Podcast: Netstrata scandal from the inside

The long-awaited report into what has become known as the Netstrata Scandal came out last week – too late for the podcast – so we bring it to you in all its shabby glory this week.

Fair Trading NSW have, unusually for them, hopped in with a fairly strident comment and Netstrata has responded with vehement denials of wrong-doing and assurances that anything than needed fixing has been fixed.

You can find our report on the McGrathNicol findings HERE, the original McGrathNicol report HERE,  Fair Trading’s response HERE,  and the Netstrata reaction HERE. 

So what’s the truth?  We have had the dubious pleasure of owning in a strata scheme managed by Netstrata and seeing the way they work at close hand, from the first AGM to the day they walked away.

What are they really like?  Listen to this week’s Flat Chat Wrap to find out.

Transcript under construction

This is a slightly edited version of the podcast transcript, not least because our transcription service spelt McGrathNicol’s and Four Corners’ names wrong (not to mention mine), JimmyT

Jimmy

Well, we missed the boat last week when the biggest news in Strata came out.

Sue

What was that?

Jimmy

Well, you know perfectly well it was.

Sue

Well, we didn’t miss the boat, it just came out after we’d recorded.

Jimmy

Yeah, the boat sailed later. The boat missed us. So, the Netstrata report came out from McGrath-Nicol, the independent examiner, and they were pretty scathing about Netstrata.

So, we’re going to talk about what McGrath-Nicol said about Netstrata and what Fair Trading is saying about Netstrata.

Sue

And what Netstrata is saying about Netstrata.

Jimmy

And then we’re going to talk about what Netstrata is saying about the whole thing. So, that’s going to keep us pretty busy. I’m Jimmy Thomson.

I write the flat chat column for news.com.au and I edit the flat chat website.

Sue

And I’m Sue Williams and I write about property for the Sydney Morning Herald, the Age, the AFR and Domain.

Jimmy

And this is a flat chat rap. We’ve been waiting for this report now for just, well, it’s a year since the first allegations about Netstrata were aired.

Sue

A year? Is it really that long?

Jimmy

Yeah.

Sue

Wow.

Jimmy

It was an item on 7.30 which had been culled from a longer track for the Four Corners program by Linton Bessa.

Sue

Yep.

Jimmy

And in it, the CEO of Netstrata, who also happened to be the president of Strata Community Association, which is the Strata manager’s professional body, was, I think it’s fair to say he was ambushed. Well, he was caught unawares.

Sue

But can you ambush an innocent person? Because they have nothing to hide.

Jimmy

I think you can ambush an innocent person. Look, Donald Trump ambushed Zelensky the other day on TV.

Sue

That’s true.

Jimmy

And I would consider, well, none of them are entirely innocent, but I think of the three people in that room, Zelensky was the least guilty by a long shot.

Sue

Oh my God, absolutely. It’s no comparison.

Jimmy

So yes, you can ambush an innocent person. In this case, Stephen Brell was asked if his company took commissions for insurance. And he said, no, we don’t.

And the law at that time said if Strata managers did take commissions, they had to declare them. And then it was pointed out that, in fact, what Netstrata was doing was funneling its insurances through its own brokerage and taking a service fee. And in some cases, that service fee was more than a commission.

In some cases, it was less. But he was caught totally wrong-footed. And there was lots of comments from people who were Netstrata clients saying that their insurance premiums had doubled.

And it was because Netstrata was their Strata manager and Netstrata had the ability to just push through insurance policies.

Sue

And if they refused to go with those policies, Netstrata was often charging them for going with other companies, weren’t they?

Jimmy

They would then charge them a commission.

Sue

Yeah.

Jimmy

Look, it’s very complex and very messy. At the end of that, there was this weird period where Brell said he was stepping aside, but he wasn’t stepping down as president of the SCA. But he…

Sue

This is SCA NSW, not the… Yeah, SCA NSW, indeed.

Jimmy

And then the whole Four Corners thing came out and there was allegations about two, I don’t know, one other Strata manager, Michael Lee.

Sue

Yeah, from Result Strata.

Jimmy

And meanwhile, at the same time, there was other issues around a third Strata manager, Whitney Wang.

Sue

Yep, from PSMG, Professional Strata…

Jimmy

Strata Management Group.

Sue

Yeah, that’s right.

Jimmy

And there’s all sorts of shenanigans going on there. And obviously, the government confronted by this, the NSW state government said, we can’t allow this to go on. Now, a sidebar to this, when the Fur Corners report came out, was that the former Strata commissioner, who wasn’t former then, was caught basically having…

He had declared that he still had investments through a company trust, a family trust, in some real estate companies in Canberra that also operated in New South Wales. And he did stand aside. And eventually, his contract ran out and was not renewed.

So there were bodies lying all over the battlefield on this one. But the government appointed a company called McGrath-Nicol to investigate the allegations. Now, when the ABC report came out, they were absolutely flooded with complaints and allegations from other Net Strata clients and other clients of other Strata management firms.

Our own personal history with Net Strata, it’s not great. 

Stephen Brell demanded my resignation as chairman and wrote a letter to the other people on the committee. And the whole problem was me, not them.

And there were a couple of people who believe it. I remember the developer calling me up and saying, you’ve really upset Stephen Brell at Netstrata. And he’s thinking of pulling the Strata management company.

My response was, I hope you haven’t done anything to dissuade him. And Net Strata are no longer that buildings.

Sue

Great.

Jimmy

By the way, when they declined to apply to renew their contract after the first year, the reason they gave was, it was too difficult a building to manage because of some of the personalities, i.e. me. They didn’t say it was me, but there was me and a couple of other people.

Sue

Yeah, sure.

Jimmy

So what did the McGrath-Nicol report say?

Sue

It said that the company was charging excessive fees and not disclosing conflicts of interest or referral commissions.

Jimmy

Right.

Sue

And if you wanna go into more detail, I think they found, allegedly, because I think Net Strata is now contesting many of the findings. Because I think originally they did a report, didn’t they? And Net Strata said, no, they wanted to go over the report.

Jimmy

They had a 70-page rebuttal, which they delayed the issuing of the report by about a month.

Sue

That’s right. But now the report is incredibly detailed and the potential breaches of Strata law include two instances of non-disclosure of commissions received by Net Strata, possible breaches in relation to non-disclosure of commissions received from a third-party service debt collection agency, seven instances of failing to obtain at least two quotes for expenses exceeding $30,000 and several potential conflicts of interest not disclosed by them, including the personal relationships that employees of Net Strata had with suppliers.

Jimmy

In a typical situation, and I remember vividly at the first AGM of our building, the Strata manager got up and said, now you’ve elected your committee, now normally we would just take over from here. And I didn’t even realise at the time because the contract was in this booklet in tiny print that we had agreed to a full delegation of powers to Net Strata. We had made them the chairman and the secretary and the treasurer.

Sue

Which is extraordinary. And before that happened, I’d never heard of that happening before, but I think it’s actually in a number of their contracts, isn’t it?

Jimmy

Oh, I think it’s their standard, it’s their business model.

Sue

So they take full delegation for running an apartment building.

Jimmy

I mean, they’re based in Wollongong, right? So they’re Illawarra region initially. And they’re going out to little apartment blocks in towns like Wollongong and Kiama that don’t have the history of apartment living that we do here in the city.

So they don’t have that collective experience. So they’re going along and saying, look, this is really complicated. You’ve got to collect your levies, you’ve got to make bylaws, you’ve got to blah, blah, blah.

We’ll do it for you, all right? Just relax, enjoy your seaside apartment block. We’ll take care of things.

Now, there’s nothing essentially wrong with that, provided what they’re doing is always the right thing.

Sue

And always in the best interest of the owners.

Jimmy

So it could be potentially a great thing for buildings where the vast majority of people in the building have no idea how to run a strata scheme, but the potential for abuse is huge. So it seems like in some cases, some of their managers were taking advantage of this. Now, this is something that Netstrata is denying.

But this report, I mean, fair trading has notoriously been very reluctant to come out in these issues and make strong statements. This is what Fair Trading Commissioner Natasha Mann said about this. At the heart of this matter is that strata managers have a legal duty to act in the best interests of the people they work for, the owners’ corporations.

The disturbing practices described in this report suggest that Netstrata does not appear to have always done this. On multiple occasions, Netstrata’s own interests appear to have trumped the interests of the people they had a duty to act on behalf of. Now, since the report was started, there’ve been a lot of law changes.

In fact, you could go down all the allegations about Netstrata and Whitney Wang and Michael Lee and say, okay, they’ve just brought in laws to tick all those boxes. And those laws were passed just the other week. But the other aspect of this is that fair trading are saying they will be using this report as a basis for further investigations.

Sue

Because they’re doing a broader report on Netstrata, aren’t they? They’re doing a much bigger investigation.

Jimmy

Yeah.

Sue

So this is only one aspect.

Jimmy

This is not the end of the story. In fact, we’re kind of just at the beginning.

Sue

Yeah.

Jimmy

Needless to say, Netstrata disagree with the findings on the report.

Sue

Surprise, surprise.

Jimmy

But you know, one of the things that bothers me as somebody who advocates on behalf of Strata owners, I’m getting reports of when this all blew up, Netstrata Strata managers turning up at their AGMs and going, look, this is just a couple of disgruntled ex-employees have caused this storm in a teacup. It’s nothing for you guys to worry about.

Sue

And it’s media just kind of…

Jimmy

And the media blowing it up out of proportion.

Sue

So instead of kind of drilling down and saying, we’ve done wrong and we’re going to improve our services, we’re going to improve our processes.

Jimmy

Yeah.

Sue

They were just kind of denying it.

Jimmy

And in fact, what they should have gone in and said to all their clients, we are not employing the full delegation that you’ve given us. We want you to make decisions and we will advise you. And I haven’t heard of anywhere where that has happened.

And you look at Netstrata, I mean, you look at that agreement that they gave us for our investment property, right at the back, all the subsidiaries that they use, fire services, maintenance, insurance brokerage, a legal firm for debt collection, all either subsidiaries of, or very tightly connected to Netstrata. So even when they’re saying, well, we don’t get commissions from these people, they’re making profits. Where they are the wholly owned subsidiary, those profits are flowing back into Netstrata’s coffers.

So they’re being a bit cute about all this so far. When we come back, we’re going to look at what Netstrata have to say about this report. That’s after this.

And we’re back. Now, before we go any further, I should point out that there are articles on the FlatChat website that link to the Fair Trading’s website and their response to the original report from McGrath-Nicol and to Netstrata’s response. So if you want to dig a little bit deeper on this, the material is all there for you to read.

So we come to the Netstrata response and predictably, they were not holding up their hands and saying, you’ve got us bang to rights, Governor.

Sue

Absolutely, because they’re saying that they’re contesting most of the potential breaches listed in the report and look forward to working through these in more detail with Fair Trading.

Jimmy

So basically, they’re going to school Fair Trading on where McGrath-Nicol got it wrong.

Sue

And I called them for more detail because I was writing a story for the Sydney Morning Herald on this to find out which exact potential breaches they were contesting, but they didn’t come back with much. They just repeated that they’re contesting potential breaches. So they say they’ve already implemented many of the independent reviewers’ recommendations and remain committed to delivering better customer outcomes.

Jimmy

Now, the other thing, the next thing that it says in their response is that they welcome the report’s findings that customer charges for a broad range of services Netstrata provides at its wholly owned subsidiaries are charged at or below typical market rates. Now, what they’re saying is, yeah, okay, we have these subsidiaries and we have these sweetheart deals, if you want, with other companies, but they result in the owners’ corporations paying less in some cases or exactly what they would otherwise.

Sue

So why not give the owners’ corporations the freedom to choose whether to use those services or not? If they are well-priced, they will go with them. But by kind of obfuscating all their choices, how do we know if it’s cheap or not?

Jimmy

And it makes people suspicious on what happens if they decide not to give them a discount.

Sue

And there are some cases we know where it’s a lot more expensive.

Jimmy

Yeah, I mean, and that’s this thing about the service charge. In our case, in our investment property, the general commission on insurance premiums is between 20 and 25%. By going through Netstrata’s preferred insurance provider, we were actually only paying something like 16 or 17% on top of the premium.

So you could say, well, we’re saving money. The question then arises, well, what was the insurance? Was it like for like?

Was it identical? Are we comparing ducks and apples here? And the answer is you don’t know.

This is one of the complaints that came up through the McGrath-Nicol report that they were not getting multiple quotes for big ticket items where they really should. Now, you could argue that, well, if they’re getting a cheaper rate anyway, why do you need the multiple quotes? Because you need to know what you’re paying for.

It’s as simple as that. I mean, ultimately it comes down to the owner’s corporation saying, when they’re challenged by their owners who say, how come we’re paying X, Y, and Z for this? They have to be able to say, because we looked at and compared and decided this was a better deal.

It might be a little bit more expensive, but we’ve got better cover. So it’s that thing of, it’s almost arrogant and patronizing for any strata manager to say to their owners, we’ll look after everything and you’ll be fine.

Sue

And we are the ones paying for that. So we need to know.

Jimmy

Yeah, absolutely. But I was having a chat with Chris Duggan the other day, former president of New South Wales SCA, former president of the National SCA. And we were talking about, when you go into your first AGM and you get confronted by all these contracts and you’ve got no idea what any of them mean, and they’re probably written in such a way that you would need a lawyer to tell you, or the consequences of you doing this is that.

And he said, well, it’s not the strata manager’s job to do that. I disagree.

Sue

I think most owners would look to the strata manager for advice.

Jimmy

Yes. And if the strata manager is standing there with his arms folded and nodding and saying, let’s take a vote. Do you want this or do you not want this?

The ordinary owner is going to assume quite wrongly that the strata manager has approved this. Now they know that. They know that.

Again, that first AGM in an investment property and we kicked out the stormwater drain contract. And then I looked at the, and a couple of other people looked at the budget and recognised that it was seriously underfunded. Obviously, obviously to help the developer to sell apartments.

Sue

By saying, oh, the levies are only going to be this much.

Jimmy

Now, when I said, look, let’s suspend approval of the budget. And I could kick myself. Now, when I think of what the strata manager said, he said, no, no, no, you’ve got to approve the budget.

You can come back and change it, but you’ve got to approve the budget. Otherwise it will make it impossible to sell the apartments. Who was he favouring?

Sue

Wasn’t favouring the owners.

Jimmy

Wasn’t favouring because they just bought. They don’t want to sell. Most of them didn’t want to sell.

It was the developer who’s sitting there with 20 properties unsold, who’s having kittens at the thought of us going, you know what? Our levies are going to be 15 to 20% more than you’ve calculated here. So where this neutrality of the strata manager doesn’t wash.

And I think it should be, if they need to get paid more for doing it, then they should have to come up. But the other idea, Cathy Sherry said at that conference we were at, the strata manager who devises the scheme, the system and the bylaws, and the budget for the scheme as paid for by the developer should not be the same strata manager who takes over the running of the building. It should be an absolute split there.

So that, yep, here’s come along and they’ve put together the package. And here is a completely different strata management company who have looked at this package and gone, hang on a minute, guys, you’ve under-quoted and stuff like that.

Sue

That would lead to a lot more honesty, wouldn’t it really?

Jimmy

It would. And I think the other aspect, and this is my big campaign for 2025, the split first AGM. Get everybody together.

They have coffee and cake and whatever. They have a chat. They elect a committee.

They might approve the strata manager contract because they can only last for one year in the first instance. And then the committee says, okay, we’re going to take all these contracts away and we’re going to come back in three months. I was thinking three weeks or four weeks.

Tim Sarra, who was of Strata Choice, who was on this podcast a few weeks ago, he said three months. That’s a senior strata manager. John Minns, before he stepped down from being strata commissioner, he thought there should be a two-stage first AGM.

That’s something that fair trading really needs to be looking at. Now, people will say, oh, you’ve just doubled the cost of the first AGM. Not with Zoom and things like that.

And the savings and the education factor.

Sue

It could be huge.

Jimmy

Right. So it all trundles on. Net strata are denying most things.

But one of the things that’s interesting in what they say is a comment that they make, I think that has alarm bells ringing for me. Net strata say that it welcomes further guidance from New South Wales Fair Trading, given that some of the report’s findings are at odds with industry understanding and practices. Now, that sounds to me like they’re saying, and not in so many words, they’re saying these guys who did this report don’t know how strata management works.

We do. And we’re just following standard practice here.

Sue

Because I think in another part, they actually said that it’s at odds with the commercial realities of strata management as well.

Jimmy

It would cost more.

Sue

Yes.

Jimmy

Well, yeah, exactly. But just about every senior strata manager that I’ve spoken to says that strata management fees are too low.

Sue

And they haven’t changed for like 15 years or something.

Jimmy

But the problem is that some of the biggest players are going around saying we can undercut. Don’t go with these little strata managers who are charging you too much. We’ll charge you less per unit per year.

And I think, and I spoke to John Mins about this, and he said setting a floor for the rates is never a good idea because people work to the rate that you’ve set. But whatever the solution is, it’s not working now, that’s for sure.

Sue

Absolutely.

Jimmy

And what is happening is that strata managers, just to stay afloat, are having to run around and get insurance commissions and sweetheart deals and all the rest of it. If it truly is a professional organisation, and I’d say that is seriously in doubt at the moment, SCA New South Wales needs to find a way that the strata managers can be paid properly for the work that they do so they don’t have to duck and dive and get other income and nice little earners in other areas.

Sue

Absolutely, yep.

Jimmy

On that note, the net strata thing is going to run and run. The other alleged naughty people in strata are appealing.

Sue

Yeah, Whitney Wang’s appealing. Don’t know about Michael Lee, I don’t know. I’ve tried to contact him, but I haven’t been able to.

Jimmy

Look, it’s all going to keep going, hopefully. It’s going to sort itself out. I believe that SCA New South Wales is in considerable disarray at the moment.

They’re not talking to you, I believe.

Sue

No, no, that’s right. They didn’t want to comment.

Jimmy

Right.

Sue

They just refer me to their website all the time.

Jimmy

Yeah, it seems to be the standard practice these days, referring people to the website like that.

Sue

Just among strata managers.

Jimmy

Okay, thanks Sue for diligently going through all this stuff. And I really look forward to reading your story in the Sydney Morning Herald.

Sue

Fantastic. And look, thanks everyone for listening.

Jimmy

You’ll find all the links you need to all the stuff on the Flat Chat website. And if it’s not in the story that you click on, it will have a link to the story that you need, that you want. It’s all there.

We’ve got it all covered. Thank you all for listening.

Sue

Bye.

Jimmy

Bye. Thanks for listening to the Flat Chat Wrap Podcast. You’ll find links to the stories and other references on our website, flatchat.com.au. And if you haven’t already done so, you can subscribe to this podcast completely free on Apple Podcasts, Google Podcasts, Spotify, or your favorite podcatcher. Just search for Flat Chat Wrap with a W, click on subscribe, and you’ll get this podcast every week without even trying. Thanks again. Talk to you again next week.

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