The present reform Bill proposes a tightening of the arrangements, introducing a basic standard of personal probity for applicants (also included in the Queensland proposals) an approved common competency standard, disclosure requirements relating to discounts and commissions and improved disciplinary procedures.
The review of operation of the present system and the current proposals highlight the perceived deficiencies in the existing licensing arrangements. Should the UK Government seriously consider a licensing system the current Bill, when enacted, will provide an ideal based on a full period of testing.
Whilst this is a prerequisite of ARMA membership it has no statutory force and does extend to non-members of ARMA or self-managed buildings. This is an issue which requires urgent remedy with or without a licensing system. There seems no reason why legislation should not require any person, or corporate person, performing certain prescribed functions to maintain and show evidence of professional indemnity insurance, to prescribed levels on penalty of prosecution.
In view of the very substantial sums held and handled by UK managers, and the financial advice they provide in terms of insurance and long-term building maintenance, there is a case for their inclusion within Financial Services Act requirements.
There is already a high level of regulation, through registration, of strata managers in New South Wales under the variously amended Property, Stock and Business Agents Act 1941 (as noted in my previous paper). NSW remains the only state which regulates the strata industry.
The Bill had its first reading on 9th May 2002 following consideration of responses to a paper on overall proposals for reform issued by the Minister of Fair Trading in September 2001; the Bill proposes a rationalisation of licence arrangements including requirements for education standards and introduces a Compensation Fund to protect consumers in the event of trust account losses. The 2001 paper followed an extensive review of the operation of the Act and the new Bill is viewed as primarily consumer protection legislation, not a land or property management issue. The Minister's statement noted "the review concluded that there is a continuing need for government regulation of the property services industry in order to provide an appropriate level of consumer protection."
The 1941 Act and the Bill include strata managers within a range of different agents.
The proposals for competence acknowledge the present absence of any standard curriculum or standard through the introduction of National Competency Standards for each agent requiring licensing. The Minister for Fair Trading will have the power to approve qualifications according to:
The standards are to be established through consultation within the industry and the Australian National Training Authority and particular attention will be paid to "areas of significant risk for the consumer" in the context of the newly qualified agent.
Subject to the competency requirement a licence will be conditional upon the agent completing a further level of qualification and undertaking a minimal amount of continued professional development; the licence will require annual renewal subject to evidence of the CPD studies. These proposals are strongly supported by the professional body for strata managers in NSW.
The proposals seems to have raised little opposition or comment from the industry.
The fund provides for compensation for loss and legal costs of the consumer, plus legal and other expenses incurred by the Director-General in connection with claims. At present the contribution to the fund come from the agents as part of the procedure for application for licence or licence renewal. The Bill now proposes an ability for the Director-General (with approval from the Minister) to impose a levy.
It would be at the Director-General's discretion to raise the levy if he "is at any time of the opinion that the Compensation Fund is likely to be insufficient to meet the liabilities to which is subject". This has raised considerable opposition from strata-managers who, oddly, interpret possible inadequacies of the Fund as resulting from the Department's inefficiency in administering it - "persons licensed under the Bill will be levied to pay for the Departments inefficiencies". It is more to the point that the Compensation Fund is entirely financed by mandatory contribution from the strata-managers (and other agents) themselves and is not rechargeable to unit owners. This contrast with the Property Service Statutory Interest Account.
The NSW requirement for approved schemes provides a model to ensure adequate levels of cover and risk although it does not seem likely that the Association of British Insurers would be conducive to the policing function proposed. There would, however, seem no reason why legislation (consumer protection legislation if not landlord and tenant) should not require persons carrying out prescribed tasks of property management (e.g., raising and collecting service charges, arranging or providing any management services) to maintain and show evidence of professional indemnity insurance to prescribed levels, on pain of criminal conviction.
Imposition of the standard is only fully realisable through a licensing or registration scheme but, with the increasing element of choice being laid open to leaseholders through easier enfranchisement and the right to manage, it may be achievable through market forces. Here the model is with the two progressive qualifications of the Community Associations Institute in the USA; there is no statutory requirement but virtually no Community Association would appoint an agent without PCAM (Professional Community Association Manager); similarly in the majority of cases of self-managed blocks the principal will have taken a CAI course of study and achieved RCM (Registered Co-operative Manager).
The contribution will not accrue as a direct service charge to the lessees in that they are payable globally from interest on the account as a whole.
ARMA estimates the total amount passing through designated trust accounts as £250M; using the NSW prescribed percentage of 60% and applying a lowest instant access deposit account rate of 1%, such a scheme could raise something in the region of £1.5M annually to fund a regulatory scheme.
Whilst the industry is not regulated through licensing as in NSW the management practices of the strata manager are in effect regulated through the prescriptive procedures for the management of bodies corporate in the Standard Modules. These Modules, includes within the 1997 Act, prescribe rules, procedures, notices and practices relating to the governance and management of the body corporative including conduct of meetings, documentations resolutions for use of funds, contracts and the employment and accountability of the strata manager.
The Bill proposes a number of amendments to the Modules, with major implications to management practices.
The Code has 12 mandatory provisions set out in Schedule 1 which essentially require that the body corporate manager must:
The application of the Code is that it will form part of the body corporate manager's contract of appointment and so provide specific grounds for actions for contractual or tort liability by the body corporate.
However, was the RICS Code, or something similar, be deemed to be included in the agent's contract of appointment it would provide a relatively simple route to court enforcement.
(This issue is examined more fully in relation to the New Zealand Retirement Villages Bill, below)
In terms of disclosure the legislation generally requires annual statements of service charges accounts and the Queensland Bill proposes a strengthening of this very much along the lines of S. 152 Commonhold and Leasehold Reform Act 2002.
If the supervisor considers the financial condition of the village to be inadequate he may:
The term "inadequate" is not defined in the Bill, or elsewhere in the guidance, and will presumably, have to be tested by the courts.
The Bill is silent on the issue of the cost of the statutory supervisor and whether this is a professional post or some part time arrangement undertaken by, say, one of the residents. The latter is suggested in that Schedule 4 to the Bill which sets out the duties etc, specifically absolves the supervisor from any liability for loss suffered by any party resulted from any action, or failure to take action, by him.
Firstly, as noted above in connection with disclosure, each village must have a code of residents' rights, drafted to include 12 mandatory provisions in Schedule 3 to the Bill. The intention of the code is to protect the basic rights of the residents but also to lay down a basic service standard for the retirement industry. Some of the clauses relate to issues of personal respect and dignity (e.g. ECHR requirements) but they include rights to information and consultation. Once registered the Code may not be amended, even by the agreement of the residents. The code of residents' rights sets service standards, the code of practice is intended to set minimum requirements of operational and management standards. As with Section 87, Leasehold Reform Act 1993, the Minister may approve a submitted code; if no suitable code is submitted by a specified date the Minister must produce a code.
The code must include nine mandatory provisions set out in Schedule5. It is not entirely clear, within the Bill, whether the approved code has the weight of a regulation; the draft requires that it must be complied with by any operator of a retirement village but gives no information on sanctions for default [this will be further researched].
The most significant facet of the enforcement of both codes is that they are deemed to be enforceable as a contract by a resident and prevail over any inconsistency or delivery in any occupation right agreement.
The operator or landlord must pay for the costs of the panel irrespective of whether he is a party to the action; the panel may award costs to a party.
Similarly, the separate dispute panels appear unwieldy and would only be workable in substantial estates. The mediation and adjudication system operated for strata-title in New South Wales and in New Zealand (outside the retirement sector) would provide a more consistent operation.
[The alternative, of course, would be a service provided pro-bono by members of ARMA/ARHM as a contribution to improved management standards]
This would allow an individual tenant to seek remedy, through damages or specific performance, at the court for any shortcoming in service delivery amounting to a default of the code. This would provide a far simpler process than the existing legislative use of the code in applications for the appointment of a manager (Landlord &Tenant Act); the remedy should be less draconian than the replacement of the manager in a simple order for compliance or award of damages.
However, before considering this further we need to look at present court practices. The principle of the award of damages in landlord and tenant actions is not to punish the landlord but to restore the tenant to the position he would have been in had the breach not occurred and it is difficult to imagine what damages might be awarded for breach of, say, the managers' obligations relating to provision of information. Whilst the code attempts to establish standards of service provision it would be difficult for a court to quantify damages suffered by a tenant for any reduction in those standards not causing actual harm or loss to the tenant.
It is an attractive idea but only effectively workable if damages could be awarded by the court on a punitive basis, not as remedial damages but, effectively, as fines for default. An ability for an individual tenant to pursue a manager thorough the relatively inexpensive medium of small claims in the county court would provide a far greater direct accountability of the manager to the individual tenant (and would, to a degree, resolve the issue of to whom does the manager have responsibility, his client, the landlord, or the tenants who are paying for his services).
It may be worth underlining the much higher levels of investment by the Australian citizen than his UK counter-part as the basis of retirement support; ownership of a second property for "buy to let" is commonplace, assisted by tax concessions.
Clearly agents will advise on insurance of the building and will make recommendations to the corporation on best value; does this constitute inducement to a particular product/similarly, the agent will make professional recommendations for long-term maintenance; does this represent investment advice? There are similar concerns relating to sinking funds; clearly advice on how to invest the funds is financial advice but are the financial calculations for the fund provision and the appropriate levies to achieve what the agent advises to be adequate provision not also a form of financial advice?
None of these questions is yet answered by ASIC.