More stringent insurance disclosure rules may be just one of the repercussions from last week’s Four Corners program alleging malpractice in the strata sector.

Consumer groups have called for a national inquiry and tougher state-level regulation, while the role of commissions is again up for debate.

Concerns around opaque strata arrangements have been simmering for some time, as highlighted by Steadfast’s decision several years ago to be proactive and ask John Trowbridge to undertake an extensive independent review of practices in the sector.

The Australian Consumers Insurance Lobby said in February it had presented regulators with examples of poor conduct across the sector and called for wider investigations, while an ABC report in March targeted excessive fees charged by NSW strata management firm Netstrata, plus other issues.

That report led to NSW Fair Trading asking independent expert McGrathNichol to conduct a review of Netstrata, and triggered a parliamentary bill introduced last month to toughen regulation.

Last Monday’s Four Corners program looked at strata failings separate to insurance, as well as honing in on Steadfast, which owns CHU, the largest underwriting agency in the sector. The program alleged the company’s reach through agencies, broking and service providers reduces competitive tension, is not transparent and inflates property-owner costs. 

Steadfast says it holds itself to high professional and ethical standards and rejects suggestions of business being improperly channelled to related entities. It says it has acted to improve remuneration transparency since the Trowbridge review and will undertake a further probe to identify and address inappropriate behaviours. The company’s shares fell more than 10% last Tuesday, partly recovering by the end of the week.

Following the ABC program, nine consumer groups, including ACIL, Choice and the Financial Rights Legal Centre, wrote to Treasurer Jim Chalmers requesting the Australian Competition and Consumer Commission or the Productivity Commission lead an inquiry into the sector.

NSW and Queensland indicated support for a national review and the Australian College of Strata Lawyers called on each state and territory to introduce a properly resourced enforcement agency to be a “strata cop on the beat”.

Macquarie Equity Research says the strata market is likely to continue receiving negative press over the medium term, spurred by affordability challenges, and it is likely other states will follow NSW in boosting disclosure.

“While standard industry practices do not pass the pub test, we do not believe there are legal ramifications for insurance brokers or underwriting agencies,” it says.

“For brokers, the pathway to improvement has been outlined in the Trowbridge report for some time, and we expect media attention to be the catalyst for industry-wide change.”  

Macquarie estimates the strata insurance market was worth about $1.9 billion last financial year, excluding industrial special risk policies, and forecasts it will grow by about 19% over the next two years on rate gains and as sums insured catch up to building inflation. That’s only about 16% of the home market, excluding landlords, but still makes it one of the largest insurance products, it says.

Morningstar also says the industry will probably need to improve disclosure to customers, and regulators may look to remove some of the alignment between strata managers and brokers. The ABC program raised concerns over a broking business in which both Steadfast and a strata manager hold shares.

Reputational damage is a risk, especially if examples of brokers and strata managers providing poor advice are brought to light, which could lead to market share loss for Steadfast, Morningstar says.

The ACCC has repeated its call to ban commissions and has highlighted the limits of disclosure in resolving issues. It also notes Steadfast’s expansion went under the radar.

Goldman Sachs says commissions were retained after they were examined as part of the Quality of Advice review, published in February last year.

“ACCC comments suggest some risk around mergers and acquisitions – particularly in view of new ACCC powers being considered by the government on creeping acquisitions – relevant for AUB as well,” it says. “Offshore opportunities may become more meaningful as a result.”

The NSW Strata Managing Agents Legislation Amendment Bill 2024, still before state parliament, bans strata agents from receiving commissions on insurance products when they do not play a role in finding the best deal for property owners. It also increases disclosure obligations and penalties.

Greens state upper house MP Cate Faehrmann asked Better Regulation and Fair Trading Minister Anoulack Chanthivong in a budget estimates hearing last Tuesday why the bill did not go further, given the ABC report and ACCC view on commissions.

“The banning of commissions as a general business model is a policy option that’s on the table for the government,” Mr Chanthivong said. “I’ve asked the Fair Trading commissioner to closely examine the policy options that will work. The bill before the parliament is specific to an insurance product, because this is a much broader conversation.”

Good policy takes time and “it’s not a simple process of adding one sentence in a bill”, he said.

NSW Fair Trading commissioner Natasha Mann says McGrathNichol has delivered its draft report on Netstrata. It is intended findings and recommendations will be made public, although no timing has been indicated.

The findings are likely to put renewed heat on strata issues, while consumer groups will continue pressing for action at a national level.

“The lack of transparency and accountability in the current system has left many of us vulnerable,” Owners Corporation Network of Australia executive director Karen Stiles said last week. “We need a thorough inquiry that not only highlights these issues but also leads to substantial reforms.”