Big strata wins again as new laws tread softly

It seems one person’s regulation is another’s backdoor legitimacy, if the reaction to this week’s anticipated “crackdown” on strata managers by NSW Fair Trading is anything to go by.

Minister for Better Regulation and Fair Trading Anoulack Chanthivong introduced a suite of minor amendment Bills to the NSW Parliament this week, all drafted to tighten up control and transparency of strata management practices.

The law changes (which you can access here) come in the wake of the Netstrata scandal, where the strata management giant was revealed to have been funnelling insurance commissions through a subsidiary company, and calling them “fees for service”.

This meant that the commissions – reportedly worth an average of more than 25 per cent of insurance premiums – didn’t have to be declared to their Owners Corporation clients, as strata law would otherwise have required them to do, although the revenue eventually found its way into Netstrata’s coffers.

Whether that was a deliberate ploy or not is a matter for conjecture, but it exposed the entire “vertical integration” structure of strata service provision whereby some strata managers also have subsidiary companies such as insurance brokers, fire safety inspectors, plumbing engineers, electrical contractors, strata lawyers, debt collectors, and building management services.

The changes to the laws introduced this week will, if approved by parliament, require strata managers to declare current and recent relationships with service providers, as well as indirect benefits from insurance and any other commissions.

What effect will this have?  The word coming out of the broader, more engaged strata owners’ community is that this has merely entrenched insurance commissions as a fact of strata life when this was a chance to start phasing them out. 

It has also legitimised the vertical integration model where unsuspecting and unaware strata owners – sadly, probably the majority – will go along with the “one-stop-shop” appeal of having all their services under the one roof, not realising that they might get much better service at lower costs if their strata managers were told to shop around.

Meanwhile strata managers are saying they need commissions on compulsory and high-value insurance policies to stay afloat.  However, some of the same companies are busily undercutting each other on price to attract more customers.

The losers in all this jiggerypokery are strata owners, the only players in this great shell game who actually put money INTO the system.

To be fair to Minister Chanthivong, this is probably just the first step in what Fair Trading sees as a longer-term project to boost consumer confidence in strata living.

“Building more high quality, higher density housing is a key pillar of the NSW Government’s comprehensive plan to build a better NSW,’ he said this week.

“These reforms are critical to supporting confidence in investing and living in strata schemes.  

“They will help to restore the confidence of the 1.2 million people already living in strata schemes, but they won’t be the last changes we make as we work to make strata an attractive housing option.”

Fair Trading is keeping its cards close to its chest but it seems that, pending consultations, the next stage will cover more complex reforms, including:

• Ensuring consumers have transparency on maintenance and repairs and a more accurate idea of ongoing costs.
• Addressing poor performance by strata managing agents, building managers and strata committees.
• Better protection of strata owner interests, including embedded networks

Embedded networks is a whole other vexed question.  It’s a process whereby strata managers encourage owners to sign long-term and grossly inflated service contracts to compensate contractors who have provided infrastructure to the developers for free or at huge discounts.

Energy providers, lift engineers and stormwater drain providers have all been found to have benefitted from this kind of pernicious cronyism between strata managers and developers.

The question is, will having to declare prior relationships – as the law changes will demand – make any difference to owners who stumble into their first AGMs ready to sign anything that anyone in a shiny suit puts in front of them?

So, while the latest changes to the various laws governing strata managers are a step forward and may well lead to much more fundamental changes, you would be entitled to assume that strata managers will see this as a bullet dodged while apartment owners may well think this was an opportunity missed.