NSW Productivity Commissioner Advocates for Ban on Strata Manager Commissions
The New South Wales productivity commissioner, Peter Achterstraat, has called for a swift prohibition on commissions received by strata managers, citing significant conflicts of interest and the growing importance of apartments in the housing landscape. With projections indicating that apartments will constitute half of all Sydney homes by 2041, Achterstraat emphasizes that protective measures are urgently needed to safeguard apartment owners.
Conflicts of Interest in Strata Management
Apartment owners typically engage a strata manager, often from a private company, who is paid a fee to oversee the affairs of the owners' corporation. However, these managers frequently earn additional commissions for securing insurance and other contracts, such as energy and telecommunications services, directly from providers. Achterstraat's report highlights that this practice can lead to poor management decisions and a trend toward "vertical integration," where managers financially benefit from directing business to connected service providers.
In one submission to the review, a strata resident recounted an instance where a building repair was quoted by a large maintenance company located far away, which turned out to be part of the same conglomerate as their strata management firm. This example underscores the potential for inflated costs and lack of transparency.
Financial Implications and Reform Proposals
The review, which garnered over 550 submissions, included a case study of a large residential strata scheme in inner Sydney. Here, the strata manager accepted insurance commissions at 15% of premiums, leading to payments skyrocketing from $8,000 to $27,000 annually over four years, despite no increase in workload. When the strata committee switched to an independent insurance broker, premiums dropped by 30%, demonstrating the financial benefits of removing commission-based incentives.
Achterstraat proposes transitioning to an upfront, fee-for-service model, which would make NSW the first Australian state or territory to ban such commissions. He estimates that this reform could yield over $300 million in benefits for the state over the next 15 years through enhanced competition and reduced costs. While some in the industry resist change, arguing that commissions compensate for intensive work, the report suggests that any fee increases could be offset by lower premiums and other expenses.
Industry and Political Responses
The Strata Community Association, the peak body for the industry in NSW, supports moving away from commissions. However, the report notes resistance from some strata managers who rely on these payments. Achterstraat recommends a phased ban over three years to allow for a smooth transition, offering options such as voluntary phase-outs or legislative action.
NSW Minister for Fair Trading, Anoulack Chanthivong, who commissioned the review, has welcomed the proposed reforms and stated that the government will carefully consider the recommendations. Similarly, NSW Opposition Spokesperson for Fair Trading, Tim James, indicated openness to reform proposals, provided they are based on compelling evidence.
As Sydney faces housing affordability challenges, with Achterstraat previously warning about demographic shifts, this push for regulatory change aims to protect consumers and ensure fair practices in the rapidly expanding strata sector.
