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Chapter 2 - Regulation of timeshare schemes
Introduction
2.1
The introduction of a new management structure and
uniform compliance regime for managed investment schemes was intended to reduce
institution risk and enhance consumer protection. The regime was put in place to
improve the international competitiveness of the Australian financial services
industry.
2.2
Timeshare operators assert that the regulatory
framework imposed under the Corporations Act has erected unnecessary and
expensive administrative hurdles for industry. Further, it is argued that the
regime has the effect of decreasing the international competitiveness of the
timeshare industry without improving consumer protection.
2.3
This chapter provides a context for consideration of
the issues raised by the timeshare operators and other evidence to the inquiry.
It begins with a definition and brief overview of the timeshare industry before
setting out the main features of the regulatory arrangements which currently govern
timeshare schemes.
Industry definition and profile
2.4
The legal definition of timeshare is provided under the
Corporations Act 2001 (Corporations
Act), which specifies that a timeshare
scheme is a scheme, undertaking or enterprise, whether in Australia
or elsewhere:
- participants in which are, or may become, entitled to use, occupy or possess,
for two or more periods during the period for which the scheme, undertaking or
enterprise is to operate, property to which the scheme, undertaking or
enterprise relates; and
- that is to operate for a period of not less than three years.[1]
This captures the
variety of timeshare schemes operating in Australia,
including those featuring holiday exchange arrangements.
2.5
The timeshare industry is a hybrid of the property
development, tourism, and hospitality industries, and as such involves four
principal groups of service providers:
-
developers who build resort complexes;
-
marketers and promoters who sell units to
consumers;
-
exchange companies which facilitate the
bartering of units between locations; and
-
networks of participating resorts.[2]
2.6
Timeshare schemes traditionally operated as title-based
schemes in which a purchaser became a tenant in common with a right to share in
the ownership of real property. The timeshare contract secured the owner a
holiday at the same timeshare property for a specified period, at a designated
time once a year.
2.7
Timeshare operators now offer more flexible 'holiday
club' or vacation exchange schemes. These allow for time in resort or hotel
accommodation to be exchanged between members using mechanisms such as the 'points'
system. Owners purchasing under title-based schemes can convert their
investment into points to purchase any number of days accommodation, plus extra
services, at any time of the year at another participating resort. New clients
buy a certain number of points to achieve the level of service they require,
and can upgrade by purchasing additional points.[3]
2.8
To invest in timeshare the purchaser must sign a
timeshare contract. This is a complicated document involving management and
trust arrangements and setting out the obligations of a number of parties. The
price of an average contract is between $12,000 and $25,000.[4] Timeshare contracts apply for a
pre-determined period of up to 80 years duration.[5]
2.9
The resale market for timeshare in Australia
is undeveloped compared with Europe and some states of
the United States.
If the owner wishes to exit the contract they may receive between 50 or 60
percent of the paid price for points products, title-based products in older resorts
may realise only 10 per cent of the original price.
2.10
Most new-offer timeshare schemes are structured as share-based
schemes or unit trusts. At the end of the contract, the scheme must determine
whether the timeshare operation will be wound up and the funds distributed
between the owners or whether the contracts will be reinstated. As with other
trust-based systems, all property is held and managed by the operator until the
scheme expiry date.[6]
Evolution of the product
2.11
The Swiss company Hapimag originated the idea of
timeshare in the 1960s. It sold ski resort units on the basis of one set month
or one week's annual usage, for a fixed number of years or in perpetuity.[7] After the oil crisis in the 1970s,
tourism slumped and American resort owners began offering seasonally adjusted
prices on a timeshare basis to encourage high year-round occupancy rates. In
1974 the development of global 'ownership pools' allowed for members to
exchange their holiday entitlements for another member's entitlement in other resort
locations.[8]
2.12
In the 1980s the global timeshare market began to
attract large international hotel management and hospitality groups which
offered higher standards of accommodation and focussed delivery on the more
flexible vacation arrangements.[9] This foreshadowed
the revival of the global timeshare industry in the 1990s, as the table below
shows.[10]
Table 1: Growth of global timeshare industry 1980 to
1998
|
1980
|
1985
|
1990
|
1994
|
1998
|
Owners
|
155 000
|
805 000
|
2 048 804
|
3 144 000
|
5 498 000
|
Resorts
|
506
|
1 774
|
2 357
|
4 145
|
5 487
|
Intervals sold per year
|
100 000
|
245 000
|
405 000
|
560 000
|
778 000
|
2.13
The World Tourism Organisation now rates timeshare as
the fastest growing segment of the world tourism and leisure industry.[11] Statistics indicate that the volume of
global timeshare sales has grown by an average of 15 per cent over the last ten
years, with sales in 2003 estimated at A$15 billion.[12]
Timeshare in Australia
2.14
The 1980s saw a proliferation of timeshare schemes,
particularly on Queensland's Gold
Coast, but the questionable marketing practices of property entrepreneurs soon
led to an industry downturn. In 1990 the collapse of the unlisted property
trust market further reduced investor confidence.[13] By 1995, there were fewer than five
resorts actively selling timeshare in Australia.[14]
2.15
In 1994 the Australian Timeshare and Holiday Ownership
Council (ATHOC), the timeshare industry's peak
body, was formed to improve the image of the industry. It developed an industry
code of practice and provided training and dispute resolution services. Corporations
law reform in the late 1990s raised industry standards and provided more
protection for consumers.
2.16
ATHOC and industry
submitters maintain that the now buoyant timeshare industry results from the
entry of large internationals into the Australian market. For example,
international exchange arrangements offered by large operators like RCI Pacific
are said to support high year round occupation rates in resorts, which
contribute to stable employment and regional economic growth. According to the
2002 timeshare survey Resort Timesharing
in Australia and New Zealand (the Ragatz report), timeshare owners in
Australia spend about $116 million annually at resort communities, while timeshare
resorts spend about $39.7 million on maintenance, staff and purchase of goods
and services a year.[15]
2.17
The ATHOC submission
reports that the Australian timeshare industry recorded over $300 million in
timeshare sales in 2004, with over 130,000 households owning rights to about
160,000 timeshare weeks. There are at present approximately 110 timeshare
resorts in Australia.[16] A list of major participants in the
timeshare industry in Australia
is at appendix 3.
2.18
Yet despite this positive picture, the Committee has
been petitioned by major timeshare operators over a number of years about the negative
pressures placed on the industry by its regulation under the Corporations Act.
2.19
In 2003 the Committee surveyed industry opinion to
obtain a better understanding of these issues. Respondents maintained that the
regulatory framework imposed on timeshare is not appropriate, principally
because timeshare is a tourist product not a financial product. They considered
that the present approach imposes unnecessary restrictions and high compliance
costs on the industry, while also affecting consumer perceptions of timeshare. As
a result, the Committee was told, the Australian timeshare industry remains underdeveloped.
In particular:
-
timeshare does not have the domestic market
presence it has overseas; and
-
timeshare operators cannot meet the high level
of international demand for resort accommodation in Australia.[17]
2.20
The main features of the regulatory regime applying to
the establishment and operation of timeshare schemes in Australia
are set out below.
Corporations Act reforms and the timeshare industry
2.21
Section 9 of the Corporations
Act 2001 specifically defines a 'time-sharing scheme' as a type of 'managed
investment scheme', where:
- people
contribute money or money's worth as consideration to acquire rights (interests)
to benefits produced by the scheme (whether the rights are actual,
prospective or contingent and whether they are enforceable or not);
- any of the contributions are to be pooled, or used in a
common enterprise, to produce financial benefits, or benefits consisting of
rights or interests in property, for the people (the members) who hold
interests in the scheme (whether as contributors to the scheme or as people who
have acquired interests from holders);
- the members do not have day-to-day control over the operation
of the scheme (whether or not they have the right to be consulted or to give
directions).
2.22
Traditional financial assets schemes predominate among
managed investments schemes but the legislation also covers a number of
property, primary production, mortgage and master fund schemes. Timeshare
schemes, along with film, derivative and strata schemes, are relatively low in
number. In 2003 less than four percent of managed investment schemes were
timeshares schemes.[18]
2.23
As managed investments, timeshare schemes are regulated
principally by Chapter 5C of the Corporations Act, although other provisions of
the Act apply where relevant. Chapter 5C was inserted into the Corporations Act
by the Managed Investments Act 1998 (MIA)
with effect from 1 July 1998.
2.24
The MIA completely
revised the regulation of managed investment schemes. Under the previous
prescribed interest system, schemes were operated under a dual trustee/fund
manager structure. Under the MIA, there is no
independent trustee. Instead, sole responsibility for custodianship of funds
and scheme operation lies with the fund manager, the single responsible entity which
must set up the compliance structure, register with ASIC and meet new licensing
requirements.
2.25
These requirements are contained in the regulatory
framework introduced by the Financial
Services Reform Act 2001 (FSR Act), which applies to managed investment
schemes regulated under Chapter 5C.
2.26
The definition of a financial product, found in Part
7.1 Division 3 of the Act, includes managed investment schemes, and any form of
interest in these schemes.[19] Subsection 763A (1) provides the
general definition that a financial product is a facility through which, or by
the acquisition of which, a person makes a financial investment, manages
financial risk or a makes non-cash payments, although exemptions also apply.[20]
2.27
Under former regulation as 'prescribed interests' any
scheme offering timeshare rights on the basis of shares in a title to real
property had to provide a registered prospectus to potential investors. The
prospectus was expected to disclose the nature of the scheme and set out the
protections offered to investors. However, there were no statutory requirements
or administrative guidelines for the content of the prospectus, nor was there a
registration and licensing regime.
2.28
Under the amendments introduced by the FSR Act any
promoter involved in the advertising, marketing, selling or promoting of
interests in a managed investment scheme is operating a financial service
business[21] and must hold an Australian
Financial Services (AFS) licence for the type of product sold by the business.[22] The obligations of the financial
services licence are clearly enumerated[23]
and have the effect of significantly increasing disclosure and transparency
requirements for providers of managed investments products, which includes
timeshare schemes.
2.29
The following sets out the key requirements for
timeshare managed investment schemes under the Corporations Act 2001.
Registration with the Australian
Securities and Investments Commission (ASIC)
2.30
To register
with ASIC a timeshare scheme must:
-
have a responsible entity which is a public
company that holds the appropriate AFS licence ‘to operate the scheme and
perform the functions conferred on it by the scheme’s constitution and [the
Corporations Act]’;[24]
-
ensure that the RE holds scheme property on
trust for scheme members;
-
have a constitution setting out matters such as:
-
the costs of investing in the scheme;
-
the responsible entity’s powers and rights, if
any, to be paid fees out of scheme property;
-
a complaints resolution mechanism;
-
winding-up arrangements; and
-
procedures for making and dealing with
withdrawal requests.[25]
-
have a compliance plan setting out ‘adequate
measures that the responsible entity is to apply in operating the scheme to
ensure compliance with [the Corporations Act] and the scheme’s constitution’;[26]
-
appoint a registered company auditor to audit
the compliance plan and advise ASIC of any suspected breaches which the auditor
believes has not been or will not be adequately dealt with by the responsible
entity;[27]
-
lodge the auditor’s compliance report with ASIC
together with lodgements of the responsible entity’s financial reports and
directors’ reports;[28] and
-
have an in-house compliance committee to monitor
the activities of the responsible entity.[29]
Australian Financial Services
licence obligations
2.31
To obtain and hold an AFS licence the operator of a
managed investment scheme must ensure compliance with the following general
obligations, such that:
-
the financial services covered by the licence
are provided efficiently, honestly and fairly;
-
adequate financial technological and human
resources are available to deliver these services;
-
representatives of the business are adequately
trained, competent to provide the financial services pertaining to the licence,
and are adequately supervised for compliance with the law;
-
an internal dispute resolution system is in
place which complies with the standards and requirements determined by ASIC and
covers complaints made against the licensee by retail clients; and
-
the scheme is a member of one or more external
dispute resolution schemes that are approved by ASIC's regulations and cover
complaints about the licensee made by retail clients (other than those that can
be dealt with by the Superannuation Complaints Tribunal).[30]
2.32
In addition, a financial services licensee must report to
ASIC breaches which might affect the licensee's capacity to deliver the
financial service.[31] Financial service licensees
must also provide the required disclosure document, statement or prospectus,
for the type of financial service they provide.[32]
Disclosure requirements for licensees
2.33
Section 710 of the Corporations
Act sets out the general content requirements for a prospectus which must
contain 'all the information that investors and their advisers would reasonably
require to make an informed assessment'. Managed investment schemes must
disclose:
-
the rights and liabilities attached to the
offer, including any detail the purchaser might 'reasonably be expected to
know', such as the nature of the scheme and any risks, or fees, commissions or
charges attaching to the offer; and
-
assets and liabilities, financial position,
performance and prospects of the scheme, including details about the scheme
operator, and financial licensee.
2.34
Section 714 also states that any product issuer must
lodge and declare lodgement of a copy of the profile statement with ASIC, and
give any other information required by regulations under ASIC.[33]
2.35
ASIC's Policy Statement 175 Licensing: Financial Product Advisers
—Conduct and Disclosure (PS 175) describes how the disclosure and conduct
obligations set out in Part 7.7 of the Corporations Act apply to the provision
of financial service product advice to retail clients. The required information
must be set out in a Product Disclosure Statement, a Financial Services Guide,
and/or a Statement of Advice. The adviser must also ascertain the financial
situation of the client, to meet the 'know your client' rule.
2.36
ASIC's role in applying additional statutory
requirements and providing relief from the effect of the Corporation Act for
timeshare operators in particular is discussed below.
ASIC's regulation of timeshare schemes
2.37
ASIC’s responsibilities in overseeing the managed
investments regulatory framework are quite extensive. ASIC assesses and
approves scheme registration and licence applications. It is the body which the
compliance plan auditor and compliance committee are required to advise in
certain circumstances where there are actual or suspected breaches of the law.
The responsible entity’s annual financial reports must be lodged with ASIC, as
must copies of disclosure documents appropriate to the type of service being
offered and type of scheme.
2.38
ASIC has the power to undertake surveillance checks of
schemes and is equipped with a range of enforcement options. It also has powers
under section 601QA to modify or exempt a person from the application of
Chapter 5C. ASIC has used these powers to exempt certain timeshare schemes from
the requirements of the Act or otherwise to modify their application.
2.39
To clarify its expectations of the industry, ASIC
issued its first policy statement on timeshare schemes, PS 66, in 1993. The
statement set out the types of schemes subject to regulation and provided exemptions
from certain aspects of their regulation as 'prescribed interests'. PS 160: Time-Sharing Schemes was an update issued in 2000 after the introduction
of the Managed Investments Act 1998. It
sets out both concessions and additional requirements ASIC has determined for
the industry.
2.40
Relief from the requirement to register as a managed
investment scheme is provided under various pro forma instruments according to
the particular type of timeshare. The three main categories of timeshare
schemes eligible for relief are:
-
schemes that were previously not required to
comply with the prescribed interest regime under state laws (PS 160, Pro forma
205);
-
substantially sold out title-based schemes (PS
160, Pro forma 207); and
-
schemes where the responsible entity relinquishes
control to member owned clubs (PS 160, Pro forma 206).[34]
Exemptions under state laws and for
fully sold title-based schemes
2.41
PS 160 offers exemptions for schemes that were
previously not required to comply with the prescribed interest regime under
state laws (Pro forma 205). The relief is offered on the condition that such
schemes:
-
make no primary offers after 31 May 2000; or
-
belong to an approved external complaint system
or become a member of an approved industry supervisory body before 1 October
2000 (extended to 31 March 2006).[35]
2.42
PS 160 provides that, on application to ASIC, sold out title-based
schemes are also eligible for exemption from the managed investment provisions
if:
-
planned buildings specified in the prospectus
had been built or substantially completed, or would not be built without
affecting the interests of members;
-
a minimum of 90 percent by value or number of
all the interests in the scheme were held on 1 June 2000 by persons who were
not associated with the scheme operator, manager, promoter or developer;
-
any further issue of sale of interests in the
scheme be conducted by a licensed securities dealer, and that the offer must
comply with conditions for licence as if the scheme were a registered scheme;
or
-
other conditions relating to issue of membership
certificates, member voting rights, membership of an external complaints system
or an approved industry body and the application of cooling-off rights to
purchasers of scheme interests are satisfied.
2.43
ASIC's submission records that, as at September 2004,
there were four operators relying on relief under formerly exempt state laws
and 26 operators relying on relief as title-based schemes.[36]
Exemptions for owner operated clubs
2.44
Some timeshare schemes are run as 'clubs' by a board
representing timeshare co-owners. Clubs that have taken over management of
scheme property from the responsible entity are entitled to relief from Chapter
5C in certain instances.[37] These are
that:
-
there are certain controls on the club’s
expenditure;
-
the club has a veto over all decisions that
materially affect members’ best interests;
-
the club is a public company;
-
the property is held on trust for members or
members hold title (and the relevant title documentation) to the scheme
property, and members hold membership certificates in the club;
-
scheme buildings are completed or substantially
completed and at least 90 percent of the interests have been issued to persons
other than the scheme promoter, developer, manager, responsible entity or an
associate of theirs;
-
the club holds a trust account audited twice
yearly by a registered company auditor;
-
any agreement between the club and another party
to supply management services must provide members with voting rights to
dismiss the person providing the service and without any additional payment;
-
the club is a member of an approved industry
supervisory body;
-
all sales of scheme interests are subject to a
minimum of five business days cooling-off period; and
-
the responsible entity does not operate a rental
pool.
2.45
Notably, if the club offers any new or secondary
(resale) interests the operator must take out a financial services licence for
dealing and advising, and comply with its conditions, as though the scheme were
a registered managed investment scheme.[38]
2.46
ASIC reports that, at September
2004, there were only two timeshare schemes relying on this relief.[39]
Exemption as prescribed interest
schemes
2.47
The Managed
Investment Act 1998 was introduced with transition provisions which allowed
the prescribed interests regulatory framework to continue to apply to certain
scheme operators for two years.[40] PS 135:
Managed Investments: Transitional Issues
sets out ASIC's policy on transitional arrangements for managed investment
schemes of various types, providing relief from registration and other
requirements. Under PS 135 ASIC may extend transition provisions for timeshare
operators.[41]
2.48
In March 2003, ASIC announced a further extension of
relief from registration requirements for non-transitioning exempt schemes
until 30 June 2010. Extensions
will only be awarded, however, if it is clear to ASIC that scheme property will
be properly managed. ASIC has advised that still further extensions may be
allowable.[42]
2.49
ASIC reported that, at February 2005, there were 18
timeshare schemes still operating as prescribed interest schemes.[43]
Exemptions from net tangible asset
requirements
2.50
Among other concessions[44]
provided to timeshare schemes, ASIC provides an exemption from the minimum net
tangible assets (NTA) requirements applying to financial services licence
holders.
2.51
As mentioned, a responsible entity must hold such a
licence to provide the relevant services. Under the Corporations Act, licensees
must have 'adequate financial resources' to provide the licensed services and
carry out supervisory arrangements. Part C of ASIC’s Policy Statement 166 Licensing: Financial Requirements relating
to managed investment schemes and custody services states that a licensed
responsible entity holding scheme property and assets itself must have a
minimum of $5 million NTA.[45]
2.52
PS 160:5 provides that a responsible entity of a
timeshare scheme is not required to have NTA of $5 million if it holds scheme
assets consisting of:
-
scheme levies held in a trust account that is
audited twice annually by a registered company auditor who reports to the
responsible entity;[46] and
-
title to land to which a timeshare scheme
relates.
Class orders
2.53
Class orders are offered extensively by ASIC to provide
relief to timeshare scheme operators on a case by case or issue basis. In its
submission to the Turnbull review of the Managed Investment Act in 2001, ASIC
reported that of the 137 Class Orders issued during the two year transitional
period for the legislation, a disproportionate number of 81 related to
non-mainstream products, including timeshare schemes.[47]
Introduction of the cooling-off
period
2.54
ASIC may also modify the law to apply additional
restrictions on licensees dealing in timeshare schemes. PS 160:11 provides
that, to obtain a licence, timeshare operators must ensure that each sale has a
cooling-off period of:
-
five business days, if the applicant is a member
of ATHOC; and
-
ten business days in other cases.
2.55
Sale
documentation must prominently advise of this and purchasers must be given a
separate dated statement to this effect. A record of the statements is to be
kept by the responsible entity of the scheme. If a prospective member decides
not to proceed, all consideration, including administration and any other fees,
must be refunded.
Approved dispute resolution and an
industry supervisory body membership
2.56
Access to class orders and the exemptions allowed under
PS 160, as outlined in this section, are contingent on the applicant belonging
to an ASIC approved external complaints system or holding membership with the
approved industry supervisory body (ISB).
2.57
Many timeshare operators are members of the Financial
Industry Complaints Service (FICS) which is an approved external complaints
body. ATHOC operates a complaints resolution
committee (CRC) but ASIC withdrew interim approval for it to deal with regulated
matters in March 2004.[48] ATHOC
has appealed against this decision and the matter is now before the
Administrative Appeals Tribunal (AAT). The ATHOC
CRC now deals only with unlicensed, unregulated complaints about maintenance
and management of resorts.[49]
2.58
ATHOC has also made
application to ASIC to become the ISB but to date has been unsuccessful.[50] Given the lack of an approved ISB, ASIC
has permitted interim modification of the requirements so that schemes may hold
membership of ATHOC instead. In September
2004, ASIC issued Class Order 04/1204 which gave an extension of time until
June 2005 for timesharing schemes to belong to ATHOC.
A further extension, to March 2006, was offered in April 2005.[51]
2.59
ASIC has advised that it is considering revising the PS
160 requirement for membership of an ISB, and potentially reviewing PS 160 more
comprehensively, given that no ISB has yet been appointed.[52]
Conclusions
2.60
The new obligations imposed on timeshare schemes by the
introduction of the Managed Investments
Act 1998 and the Financial Services
Reform Act 2001 are very significant. Timeshare schemes are among a small
sliver of untypical managed investments schemes which attract a
disproportionate number of applications for relief from Chapter 5C.
2.61
Given the nature of the timeshare industry, with its
diverse range of products and service providers, the obligations imposed under
Corporation Act reform have seemed onerous to timeshare operators compared with
some other managed investment providers.
2.62
The industry effectively operates as two tiers: timeshare
marketers and developers attract the full legislative effect of financial
reform. As operators of a managed investment scheme they must register the
scheme, obtain an appropriate financial service licence and meet disclosure, training
and other requirements. For fully sold clubs the position is more ambiguous.
While exempt from meeting scheme management and compliance structures, they are
prohibited from assisting with resale or advising owners about their timeshares.
If they do, extensive and costly compliance requirements must be met.
2.63
For industry players such inconsistencies cause
operational problems and increase costs, raising questions about the
credentials of the present regime effectively and comprehensively to regulate
the timeshare industry. For consumers, lack of clarity about the legal status
of timeshare may diminish awareness of rights and protections; may make them
vulnerable to loopholes in a timeshare contract.
2.64
The next chapter of the report will look more closely at
some of the strengths and weaknesses of the current approach.
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