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RESPONSE TO THE REPORT OF THE NATIONAL REVIEW OF HOMEBUILDERS WARRANTY INSURANCE AND CONSUMER PROTECTION Prepared by a Working Party of the Standing Committee of Officials of Consumer Affairs November 2002 DRAFT RESPONSE TO THE REPORT OF THE NATIONAL REVIEW OF HOMEBUILDERS WARRANTY INSURANCE AND CONSUMER PROTECTION The domestic building industry is an important industry in the Australian economy and is important to the consumer. Generally, the industry is characterised by small businesses1 with a large labour and apprenticeship component. Hence, the government uses the industry as a vehicle for implementing policy, particularly for stimulating the economy through selected funding and taxation initiatives. Distortions in the market can impact adversely on the consumer's choice and confidence. Poor building practices will not only reduce consumer confidence, but will result in cost inefficiencies. Obviously if consumer confidence is enhanced by better building practices and better complaint resolution, this will have a positive impact on the domestic building market. More recently, government has concentrated on the matter of homebuilders warranty insurance in attempting to address consumer loss incurred as a result of defective and incomplete building. The implementation of the "Ten Point Plan" by Victoria and New South Wales in July 2002 was intended to provide an insurance product where the risk is more predictable to measure and cost. This was intended to assist in maintaining a viable and sustainable homebuilders warranty insurance system for the protection of building consumers. It may be expected that these changes will transfer some of the risk from the insurance companies to the government and the consumers. In reviewing the Report of the National Inquiry into Homebuilders Warranty Insurance, the Standing Committee of Officials of Consumer Affairs (SCOCA) Working Party agreed with the main finding of the National Inquiry "that the cost and availability of homebuilders warranty insurance is as much a function of the regulatory framework governing the homebuilding process as the conditions applying to the insurance market" and that "making the building process more reliable and less acrimonious offers the only lasting solution to homebuilders warranty insurance for consumers, builders and insurers". While agreeing with many of the Report's recommendations, the Working Party was concerned that implementation of just some of the recommendations would still allow gaps in the system. To assess the Report's recommendations, the Working Party delineated from first principles an adequate consumer protection framework and the principal elements required to sustain that framework working in a dynamic, competitive, informed and fair marketplace. The Working Party compared the many recommendations of the Percy Allan Report against this framework. The primary elements of the framework identified by the Working Party are:
In addition, the Working Party considered that there needs to be a form of "fall-out" protection which can be in the form of homebuilders warranty insurance, mutual funds, guarantee systems or trust funds. That is, the product may not necessarily be provided by insurance companies as long as the product provides the protection required and that the providers, eg insurance companies, banks, mutual funds, etc operate within certain probity requirements. The primary elements are interrelated and a reduction in resources or funding in one element may impact on other elements and require greater "fall-out" protection. The Working Party did not regard this "fall-out" protection as an exclusive right of the insurance sector. The recent modifications of the insurance product provide an example of the lack of competition and resultant power the insurance companies have in negotiations on this mandatory requirement. There is no guarantee that the current insurance companies will stay in the market and this could lead to a situation where one insurance company services the market or to a situation where there are no insurance companies prepared to provide the product. In either case, consumer protection will be reduced. For the same reason, the Working Party emphasised that the present homebuilders warranty insurance scheme should be recognised as a "fall-out" scheme and not the principal element of the government's consumer protection regime. Similarly, the Working Party's response differs from the Percy Allan Report, in that the Working Party does not support further proposals to wind back insurance cover, but places more emphasis on getting the regulatory framework right. Comments of insurers indicated that the recent changes to the insurance product would not significantly lower their claims cover. There is no evidence to date that the changes have been reflected in reduced premiums. The Working Party suggested that where some jurisdictions have made changes with the intention of achieving a more viable privatised homebuilders warranty insurance regime, that those jurisdictions should monitor the new cover for any impacts on the consumer or the home building system. The Percy Allan Report, on many occasions, used various aspects of the Queensland system as an example of good practice. Similarly the Working Party, on many occasions, was referred to the Queensland model in its discussions. The Queensland2 model, rather than certain pieces of the model, is an example of an interactive system which is providing an appropriate level of consumer protection. It is important to note that this Queensland model has been refined over the last ten years and it is very different from the Queensland model of five years ago or the housing guarantee models previously employed in other jurisdictions.
The Working Party notes the potential for the homebuilders warranty insurance issue to impose significant costs on governments in Australia. In particular, because of the mandatory insurance requirement, government would probably be perceived by consumers and industry participants as responsible for any failure of the insurance system or insurers to meet their commitments with regard to payouts or with regard to the sustainability of the building industry. In reality this responsibility must represent a large unfunded commitment for government - a commitment which cannot be controlled because it is provided by the private sector. This led the Working Party to consider whether homebuilders warranty insurance (or a form of alternative scheme) is really needed. After considering claims data from the Queensland Building Services Authority and the Victorian Housing Guarantee Fund Ltd., the Working Party agreed that there was still the need for a "fall-out" system to reduce consumer loss as a result of defective or incomplete building. The Working Party considers that, as an urgent matter, governments need to develop contingency arrangements in the event that the insurance industry is unable to adequately cater for the homebuilders warranty insurance market to ensure that the homebuilding sector is not halted or disrupted and consumers are not disadvantaged. In addition, the legislation should be reviewed to assess what legislative changes would be required if the insurance model ceased to function and other arrangements were required. The following response is submitted for the consideration of the Standing Committee of Officials of Consumer Affairs. In October 2001, following discussions on the builder warranty insurance market after the HIH Insurance Group collapse, the Commonwealth Government engaged Professor Percy Allan AM to examine the various issues relating to domestic builder warranty insurance for consideration by the Ministerial Council on Consumer Affairs. This National Review of Home Builders Warranty Insurance and Consumer Protection had the following objective and terms of reference: Objective: To explore the systemic issues in the domestic building indemnity/home warranty insurance industry with a view to identifying a competitive home warranty insurance scheme, which is viable in both the short and longer term and provides an appropriate level of protection for homeowners as consumers. Terms of Reference:
The main finding of the National Inquiry is that the cost and availability of homebuilders warranty insurance is as much a function of the regulatory framework governing the homebuilding process as the conditions applying to the insurance market. It further noted that "making the building process more reliable and less acrimonious offers the only lasting solution to homebuilders warranty insurance for consumers, builders and insurers". The highest priority recommendations flowing from the Percy Allan Report were:
Following the receipt of the Report from Professor Allan, the Ministerial Council on Consumer Affairs agreed at its meeting of 2 August 2002 to:
A Working Party with representation from all state and territory consumer affairs agencies was established and held its first meeting in Melbourne on 23 August 2002. DIAGRAMS Diagram 1: Economic Rationale for consumer protection in the building industry Diagram 2: A Sustainable Consumer Protection Environment For the full Draft Response to the Report of the National Review of Homebuilders Warranty Insurance and Consumer Protection please use the download feature.
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© Commonwealth of Australia 2000 Ministerial Council on Consumer Affairs www.consumer.gov.au
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