Annette Hurley (SA, Australian Labor Party) Share this | Link to this | Hansard source

I present the report of the Economics Committee, Australia’s mandatory last resort home warranty insurance scheme, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.

by leave—I move:

That the Senate take note of the report.

This report is the result of a very long and complex inquiry. I thank Mr Geoff Dawson and the secretariat for their assistance in the inquiry to the committee and the participating members. Home warranty insurance is a very complex issue, and there have been many, many reports done at state and national level on this issue. We looked at a couple of main areas because there have been complaints by both builders and consumers about this form of insurance, and there is much misunderstanding on both sides of it.

I will provide a little bit of background about the insurance first of all. Home warranty insurance is in fact not really a warranty on the home at all; it is last resort insurance if the builder dies, disappears or becomes insolvent. So it is not a warranty against the work of a builder; it is only last resort insurance if that builder for some reason cannot complete the home. This insurance is taken out by the builder on behalf of the consumer. That also creates some misunderstandings. Builders’ complaints about it related to the fact that the insurance companies giving them insurance look first of all at the financial viability of the builder to ensure that, of course, the insurer is not left with a lot of liability and that they are not insuring a builder that is likely to go broke or disappear. Builders often claim that they have to give a high level of guarantee and that that is restrictive and deters builders from operating. From the consumer point of view, it can be very difficult to claim the insurance when they have to prove that the builder has become insolvent or has disappeared. There were many harrowing examples where consumers had spent a lot of time and money and been through various tribunals and courts trying to get this insurance triggered.

The committee was certainly very keen at the beginning, having seen these kinds of examples, to find some way through this dilemma of what we do about home warranty insurance. But, as so often is the case when you begin these inquiries, you discover that there are many layers of complexity in these issues.

I thank the many people who wrote submissions and/or gave evidence to our inquiry. We heard from many consumers and many builders and had very comprehensive evidence from the New South Wales government, who went through their regulation of the industry. In particular, we also heard from the Queensland government, who have a first resort kind of insurance which is run by the government and provides a warranty for building standards. It provides that warranty right through and also provides last resort insurance. That did seem to be a very good form of insurance. I think the committee was very impressed by the level of support given by the Queensland government to that.

The question was: should we recommend that kind of full insurance or some other form? The New South Wales government are putting in place many checks and balances to ensure that building standards are maintained in that state, and that is an ongoing process. In other states, the process is variable. In my own home state of South Australia, and indeed in Western Australia, we found that there were very few problems—that the scheme is in fact managing quite well. The consumer protections seem to be in place, and the last resort scheme is sufficient.

Considering those layers of complexity, we recommended that there be better data gathering, that there be better reporting of what insurers are doing and what kind of profit they make out of this insurance and that recommendations be put in place about a best practice for ensuring that there is consumer protection right through the building process as well as at the end. We recommended changes right through from changing the name of the insurance, which implies that there is some sort of warranty on a house being built by the consumer. It is really only a last resort policy in all states except Queensland.

A lot of the examples that we heard from consumers about problems in fact originated before the HIH Insurance collapse, which caused a great many problems because HIH provided a great deal of this insurance. That illustrates how long ago it was, because that collapse was in 2001, so a lot of those complaints have been carrying on since then.

Since then, the HIA, the MBA and other building associations have worked with state governments to get some form of insurance back up. One insurance company in particular has a large share of the market, and the HIA provides broking services for that insurer and others. There was some question about whether that was any kind of conflict of interest. The committee went into that in great detail and found that there was no conflict of interest there, that the HIA had a broking service at arm’s length and that that dealt independently with builders and with consumers in terms of this form of insurance.

The Tasmanian government has made this insurance voluntary rather than mandatory. The committee discussion was to the effect that we should keep a watching eye on that to see if the Tasmanian experience in a few years time is still positive and if that does not create problems for consumers where the builder does die, disappear or become insolvent.

We have recommended that mandatory last resort insurance be kept in place in order to provide some form of last degree protection for those consumers who are building a house. The committee kept in mind that it was the consumers’ interests that were paramount. For most people building a home, that is the biggest asset they will ever own. They invest not only a lot of financial capital but also a lot of emotional capital into it. We saw that from some of the evidence where things had gone wrong. It is not only a whole house, of course; often people do substantial renovations with the same effect. In the interests of those consumers, the committee decided that it was best to keep some form of last resort warranty in place in case of the builder disappearing. The actual cost of that insurance is not something that was raised in the inquiry, in that it is not a significant impost on the home builder in the scheme of things.

So, while wanting to keep a watching brief on that form of insurance and while being very keen to ensure that consumer protection from the start of the building process and the way in which the consumer is informed right through to the end is improved in all states, I certainly commend New South Wales for a lot of the efforts they have made and of course the other states and the ACT as well. In South Australia and Western Australia, there have not been a great many complaints about this form of insurance, and obviously the consumer protections are working adequately.

Christine Milne (Tasmania, Australian Greens) Share this | Link to this | Hansard source

I rise today to note the report from the Senate Standing Committee on Economics entitled Australia’s mandatory last resort home warranty insurance scheme. When I moved for this inquiry, on behalf of the Australian Greens, it was very clear to me that the privatised last resort home warranty scheme as it currently exists does not provide adequate consumer protection or building industry management in Australia. It was very obvious to the Greens that it is not working for consumers or the building industry and it should have been either abolished or fundamentally reformed. Therefore, I know that there will be hundreds of people throughout Australia today who are going to be devastated by what they will see as an extremely weak report that has not addressed the key issues that they wanted addressed. Once again, all of those builder and consumer advocate groups who have been fighting to get justice in this area for so long will see that the Senate has effectively shelved this and left it to yet more inquiries—because it is not going to go away. It will keep on going and it will continue to dog governments until somebody has the courage to deal with it. So I have to say that I am extremely disappointed with the report.

Even the Productivity Commission, in its review, commented on the large number of complaints it received about this particular insurance product. Its report noted the need for better consumer protection in the home building industry and the need for early stage consumer protection measures like improved dispute resolution and better linking of licensing with builder performance. One of the key aspects of last resort home warranty insurance that has been so unjust, as it has been applied, has been the power of the insurance industry and its brokers. The Housing Industry Association, acting as a broker, and the insurance industry have been able to determine who can and cannot build in Australia. That gives them incredible power over people. If anyone complains or if anyone does anything then there is the option of refusing them a licence.

Quite clearly, what you need to be able to do is to separate those roles and make sure that there is much better linkage of builder registration with the skills of the builder and the performance of that builder. That is what should determine whether people are registered as builders in this country. If a builder has had a poor record of performance or whatever else, that should be able to be seen and there should be a registration that links performance with licensing. Instead of that, builders’ licensing is directly linked to the power of the insurance industry and its broker. For many years, overwhelmingly that was the Housing Industry Association. I will go to that in more detail in a moment.

Choice magazine did an assessment of this insurance product and described it as ‘junk insurance’. I concur with that. I do not see that it provides any benefits to consumers or to the building industry. I completely disagree with the Senate committee majority recommendation in relation to the fact that it provides redress in some cases. In handling the two largest housing collapses in recent times—Beechwood Homes in New South Wales and Gumleaf Developments in Victoria—last resort home warranty insurance was bypassed. If indeed it provided the cover that it said it provided when a builder became insolvent, died or disappeared, then, since it was mandatory, it should have been the mechanism that was used in those cases, and it was bypassed. There was no evidence provided to the committee that this product actually provides any redress. This was the overwhelming view, particularly from the hearing in Sydney, where we heard that large numbers of people who have lost vast amounts of money are trying to take the insurance companies through the courts and so on to get the money that they thought they were entitled to under the terms of the insurance product.

To say that it should stay mandatory is, again, to continue the undue power and influence of the insurance industry and the Housing Industry Association in this particular market. I support what the Tasmanian government has done in making it voluntary. Interestingly, there is so much pressure on around this issue that even the Housing Industry Association came out during the inquiry and said it would support last resort home warranty insurance being made voluntary. It even supports it being made voluntary, but the majority of the committee did not see fit to take that into account, which I found very interesting. I do not believe that the insurance product should remain mandatory. It should have become a voluntary scheme. If insurance is any good, people will take it up. If it is going to be made mandatory then it has to deliver what people believe it is delivering, and that is to give consumers some insurance against claims of collapse and noncompletion and so on, which they expect when they are building a home.

There was overwhelming support, as the chair of the committee just reported to the Senate, for the Queensland model. That is a government backed model. We had lots of evidence before the committee from just about right around the country saying that that model worked very effectively and asking why it could not be duplicated around the country. It would not be viable, for example, to adopt a Queensland model as such in some of the smaller states, but you could expand the model so that everybody could access it. It would become viable in terms of the numbers if you did it across the country.

Just flick-passing this to COAG to look at issues of consumer protection is a guarantee that it will go into the ether for an endless period into the future. I am glad that there is a recommendation that issues around dispute resolution and consumer protection should go to COAG, but it is no guarantee that this will actually be dealt with. If anyone is interested to look at the Queensland scheme, it is auspiced under legislation up there. It does provide remedies for defective building works. It does provide efficient resolution of building disputes. It provides support, education and advice for those who undertake the building work and also for the consumers. It also regulates the industry to ensure that there is maintenance of proper standards and achieves a reasonable balance between the interests of building contractors and consumers.

I cannot see why we could not have recommended that the Commonwealth develop a framework to deliver the Queensland-style system across the country. The only assumption I can make is that there was not a view that state governments ought to auspice this and that it ought to stay in the private sector. We have seen how brilliantly the private sector has managed the insurance industry and the banking industry with the prime mortgage collapse. The failure of last resort home warranty insurance is another failure of the private sector.

The Greens recommended that we should adopt a national approach to the issue and rapidly move to a system based on the Queensland model of home warranty insurance. We recommended that the Commonwealth should design the scheme. It should be put through the COAG process and adopted in January 2010. Between now and 2010, the last resort home warranty insurance should not be mandatory and the Commonwealth should ask the states to deliver that through mirror legislation.

We agree, however, that any form of home warranty insurance should be included in the National Claims and Policies Database so that there is consistency with other insurance products and people can compare, at last, the profit ratio and the premium ratio to see what is going on. Also, if there are any loopholes currently in Commonwealth legislation that in any way exempt home warranty insurance from the proper regulatory oversight of APRA, ACCC and ASIC, legislation or regulation must be changed to close that loophole. This issue is not going to go away, and it is critically important.

We heard through the inquiry that the Housing Industry Association, a private company, is not a representative structure. It is not an industry association as its name suggests. It is a private company making a large amount of money. It is time that builders across Australia had a very good look at the Housing Industry Association because they do not seem to have any power to control what is a private company getting a large amount of money and in part because of this insurance product and its mandatory nature. So I would urge the government to reconsider its position in relation to this product and take a much stronger leadership role to get rid of last resort home warranty insurance as it currently exists in Australia.

Question agreed to.