Nelson

@eo@ocn said:
Yes, strata manager commissions are a sin.  OCN sees the detrimental outcomes for owners corporations, and opposes this practice on the basis below.  But let me emphasise that it’s everyone’s interest to work together constructively to support managers and owners alike through the inevitable transition. 

Hi, I just wanted to address some of the consumer concerns raised here, just to make sure we are debating this right issue – it reads to me that commissions to Strata Managers (on its own)may not be the problem that needs to be addressed.

If this form of remuneration for a Strata Manager is a sin, why it perfectly OK for an Insurance Broker, who is also a fiduciary to the Owners Corporation (OC), to receive this same income as a commission payment? They are no less conflicted.

 

1. It is not transparent.  We prefer a clear fee for service model.

The financial services sector in Australia has a world class disclosure regime, and the PSBAA adds to this for the NSW Strata Sector. The standard SCA Management agency agreement in NSW has on the front page the option for any OC to prohibit their Strata Manager from the receipt of commissions. A simple tick of a box is all that is required. Why is regulatory intervention needed when future EC members question the decisions of past EC members to legally enter into a commission arrangement? Is the problem the difficulty in readily access this type of information, as this could be addressed in a number of ways.

A fee for service model works well for larger schemes, however for small schemes, it tends to add more cost because the fee on a time basis, together with an amount together with the extra administration, exceeds the commission level, and adds costs to these schemes. That is the commission model works best (financially) for smaller schemes. However, all schemes can elect to opt in, or to opt out, when their managing agents agreement is up for renewal.

1. It is a conflict of interest (clear disincentive to obtain lower premiums)

There is nothing improper with being in a conflict of interest, it’s how that conflict is managed (disclosed and dealt with) that is important. Insurance Brokers also get remunerated via commission, and are inherently in a position of conflict all the time. It is the professional action they take to discharge their fiduciary duties towards the OC (same goes for the Strata Manager). From my experience, a professional and profitable management contract with an OC over the long term, far outweights any incentive to inflate premiums. Brokers face the same incentive if rewarded by commissions.

1. It denies owners the right to good advice *

I am not sure how you conclude that insurance commissions deny owners good advice? I would suggest under-skilled or uninformed professionals (Strata Managers or Brokers) may contribute to owners experience with poor advice. Also, from my experience, unless an OC specifically asks their Insurance Broker to give ‘full personal advice’ on their OC’s needs, they will simply get quotes and insert an advice limitation clause. The OC must properly instruct all their professionals.

1. It denies owners choice (steered towards two insurers paying highest commissions)

It is a fact that some insurers will pay brokers a higher commission level (up to 23.5% plus other benefits) than the two
insurance agencies I think you refer to (cap at 20%). But if the 300+ Strata Managers in NSW cannot practice in insurance because of this ban, isn’t that going to deny owners choice?

1. It restricts the market (a new insurer, ACE, was squeezed out, and other large and respected insurers cannot get a foothold in this tightly held market)

I repeat my point above, because competition is made up by the number of insurers and the number of distribution points (brokers and agents). You would need to ask ACE why they ceased trading, but feedback from brokers suggested their pricing was very low (profit concerns on their product). I don’t believe it is fair to suggest there are barriers to competition caused by commissions payments alone.

1. It restricts competition which is a market-based driver of better cover and lower premiums

Again, competition is not restricted by commissions. Insurer profitability has been the single biggest reason for insurers to either pull out of this sector, or for them not to enter it. It has not been a very profitable class of insurance over the last few years, as seen by consumers through premium and excess increases.

1. It denies owners the claims management advantage that brokers, with their large buying power, can deliver

Any agent or broker who has a strong and trusted relationship with their insurers can have leverage outcomes with claims advocacy. If they also have scale in their trading relationship, this can also help.

1. Commissions can unfairly inflate strata management client income, for no extra work  **

I am sure there are example of that, but equally, smaller schemes can get great value from the commission model – there is a trade-off. My view that unless any professional (commission or fee) demonstrates value, any relationship with an OC is unlikely to be enduring.

1. Commission-inflated premium is then taxed – grossed up by FSL, Stamp Duty and GST. 

I agree, a pet hate of mine, insurers tend to be in the tax collection business! But, unless you ban commissions across the sector (rather than just strata managers) this very problem will continue to exist.

I hope this adds to the debate and understanding, because we all ultimately work for the OC (and their owners) and addressing consumer concerns is important. We need to demystify, educate, evolve and improve for the benefit of all. A simple ban on commission for Strata Managers won’t get us there as a sector.

 

Nelson.

 

Dear Whale & other readers,

I am a (proud) Owner of Strata, and I would like to offer a few comments from my 30+ experience in the Insurance Industry.

Your assert that the insurance and strata industries are peddling the same line that Strataman espouses. Have you considered that this is because it could be somewhat accurate, and maybe some merit behind the points made? I am not sure some of these blogs are actually claiming that Insurers are ‘discounting’ premium to pay commissions to Strata Managers and Insurance Brokers (yes, it’s the same commission), as your suggest.

Insurers tend to price risks as accurately as possible, given the Australia insurance market is one of the most competitive insurance markets in the world (small market, and 100+ plus licences insurers). My experience is that Strata Insurance premiums are extremely good value, given the average premium sit around $3k for a 10 lot scheme with a $200 excess, or $300 plus $20 excess per owner! That’s for cover for important risks such as the building, public liability, and of course Office Bearers insurance to cover volunteers like you and I whom could be sued because of the decisions we make as Executive Committee members.

I assume readers understand the legal structure of an Owners Corporation, that it is an ‘unlimited liability’ legal entity, and as owner and member of this legal entity, we have a shared liability to make good any financial shortfalls. As Insurance is finite, there is an inherent exposure all owners face (a mismatch between exposure and cover). Yet we debate issues of premium cost rather than understanding the comparisons between policy covers (they are not the same), quality of financial security, claims payment track record to name a few.

So why do insurers pay commissions to Insurance Brokers and other Agents such as Strata Managers? Because it is an extremely efficient form of distribution cost, leading to lower premiums. Rather than employing teams of sales and distribution staff, Insurers know that brokers and Agents can form a much more intimate relationship with the ultimate customer, and importantly advocate an accurate view on the risk profile of the scheme, leading to the most competitive terms (policy cover, security, claims payment turnaround, etc, and yes, price). Why are Strata Managers a good distribution point for Insurers, because they know the building, its history, quality, better than anyone. Generally, even Insurance brokers need to go to Strata Managers to get details on risk profiles, claims histories, etc adding another step in the process. Strata Managers and Insurance Brokers also do a number of administrative tasks on behalf of an Insurer, and are critical at times of difficult and complex events to advocate and coordinate claims related activities. They also need to be subject to ongoing training and professional development. The Insurer expects a lot in return for the commission payment.

Now there are a couple more facts I would like to share here, all of which are good for consumers. Strata Managers can only distribute insurance product on behalf of a Australian Financial Services (AFS) Licensee. In the Strata industry, a AFS Licensee includes an Insurer, a Broker, or an Underwriting Agency. The activities that a Strata Manager is appointed to conduct under their management agreement in my view requires them to be trained and appointed by a AFS Licensee as either an Authorised Representative (to give general advice) or as a distributor (no advice). The benefit of having you Strata Manager appointed as an Authorised Representative (General Advice) of a AFS Licensee, is that licensee must supervise and audit their insurance related activities, AND provide Professional Indemnity cover for their activities. That is a massive consumer benefit, given that a Strata Manager is supported by a well-capitalised AFS Licensee, under the supervision of ASIC, and for Insurers, both ASIC and APRA. If for some reason, things go pear shape, you have support under this AFS regime (all governed under the Corporations Act).

There is another comment made related to the State Government, that they have done their homework on the proposed ban of commissions to Strata Managers. All I can say here is that the OFT is doing a massive job, and this issue is one of many major reforms they are considering. And I commend them for taking on a much needed review. But I can also say that there was no Financial Services representatives at the round tables, and this issue needs facts, it needs debate, and it needs consideration from a broader range of stakeholders. Remember, this proposed ban is for Strata Managers only, it is not prohibiting commissions being paid within the Strata Industry. If the OFT want to remove commissions and introduce fee for service, they must do so across the whole sector, not just impose a restraint of trade on Strata Managers.

Anyway, the current proposal means commission will still exist, but transferred to others. Brokers are likely to be the main beneficiary, so premiums are unlikely to reduce. Strata Managers will need to charge fees, but they will be well in excess of commission payments. A 15-20% commission on a $3k premium is only $450-$600 reward. A charge out on a time based fee service for the training and administrative work, plus the risk Strata Managers take on, could be many multiples of this (you need to ask a Strata Manager). I share the fear that many small to medium sized schemes, where affordability for owners and tenants alike is fragile, they will struggle with the increased costs, cut back services, Strata Mangers will then need to manage the downstream consequences. If Strata Managers are permitted to retain commissions, economics would suggest that there would be more chance of retaining competitive management fees, simply from a leverage of scale.

I hope some of these point help in your considerations and debate. In the meantime, make sure your Strata Manager has been appointed as an Authorised Representative (to give General Advice) as a condition of your current insurance arrangements. Many AFS Licensee will not appoint them to this level, because of the risks they need to assume. That’s not good for Owners, nor the Strata Community.

Nelson (Piquet)