Strata review proposes revamp of 'convoluted' remuneration
Conflicts of interest that can’t be satisfactorily managed across the strata industry should be phased out, an independent review of “convoluted” arrangements within the sector has recommended.
The report authored by industry expert John Trowbridge says the key conflicts of interest arise from the commission rebate/broker fee system, where the strata manager and broker agree on a share of commission to be rebated to the manager, while they may also agree on an extra fee to the broker to cover its service costs.
“The optics of the system, irrespective of its merits, whereby brokers receive revenue from two sources (a commission from the underwriter and fee from the client), then remit a major part of the commission to the [strata manager], are perplexing to say the least,” the latest report says.
The report says it’s anomalous that firstly the strata manager arranges to receive a significant part of remuneration by agreement with the broker, instead of with the owners corporation as the client, and secondly the strata manager’s remuneration is not related to the value of the services to be provided.
It’s also “unsatisfactory” that the broker gives away a significant part of commission and then enters into a second agreement to arrive at a fee that, in conjunction with any retained commission, funds the broker’s cost of services, the report says.
The Independent Review of Strata Insurance Practices Phase 2 report released today follows a discussion paper on disclosure and a follow-up report that made recommendations on transparency.
The review has pointed out that strata is unusual because of the multiple intermediaries between the lot owners and the insurer, and current arrangements that have evolved over time are opaque.
“The system’s convoluted structure is a clear impediment to its comprehension by both lay people and insurance practitioners alike,” the latest paper says.
The system also distorts competition in the strata management market because commission rebates enable managers to present prices for their total services that are artificially reduced by subsidies from the rebate.
Mr Trowbridge says there needs to be “structural realignment” of remuneration, with changes to benefit owners corporations, while delivering fair compensation for strata managers and brokers and ensuring constructive relationships are maintained.
The commission rebate/broker fee system should be phased out across three stages, starting with introducing transparent disclosure, as recommended in Phase One of the strata review, he proposes.
The second stage would involve planning and preparing for reforms where brokers are remunerated by commissions only from the underwriter, or fees from the owners corporation, but not both. Strata managers would be remunerated wholly by fees from the owners corporation, or partially if the broker agrees to rebate a portion of the commission.
Those strata managers and brokers already operating on a fee-only model would realign fees to correspond to the “value of services principle”.
In the third stage, the changes would be fully implemented through the 2024 and 2025 renewal cycles, with the timetable allowing the new transparent disclosure regime to be bedded down before the reforms are introduced.
As part of self-regulatory arrangements, it’s also proposed that both Strata Community Association and the National Insurance Brokers Association would prepare guidance notes or practice standards.
The strata review project has been sponsored by Steadfast, but the report says the conduct, findings and proposals have been arrived at independently of the company and its commercial interests.
The paper is available here.
