NAT: Q&A Does vertical integration create a conflict of interest for strata companies?

This article discusses the conflicts of interest arising from vertical integration in strata management and the need for greater transparency and regulation.

Question: What conflicts of interest arise from vertical integration in strata management? Is there need for greater transparency and regulation?

How do you see vertical integration evolving in the strata space? If a company does management, maintenance, insurance broking, and utilities billing, what are the risks for owners and committees, and what protections or transparency measures should be in place?

Answer: It’s almost impossible for someone who’s working under a vertical integration model to satisfy the law.

That’s a very, very complex question. Vertical integration, of course, is the practice of an agent going down the expenses of an owner’s corporation or a body corporate, and forming companies to do those things. So, for example, repairs and maintenance, fire inspection, and writing reports. Some strata managers even have an interest in law firms. That’s what vertical integration is.

Now, in the current review and law reform that’s going on right across Australia, conflicts of interest are in scope. But I don’t think we’re going to get to a stage where vertical integration will be outlawed. I think that’s going to be a bridge too far for the government.

The question then is, how do strata management firms manage that conflict of interest? At the moment, they’re not managing it well at all. They’re using different names and different contracts, and they’re not telling people properly and making full disclosure so that people can make informed consent.

So, vertical integration is really problematic. But it’s here to stay, I think. It’s hard to imagine that, beyond insurance brokerage, which might be banned, the governments might say you can’t have an interest in an insurance brokerage company. Beyond that, it’s hard to see that they’re going to stop companies from having facilities management divisions and having all these other related parties.

It’s almost impossible for someone who’s working under a vertical integration model to satisfy the law. I was dealing with a very experienced lawyer last week who said, The root of all evil comes from related party transactions. And, I think we’ve seen that, and we’ve studied that quite a bit in the context of developers and the related party conflicts that can arise out of the development of strata property. We need more research about that in relation to strata management.

Now, Dr Nicole Johnson has been commissioned by the New South Wales Government to do some research into this, and her report is imminent, and it’s going to be very detailed. It’s going to be very hard-hitting. It’s going to bring to the public attention things that have never been discussed before in relation to strata management conflicts. Now, there’s going to be press about that, and we’ll have a whole new round of discussions because of this report.

We need to be ready for this discussion, and people who are engaging in vertical integration need to have good answers ready about how they do it, and I think at the moment, it’s done very, very poorly, so they’re going to have to lift their game.

Note from Admin: Since the date of this recording, Dr Nicole Johnstone has released the report mentioned in the recording. The report can be accessed in full here: At the Crossroads: Addressing Pervasive Conflicts of Interest in Strata Management.

Michael Teys
Michael Teys Strata Advisory
E: [email protected]
P: +61 419 644 288

This post appears in Strata News #766.

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