
Corporations Act. The Corporations Act regulates the financial services activities of a Strata
Manager (whether they are remunerated by a commission or fee) with severe penalties for
failing to be properly authorised, or for failing to disclose remuneration arrangements / supply
an FSG. Given these obligations, the power of VCAT and the obligations under the Owners
Corporation Act are in my view currently sufficient.
19. There should be no prohibition on commissions. Any prohibition would need to be a broad
sector based ban, so that inequity would not be created as other financial services licensees and
their representatives continue to earn commissions from insurance related activities. Costs are
likely to increase overall for consumers, if a ban is introduced only for Strata Managers. As they
increase their fees to recover a reward for their time and risk in dealing with insurance,
premiums will not reduce because insurers will continue to include commissions for other
distribution channels, such as Insurance Brokers.
20. No such presumption should exist, as existing controls are sufficient.
21. For insurance related activities, all benefits (financial and nonfinancial) need to be disclosed in a
FSG. This is sufficient.
Further, any obligation to ensure goods and services are at competitive prices would be a
complex assessment for Insurance. Owners Corporations are an unlimited liability legal entity.
Any shortfalls in funds from levies or insurance recoveries need to be met by the Owners. An
Owners Corporation can easily acquire cheaper premiums, but cover is likely to be very narrow,
and some claims would need to be self-funded. If an Owners Corporation decides to buy a
broader cover at higher cost (which requires less self-funding), why should that decision need to
be questioned? There is a natural trade-off between quality and price, and whilst there will
always be a few exceptions; generally you get what you pay for!
22. No, not for insurance. The mandatory provisions within the Qld & NSW laws have not brought
any discernible consumer benefits. For large schemes, it can add cost because the process does
not need to be run every 12 months (brokers can charge a tender fee). Rather, the process is
best run every three years to ensure offerings remain competitive. Owners Corporations are still
free to run a more regular process if so required, so additional regulation is not required.
Additional Recommendation – CAV consider introducing an obligation for Strata Managers to be
appointed to the minimum level of an Authorised Representative (to give general advice) of each
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Financial Services licensee they/OC use – hence making both the Strata Manager and the AFS
licensee fully accountable to the Corporations Act for their activities.
Rationale:
 CAV embraces the existing financial services provisions, bringing with it a number of key
consumer benefits (as outlined in observations 4, 5 & 6 above), and the full resources of ASIC
for monitoring and enforcement.
 Embracing this change will help move the debate from solely on remuneration structure more
towards value for money for Owners Corporations.
Benefits:
 Strata Managers can give general advice to the Owners Corporation, improving information,
awareness, and enhancing the customer experience.
 CAV closes the gap that many AFS Licensees (Insurers, Brokers, and Underwriting Agencies) use
to avoid supervision and responsibility for Strata Managers financial services conduct.
 AFS Licensee’s will put more effort into training Strata Managers, compliance, and reporting
breeches to ASIC. This information can be then used to raise awareness, tailor future training,
and continue to improve the consumer experience.
 Financial services provisions already embed disclosure of financial and non-financial benefits via
the provision of an FSG, with significant penalties for failure to comply.
 Implemented in conjunction with minimum requirements for insurance information (a standard
or best practice the industry could devise), the consumer experience will be enhanced through
the availability of better information for decision making.
Implications:
 AFS Licensee’s - Some financial service licensees may find the change imposing, but the reality is
given the nature of the financial service, they ought to be doing this now. It is a shift to a best
practice, and they ought to be seen to support Strata Managers (and their Owners Corporations)
through this stronger regime.
 Strata Managers – This change is likely to be fully embraced, because some strata managers
struggle to get the level of AR protection they require. Most if not all Strata Managers are
trained by at least one AFS licensee to the level of Authorised Representative. SCA (Vic) fully
support the introduction of the Authorised Representative (General Advice) level to be a
minimum requirement.
 Consumers – as this will add significant financial protection, it will be hard to criticise. It will not
add cost as the regime is in place now, just not fully adopted by all participants.
I hope these observations will be of assistance to this discussion.
Yours sincerely,
Paul Keating
PO Box 360, Milsons Point, NSW, 1565
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