Other consumer protection issues
In a scheme that limits insurance claims to the builder's death,
disappearance or insolvency, it is all the more important to assure the quality
of other aspects of building regulation and dispute resolution which are the
consumer's defence if those conditions are not met. Many submissions related
more to these other defences than to home warranty insurance as such. There is
a need for:
- better regulation of builders at licence and licence renewal,
with more expeditious procedures for disciplining or delicensing delinquent
- better public information about builders' licensing and
- quicker and cheaper dispute resolution.
The committee has not researched the position in each state,
beyond noting the mostly qualitative comments in evidence, and makes only
Need for better regulation of builders
Assuring the technical competence of builders is the
responsibility of state licensing authorities. Some submissions thought that
the states are not rigorous enough about this. For example:
One of the problems that I have with the licensing arrangements
in Victoria... is that it is basically like a golf club: you go through your
initial assessment and you are accepted onto the book as a builder, and from
then on in, provided you paid your annual fee to remain on the register, you
could remain on the register.... It ought to be like a current licence, some sort
of annual assessment, in my opinion.
All agreed on the need for better links between disciplinary
decisions and licensing. Vero sees this as part of the 'defence in depth'
against delinquent builders:
It is typical of the building industry (and other industries,
too) that certain participants are inclined to ignore or work around whatever
regime is in place. In this context it is absolutely essential that the
consumer protection structure provides defence in depth - from up front
education and clear enunciation of homeowner responsibilities, through to penalties
for recalcitrant builders (that do directly influence the correct behaviour or permanently
remove them from the industry) and backstop insurance protection. 
The NSW Government said there is ample scope in NSW for
deregistering builders who do not meet appropriate performance standards. It
gave figures on disciplinary cases over the last few years: for example, in the
three years to 2006/07, 814 licences were cancelled due to Licensing Branch
compliance actions, such as licensees becoming insolvent, failing to comply
with a Consumer, Trader and Tenancy Tribunal order, or lodging a fraudulent
The Victorian government said it is currently reviewing its
builder registration and disciplinary framework with a view to better
protecting consumers against problem builders.
There are different opinions on whether the licensing function
should be in the same body as the insurance function (as in Queensland). The
Queensland Building Services Authority thought that there were benefits in
We are the only state that places financial requirements on our
licensees—because they [the other states] leave it to the insurer to look at
the financial requirements. That gives me compliance intelligence, because
every time they are paying insurance I now know whether they are exceeding
their annual allowable turnover. That then allows me to go in and have a look
at that business.... It is integrated, because you are getting the intelligence,
you are getting the data, and you know instantly when there is a problem... [In
the other states] All they say is, ‘We’re not going to give you insurance,’ so
the regulators then do not move on the individuals that may have financial
trouble in the industry.
On the other hand the HIA thought that licensing and insurance
should not be in the same body, because of the possible conflict of interest:
QBSA not only provides insurance and regulates licences it also
represents consumers in disputes with builders. This is neither appropriate nor
desirable because of the inherent conflicts of interest. State
regulator/licensing bodies must be responsible for resolving disputes. When the
role of regulator and insurer are fused there is moral hazard, since a finding
in favour of one party or the other will have direct financial implications for
the regulator/insurer. One of the major reasons for the decline and ultimate
demise of the Housing Guarantee Fund in Victoria and the New South Wales
Building Services Corporation was exactly this conflict of roles.
VCEC in its 2005 inquiry noted that linking performance to
registration does not depend on government ownership of the insurance:
While integrating insurance and registration within a government
agency offers this advantage, it is not essential. The key is the early
identification of poor builder performance and linking this to registration.
The committee agrees there is a need for better regulation of
builders and better links between disciplinary decisions and
licensing/delicensing. However the Committee notes that this does not depend on
government ownership of the insurance scheme.
Better public information about builders' licensing record
Submissions argued that consumers should have full information
about builders' licensing and disciplinary record. There is no disagreement
about this. NSW has a public register with this information.
In Queensland it is on the BSA website. It appears the same information is not
easily available in Victoria.
Need for quicker and cheaper dispute resolution
Dispute resolution arrangements typically include mediation at an
administrative level, followed by action in a consumer tribunal if mediation
fails. Details vary between the states.
Many consumer submissions described extraordinarily long drawn
out building disputes, including absurdly high legal costs in the tribunals in
relation to the sum in dispute. For example, the Consumer Action Law Centre in Victoria
described a case where - ·
- The dispute has lasted four years, without a satisfactory
- The builder rejected all attempts to conciliate the matter at
Building and Conciliation Victoria;
- Proceedings in the Victorian Civil and Administrative Tribunal
were drawn out and expensive, resulting in an order in favour of our client of
- Independent costing of our legal services showed that over
$88,000 costs were incurred in relation to the matter;
- The order remains unsatisfied, requiring our clients to seek
to wind up the builder’s company in order to claim on Home Building Warranty
Insurance (estimated to cost an additional $4,000 - $15,000)...
There were similar stories about the Consumer, Trader and Tenancy
Tribunal (CTTT) in NSW.
The Consumer Action Law Centre saw a problem that 'while the
Consumer Affairs Ministries of the various States and Territories often provide
mediation services, these are not typically reinforced with any determinative
power on the part of the regulator...'.
In Victoria, consumers with a complaint about a builder can
complain to the Building Advice and Conciliation Service Victoria (BACV), which
is managed jointly by Consumer Affairs Victoria (CAV) and the Building
Commission. The problem with dispute resolution at BACV... is that builders do
not have an incentive to resolve cases on a conciliated basis. ... Further, the
BACV has no capacity to enforce an outcome.... The inability of conciliation to
provide rectification orders leaves a very significant gap.
In NSW building inspectors can issue rectification orders, but if
the builder does not comply the consumer must still take the builder to the
CTTT (the inspector's building report may be used as evidence of defects). Not
complying with a rectification order is grounds for disciplinary action.
In response to the consumer complaint stories, the authorities
gave statistics showing what they argue is a satisfactory overall achievement
in early dispute resolution. In NSW:
The operation of the dispute resolution service initially
involves an attempt to resolve the dispute by Fair Trading Centre staff. In
2006/07 of the 6,112 complaints received by Fair Trading around 2,251 or 36% of
disputes were resolved at this stage. Of the 2,517 complaints referred to the
Home Building Service, 1,784 were subject to site inspections, of which 1,533
or 86% were resolved.... The early intervention dispute resolution service has
reduced the volume of building complaints going to the Consumer, Trader and
Tenancy Tribunal by approximately 30%.
Around 80 per cent of disputes conciliated by Building Advice
and Conciliation Victoria are successfully resolved.... The number of matters
initiated [in the VCAT] has declined from over 1000 in 2000-01 to 825 in
2006-07.... The Victorian government is closely monitoring its domestic building
alternative dispute resolution services to identify opportunities for
There are similar statistics for the tribunals. For example, in
the NSW CTTT, 48 per cent of home building matters are listed for hearing
within 28 days, 65 per cent are finalised before or at the first hearing, and
36 per cent are finalised within 35 days.
In Victoria 72 per cent of domestic building cases are resolved by mediation,
62 per cent of cases are resolved within 20 weeks, and 78 per cent within 35
Discussion of consumer protection needs
As many submissions noted, home building or renovation is likely
to be the most significant purchase most people make in their lives, and one
that they have little experience of dealing with. In this situation it is particularly
important that there is good consumer protection.
The consumer complaints - especially the stories of unbelievably
long-drawn-out tribunal cases - show that there are still problems with dispute
resolution in domestic building. However the committee does not think that the
correct response is to return to a first resort government scheme.
That would improve matters indirectly, by throwing more responsibility back on
insurers, but it would risk other problems, which the industry groups
suggested, arising from the fact that the insurance concerns events which are
within the control of the insured builder (see paragraph 8.2).
In the committee's view the better response is to improve the
builder licensing and dispute resolution arrangements directly. The committee
agrees with VCEC's comment: 'The key is the early identification of poor builder
performance and linking this to registration, rather than government ownership
[of the insurance].'
This includes the systems which go to minimising disputes -
licensing & disciplining of builders - and those that go to resolving
disputes expeditiously - a clear hierarchy of complaint/ mediation/ escalation/
judgement, with time limits. It should include protocols to ensure that, if
licensing and complaint-handling are in different bodies, adverse decisions
about builders in a consumer complaint flow through promptly to the licensing
authority's disciplinary actions and public information about the builder's
Should the insurance be voluntary?
It has sometimes been suggested that home warranty insurance
should be voluntary. In Tasmania it was made voluntary from 1 July 2008. The scheme in Western Australia used to be voluntary, but became compulsory
In submissions opinions on this point were mixed. The Master
Builders Association of WA argued for voluntary insurance, on the basis that 'typical
savings of $800 to $1000 would be reaped for those homebuyers who choose to opt
The highly concentrated structure of the WA housing industry
means that a large percentage of project homes are built by a small number of
extremely efficient builders. Consumers should be given the choice of whether
to take out insurance under these circumstances.
The more common view was that the insurance should remain
mandatory, on the grounds that otherwise the risk to consumers is too high. For
example, CHOICE said:
It seems there are three options. There is a system like
Queensland’s; there is a system like the one we have now but with improved
transparency and improved coverage for home building warranty and last resort
insurance; or there is voluntary insurance. I think the voluntary insurance
would be the worst option.... because I just do not think that the consumers who
need protection will, in sufficient numbers, choose to take out the insurance.
The 2003 Grellman inquiry in NSW and the 2005 VCEC inquiry in Victoria
made similar comments.
Insurance industry representatives argued that voluntary home
warranty insurance is not practical because the market is too small and because
of 'adverse selection' problems: the most likely takers would be builders who
are at risk or consumers who think their builder is at risk. Vero advised that
'it would not be worth us writing voluntary insurance.'
The committee notes with interest the recent change to voluntary
home warranty insurance in Tasmania and recommends that a review of the new
system be undertaken after it has been fully implemented. Such a review would
assess the success of a voluntary scheme combined with the stronger dispute
resolution and reporting procedures that have been flagged by the Tasmanian
However the committee notes builder failure in the past, some on
a large scale and, despite some problems with the scheme, believes that HWI has
provided some redress. The Committee does not support a voluntary scheme at
this time since a builder collapse would then leave consumers with no minimum
level of protection.
The committee agrees with the predominant view that the insurance
should remain mandatory.
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