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Chapter 3 - Timeshare as a managed investment
Introduction
3.1
A main contention in industry evidence to the inquiry is
that timeshare is not a true investment product, and so should not be regulated
as a financial product under Chapter 7 of the Corporations Act. This chapter
evaluates that contention by making a broad assessment of the strengths and weaknesses
of the current approach.
3.2
The chapter first tests assumptions that the inclusion
of timeshare within the managed investments regime is an accident of history.
The Committee referred to the review of the prescribed interests system undertaken
in 1991 and a subsequent review which reflected upon the regulation of timeshare
schemes.
3.3
Evidence before the Committee identified a number of advantages
and also disadvantages for the timeshare industry and for consumers under the present
regulation. These features, set out next in the chapter, introduce key themes which
direct inquiry and recommendation in the body of the report.
3.4
The chapter then situates Australia's
approach internationally by surveying timeshare regulation in the European
Union, the United Kingdom
and the United States.
This reveals that Australia's
focus on consumer protection is commensurate with other regulatory approaches
and that this is true whether the product is dealt with as securities, real
estate or under fair trade protection frameworks.
3.5
Corporations Act regulation is also shown to have a
particular advantage, in providing a nationally consistent framework for
regulation of the product which covers the now dominant holiday clubs and
vacation timeshare schemes.
Background to the current approach
3.6
As noted in the previous chapter, timeshare has been
regulated as a managed investment since the introduction of the Managed
Investments Act (MIA) in 1998.
3.7
Its inclusion under the Act was decided on the basis of
the findings of a comprehensive review of the regulatory framework for
prescribed interests, conducted by the Companies and Securities Advisory
Committee (CASAC)[53] and the Australian
Law Reform Commission (ALRC) in 1991. The review was to determine:
- if the current regime provided a proper level of
regulation of the various kinds of collective investment schemes; and
- whether different systems of regulation should
be provided for different kinds of such schemes.[54]
3.8
In 1993 the review report Collective Investments: Other
People's Money was released.
It concluded that there should be an overhaul of the existing regulation
of collective investment schemes.
3.9
The proposed framework was largely adopted and
introduced by the MIA. As part of this process,
the old definition of 'time-sharing schemes' was directly incorporated in the
new definition of collective investments; the definition was not changed by the
MIA nor by any subsequent legislation.[55]
3.10
Later, in 2001, the Turnbull review of the MIA confirmed that timeshare schemes should
remain within the purview of the Act. Amendments were recommended to ensure that
loopholes would not allow timeshare schemes to escape regulation; for example,
the definition of scheme property had expressly to include property that was
timeshare-scheme related.[56]
3.11
In evidence to this inquiry ASIC stated that timeshare,
as a deliberate act of Parliament, had been treated as a form of financial product
for more than twenty years. The definition of a financial product under the
prescribed interest system had a broad reach, as was intended by the
legislation. This has been continued under the managed investments regime.[57]
3.12
Mr Malcom Rodgers, ASIC Executive Director, Regulation,
explained that for consumer protection reasons the definition of financial
products applies 'to a range of financial products which are considerably
broader than investment products—a product where a consumer is asked to make a
decision about the use of discretionary funds'. He stated that this immediately
necessitates a requirement for up-front disclosure 'so that it is clear what
rights and risks come with that decision'. ASIC, however, made no commitment to
the future treatment of timeshare as part of the current regime, referring
consideration of the matter to the Parliament.[58]
Some advantages
3.13
Evidence before the Committee canvassed the relative
advantages and disadvantages of the current regulatory approach. Some of the
advantages arising from treatment of timeshare as an investment product were: a
Goods and Services Tax (GST) exemption; a national regulatory regime; and an
enhanced consumer protection framework.
Good and Services Tax exemption
3.14
Timeshare schemes received concessions from the GST when
amendments were made to the regulations for that purpose.[59] The industry was exempted on the
grounds that timeshare schemes do not make real estate transactions, which
would have attracted GST, but instead are selling investment or financial
products.[60]
A consistent national regulatory
regime
3.15
As financial products, timeshare schemes are captured by
consistent federal regulation, with compliance overseen by ASIC. The national
law makes for a more predictable operating environment for industry
participants, most of whom operate across state borders and many of which are
overseas based.
3.16
Inquiry evidence universally supported the need for a
nationally consistent regime for regulation of timeshare. At hearings, RCI
Pacific stated:
...one thing that the forum, ATHOC
[Australian Timeshare and Holiday Ownership
Council] and all the industry participants are quite clear on after
searching the world for legislation is that we are absolutely positive that we
cannot allow this to be drilled down to state based legislation.[61]
3.17
Accor Premier Vacation Club
(APVC) agreed that nationally consistent legislation was essential if
Australian timeshare operators are to be globally competitive, but argued
that some adjustment to current regulation is needed if this objective is to be
realised:
APVC is strongly supportive of the continued regulation and
supervision of the timeshare industry by the Commonwealth government. We
operate on a national scale and indeed aspire to operate on an international
scale. We believe that stringent, consistent and nationwide regulation can only
assist the timeshare industry in its quest to move from the category of a
bought good into the mainstream world of commerce and be viewed as a sought
good...However, like anyone else operating under legislative and prescriptive
administrative regulation, we seek clarity of the existing law and
modifications to the law so as to make it relevant to today’s commercial
marketplace, less burdensome where the law fails to achieve its purpose, and
directive so as to clarify for the regulators the will of parliament in
relation to regulations and policies.[62]
Enhanced consumer protection
3.18
The Committee heard that the introduction of financial
services reform (FSR) had been beneficial to both consumers and industry
participants: it had driven down the incidence of complaints against timeshare
operators while raising standards and consolidating a more positive reputation
for the industry.[63]
3.19
The Consumer Credit Legal Service (CCLS) and the
Australian Consumers Association (ACA) reported a decline in complaints against
timeshare operators under FSR. They considered that most matters dealt with by
CCLS client advisers and ACA caseworkers had originated prior to the
introduction, or during transition, to the new regime.[64] The CCLS stated that, in most
situations, the matters dealt with related to timeshare marketing practices and
to credit-related problems arising from timeshare vendors' use of linked
finance arrangements.[65]
3.20
In support of the claimed improvement in industry standards,
timeshare operators RCI Pacific and APVC affiliate Becton Group Holdings
reported consumer benefits from operator compliance with the managed
investments regime. They stated that the formation of statutory trusts and
scheme operation by the Responsible Entity safeguards the integrity of the scheme
while giving long-term security to scheme members.[66]
3.21
The FSR provisions add another layer of protection. The
Australian Financial Services licence must be acquired on registration of the
scheme. It sets out standards for provision of the financial service, requiring
that consumers are dealt with by trained advisers and have full access to
information about the product they are purchasing.[67] As Mr
Brian Gillard
of the Commercial Law Association of Australia (CLA) stated, the regime creates
a 'cost for misbehaviour'—the potential loss of the licence to trade, making
the business unviable.[68]
3.22
The FSR requirement for operator membership of an
approved dispute resolution scheme was also considered to be an important
element in the consumer protection framework. Mr
Paul O'Shea,
Lecturer at the Beirne School of Law, University
of Queensland, commented on the
outcomes achieved by ATHOC's Consumer
Complaints Resolution Committee, both on regulated and un-regulated matters,
while the CCLS submission cited access to dispute resolution as a vital
mechanism for consumer protection and a key achievement of financial services
reform.[69]
And some disadvantages
3.23
However, evidence also raised questions about the effectiveness
of the disclosure-based regime to protect consumers. Timeshare marketers and developers
considered disclosure relatively ineffective as a consumer protection
mechanism. They also stated that licence costs associated with compliance are
excessive. Fully sold schemes reported that the regime made resort operation
difficult, erecting significant impediments to the resale of timeshares.
Ineffectiveness of disclosure
regime
3.24
There was some general consideration of the
effectiveness of the disclosure regime to protect consumers. Mr
O'Shea presented the Committee with an
analysis of the effectiveness of disclosure requirements under the Consumer
Credit Code. His research indicated that consumers rarely read documentation in
full and were often confused about which items of information were important.
This suggested a simplified and more transparent approach to disclosure is
required.[70]
3.25
Industry operators, in particular large operators,
considered the disclosure requirements attached to financial products have
resulted in a duplication of information.[71]
ATHOC suggested that disclosure of commissions
and other payments are not relevant for timeshare. It also asked for a
simplified approach to cooling-off disclosure.[72]
3.26
Fully sold schemes had the opposite problem. As exempt
schemes, they are prohibited from giving timeshare owners, or other resort
occupants, advice about availability of timeshare in their resorts or other
product information.[73] Mr
Clive Constance,
Manager of Paradise Timeshare Club (trading as Port Pacific Resort) explained
that this disadvantages the consumer who must rely on third party promoters to
gain prices and other information about timeshare resales.[74]
3.27
Consumer groups expressed concerns that the volume of
documentation was being used to conceal rather than reveal important
information.[75] Mr
O'Shea advised that 'too much disclosure can
often be not nearly enough', this being indicated by reports that consumers continue
to be misled by timeshare operators which are ostensibly complying with the
disclosure requirements.[76]
3.28
Another concern was that timeshare purchasers, making a
relatively small financial outlay, are both less likely to seek legal advice
and less able to interpret the detail set out in a timeshare contract.[77] Linked finance arrangements made these consumers
even more vulnerable. Ms Catherine
Wolthuizen, Senior
Policy Officer with the ACA reported:
Caseworkers—and particularly the clients of casework agencies...financial
counsellors and the like—report that they tend to see people who are drawn in
by the idea that they can use linked finance to give them access to an interest
in a property, whereas they could not otherwise participate in rising property
values. Often these are people who really do not understand the nature of the
legal obligations they are entering into, the nature of the interest that they
are acquiring or the obligations that accompany the financing arrangement they
have agreed to. These are the people least able to protect themselves in the
absence of any effective regulatory framework.[78]
The costs of compliance
3.29
While it
was acknowledged that more rigorous regulation has contributed to the improved reputation
enjoyed by the timeshare industry, operators asserted that some aspects of the
compliance framework are not appropriate for timeshare. These features are said
to impose costs and inefficiencies which reduce industry competitiveness and
diversity.
3.30
ATHOC argued that the regulation of timeshare as a financial
product has brought with it obligations which are too onerous. It drew
attention to what it maintains is a fundamental contradiction in the treatment
of the timeshare as an investment. ATHOC
asked for legislation better tailored to the timeshare product as a leisure or
holiday service. Its submission stated:
With the increasing complexity and compliance burden of the
regulatory arrangements over time there has been a growing concern within the
industry that [timeshare's] specific and unique characteristics have been
somewhat overlooked within a body of laws designed and intended for the
financial services industry. The result is that the industry now regards itself
somewhat as a ‘square peg in a round hole’. A specific example of the
difficulties faced by the industry is the fact the ASIC Policy Statement 66
expressly forbids timeshare promoters to represent their product as an
‘investment’ while at the same time they must operate it as a ‘managed
investment scheme’. This is illogical and confusing for all stakeholders.[79]
3.31
International
exchange operator RCI Pacific along with marketer/developers Trendwest Resorts
South Pacific (Trendwest), APVC and Becton
supported this view. Their market interest is in the sale of new timeshare
offers, principally in the form of points-based ownership. These operators
support the corporate structure set up under the MIA
as suitable for their operations but argue that the compliance requirements
—including licensing, training and disclosure—are excessive, costly and inappropriate
to the product.
3.32
In its submission Trendwest estimated that, in 2004, it
had spent $1 million on compliance including staff wages, compliance committee
fees, audit fees, printing costs for product disclosure statements and
financial services guides, training costs, advice surveillance mechanisms and
regular training and monitoring. A further $10,000 went on training annually, and
a total of $700,000 on licensing fees and associated administration costs in
2000–03.[80]
3.33
These costs were considered by Trendwest to reduce
market diversity in the timeshare industry, concentrating the industry among large
corporations.[81] Mr
George Dutton,
Financial Officer of APVC, thought that the costs attached to licensing also limited
the entry of reselling businesses, like those operating in the United
States. He stated:
One major difference...between the USA and here is the licensing
process whereby a reseller can get into the industry in the first place...one of
the main reasons, I suspect, that there is no significant resales market in
this country is that financial services licences and all of the attendant costs
and complexities are simply way beyond the means of the average small business
person or independent trader who might be the sort of person who would enter
into such a business in this country. That is certainly a major factor in terms
of non-liquidity.[82]
3.34
Tourism and Transport Forum Australia (TTF) took the
view that the expense of compliance was overall detrimental to industry
efficiency, competitiveness and growth:
The significant compliance costs that are incurred by the
industry are ultimately passed on to consumers. When combined with the
complexity of the purchase process from a consumer perspective, a real threat
to consumer demand emerges. The international competitiveness of the Australian
timeshare industry is endangered, and investment in the industry is potentially
deterred.[83]
Re-sale problems: fully sold schemes
3.35
Fully sold timeshare schemes are exempt from the Corporations
Act. However, scheme operators state that regulation of timeshare schemes under
securities legislation places significant regulatory impediments on their
capacity to conduct resale of timeshares. Witnesses
told the Committee that many fully sold resorts have a percentage of owners
who, due to age or other life changes, wish to exit their timeshare contracts. Under
current regulations, timeshare resort managers are unable to help these owners.
Specifically:
- the Corporations Act provides that any
relinquished timeshares must be extinguished back into the timeshare scheme. As
a result, resort managers cannot offer to buy back the owner's shares.[84]
- if resort managers advise owners or assist them
with the resale, or purchasing of unwanted timeshares, the Corporations Act financial
investment advice, disclosure and training requirements must be met.[85]
- ownership
of timeshare in many older style resorts is based on a 99 year title. If
owners cease to pay management fees and ‘disappear’ with the titles, resort
owners may only recover these titles through expensive litigation.[86]
- when it comes to the wind up of the scheme it
will be unclear whether the title owner or the share ‘renter’ is entitled to
the funds held in the trust.[87]
3.36
Representatives
from Paradise Timeshare Club, Kyneton Bushland Resort and Eastcoast Timeshare Group
argued that these factors considerably impede the capacity of fully sold
resorts to remain viable, while also disadvantaging the timeshare owner who may
need to sell. The Law Institute of Victoria summed up the situation for fully sold
operators in its submission:
The LIV queries why such resorts and clubs should need to comply
with these requirements if they are simply organising the use of the facility
between their members and not selling time. It appears that the legislation was
intended to address the problems that arise for consumers who fall for the
traps of salespeople who are selling ‘new’ time but does not address the
specific needs of resales of time or those needs of fully sold out resorts.[88]
Conclusion
3.37
The Committee concluded that while the timeshare
industry has benefited from operating within the Corporations framework, industry
participants are experiencing some operational difficulties because of the treatment
of timeshare as an investment product. These include excessive costs, consumer
confusion about the product, and resort management issues which affect both
time share operators and owners. These problems suggest some adjustment to the
current regulation of the industry may be warranted.
3.38
The Committee also notes the industry's request that any
alternative regulatory arrangement considered by the Committee should be
uniform and national.
International regulatory approaches
3.39
In its review of the regulatory arrangements applying
to timeshare, the Committee wished to establish whether the Australian approach
was consistent or had any particular merit relative to the type of legislation
applying to timeshare in jurisdictions overseas.
3.40
The first obvious feature of other regulatory
treatments was that the treatment depends on whether timeshare is considered
primarily as a real estate or as a securities product. Mr Shin
Siow, Senior Counsel of Trendwest, provided a useful overview
of the treatment of timeshare in a number of countries. He explained that land
is the security in all timeshare purchases, but that the legislation interprets
this in different ways:
When you buy into time share, you are buying an interest in
land...I think this is perceived right through all the legislation around the
world. If you have an interest in land, it [may] come under the securities
regime. It is the same in Singapore
and it would be the same in Hong Kong. In the United
States they treat it as real estate. It is
regulated as real estate in seven jurisdictions, but some states will regulate
it as securities. In Malaysia, they see it as securities, but they overlay it
with a bit of trade practice kind of control, so they say, 'If this is going to
be a timeshare arrangement, these are the things that you need to do: you need
to produce a disclosure document, you need to have a cooling-off period and you
need to set aside some end-funds.' Those are the three things that they have
prescribed in the legislation.[89]
3.41
In its evaluation, the Committee found that the last
three requirements
—disclosure, cooling-off and capital adequacy—are the foundations of
international compliance architecture for timeshare. This is true whether the
framework for that treatment is carried by real estate, securities, trade
practice or other consumer protection frameworks.
The European Union Timeshare
Directive
3.42
The European Union Timeshare Directive 1994[90] demonstrates this trend. The directive is
a harmonisation initiative for the regulation of timeshare. It provides a compliance
template which imposes the following standards on any timeshare contract
entered into in a member country or where property is in the European Economic
Area (EEA):
- a right to a ten day cooling-off period. Buyers may
cancel during the cooling-off period and are entitled to reimbursement of all
costs incurred in the making the contract (such as fees for lawyer's witness
signatures as required in some countries);
- sellers are strictly prohibited from seeking
money during the cooling-off period;
- sellers must provide purchasers with a brochure
on request. The brochure must contain specified information and this
information must appear in the contract;
- sellers must provide a translation of the
contract in an official language of the country where the timeshare is located;
and
- any associated credit agreement is cancelled
automatically when the buyer cancels the timeshare contract.[91]
3.43
Complying countries decide how they will effect the
requirements in each jurisdiction. Only two member states—Spain
and Portugal—created
a specific legal framework for timeshare contracts, granting timeshare the
status of real property rights.[92]
United
Kingdom
3.44
The United Kingdom
has dedicated timeshare legislation, the Timeshare
Act 1992 (amended by Timeshare Regulations 1997), which is enforced by UK
Trading Standards. The legislation provides for a cooling-off period of 14
days, longer than the EU at 10 days, but otherwise imposes a set of compliance
requirements commensurate with the EU Directive.[93]
3.45
In the UK,
timeshare is specifically excluded from the ambit of financial services
regulation. Further, timeshare cannot vest real property rights as it is not
possible for more than four persons to register for a single property in the
land register. Nor can it be considered as a long term lease, as leases of more
than twenty one years cannot be registered.[94]
3.46
In 2003 a report based on an evaluation conducted by
the Citizens Advice Bureau (CAB) called on the UK
government to review timeshare law. Among other things, the CAB noted that the definition
of timeshare under the Timeshare Act 1992
had not captured some of the more flexible vacation plan arrangements dominating
the timeshare market, and that pressure selling and deceptive conduct remained
features of the industry. The report also suggested that the EU Commission should
revise its Timeshare Directive to take into account holiday clubs and similar
schemes and to extend the minimum cooling-off period from 10 to 14 days.[95]
3.47
Australia's
approach, which captures all types of timeshare schemes, thus appears in some
respects superior to the UK
and European regulation of timeshare schemes.
United
States: state and federal legislation
3.48
The Committee also heard that Australia's
national regulatory system avoids the inconsistencies resulting from the state
and federal statutory duplication which exists in the United
States. Mr Martin
Kandel, a former assistant Attorney-General of the state of Maryland
and now Chief Executive Officer of APVC, reported:
My unfortunate experience in the United
States is that, in addition to federal
regulation, there is regulation literally on a state by state basis. It runs
the gamut. New York State
requires a securities licence. Other states require real estate licences. Some
states—Florida being the one that
I am most familiar with—have enacted specific timeshare legislation with
built-in consumer protections. There are licensing requirements, bonding
requirements and disclosure requirements.[96]
3.49
Florida has been described as the 'timeshare
a capital of the world'. Not only does it have a thriving market for new
inventory but it also has a developed resale market.[97] The Committee examined the Florida legislation as another example
of dedicated timeshare legislation.
3.50
Florida regulates timeshare under
Chapter 721 of the Florida Statute XL Real and Personal Property 2004.[98] As in Australia, the legislation is
comprehensive in its coverage of products[99].and applies
to all timeshare plans with a duration of least three years. The legislation affects
all schemes located in the state of Florida or offered for sale in that
state.[100]
3.51
The Florida statute specifically states that timeshare plans are not
securities.[101] It is a prescriptive
regime; it provides definitions of the different types of timeshare schemes and
specifies requirements for their operation and upkeep. These cover lodgement of
filing fees and disclosure made in the offering statements for each type of
scheme.[102] Licensing requirements also
apply to all timeshare operators. The statute requires that any seller
of timeshare must be a licensed real estate broker or broker associate.
Solicitors, subject to certain limitations, may also sell timeshare.[103]
3.52
As a comparison with the Australian approach, the Committee
also examined the US
federal regulation of timeshare as securities. Under the Securities Act 1993 (US) and the Securities Exchange Act 1934 (US), timeshare schemes may fall
within the definition of securities if they have one of the following
characteristics:
- an emphasis on the economic benefits that can be
obtained from the management of renting the accommodation;
- an offer of a rental pool; or
- an offer of an arrangement that materially restricts
the purchaser's right to occupy or rent the accommodation, for example a
requirement to hold the property available for rental, or a requirement to use
an exclusive rental management agent.[104]
3.53
The US Securities Exchange Commission (SEC) advises that
in interpreting these requirements: 'substance should not be disregarded for
form, and the fundamental statutory policy of affording broad protection to
investors should be heeded'.[105]
3.54
This approach is commensurate with Australia's
current interpretation of timeshare within the managed investments regime. At hearings
Mr John Price,
ASIC Director of Financial Services Reform Legal and Technical Operations, compared
Australia's
approach:
Some jurisdictions treat the regulation of timeshare a little
differently to us. However, I think there is common ground in the sense that
things that are actively managed or sold with an emphasis on the economic
benefits that can flow from the purchase are generally subject to securities
type regulation. It is important to point out as well that, with regard to some
other jurisdictions, not only are timeshare schemes subject to federal
legislation; they are also subject to myriad state legislation, and that is
particularly the case in the United States.[106]
He concluded:
...our treatment of the regulation of timeshare schemes is really
influenced by what we perceive the consumer experience with time share to be.
In our regulatory regime we use tools such as disclosure, cooling-off and,
obviously, complaints resolution schemes.[107]
Conclusions
3.55
The Committee concluded that Australia's
compliance system is commensurate, and in some instances superior, to the regulatory
arrangements applying to timeshare in some other countries. Overseas regimes,
in their diversity, are characterised by a focus on enhanced consumer
protection, resulting in the implementation of mandatory requirements for
disclosure and cooling-off periods. This is consistent with ASIC's regulation
of the timeshare industry as an investment product.
3.56
The Committee also observed that the national
regulatory framework established under the Corporations Act offers streamlining
and consistency in the treatment of the timeshare product.
3.57
There was consensus in the evidence that nationally
consistent regulatory and consumer protection framework is the bottom line for
providing certainty to industry and consumers. The Committee agrees with this view,
and considers that a national regulatory system provides the most appropriate
model for regulation of timeshare.
3.58
The Committee recognises, however, that the treatment
of timeshare as an 'investment' product under the financial services regime poses
problems for operators. Timeshare is prohibited from being sold as an
investment, yet is regulated as an investment product. These same regulatory
arrangements also appear actively to inhibit the development of a functioning
market in resales.
3.59
The timeshare industry is therefore experiencing
difficulties which may prevent its development into a well functioning market
where the buying and selling of timeshare is conducted in a competitive
environment.
3.60
In relation to the regulation of timeshare as
securities, the Committee agrees with the view of the US SEC that an absolute
fit of the product is not essential, but rather the significance of the
legislation is in its capacity to adequately protect the consumer.
3.61
The Committee believes that ASIC currently applies this
principle in good faith in its treatment of timeshare as a financial product. The
overall effectiveness of the approach, given concerns about the costs of
compliance and the adequacy of consumer protection relative to other possible
treatments, will be assessed in the next chapter.
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