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Chapter 4 - Regulatory options
Introduction
4.1
In the previous chapter the Committee considered the
current approach to the regulation of timeshare and found that there is
widespread support for continuing to have a national regulatory scheme with a
focus on consumer protection. In this chapter the Committee considers what the
general approach to a national timeshare scheme should be. Chapter 5 will
consider some aspects of the proposed regulatory scheme in detail.
4.2
In general, four broad regulatory approaches emerged
from the evidence:
-
continued regulation of timeshare under the Corporations Act 2001, with the Australian
Securities and Investments Commission (ASIC) as the lead regulator;
-
regulation of timeshare under specific
provisions of the Trade Practices Act
1974 (most likely via a mandatory industry code of conduct), with the Australian
Competition and Consumer Commission (ACCC) as the lead regulator;
-
regulation of timeshare via nationally
consistent real estate legislation, regulated in each state by the appropriate
regulator; and
-
self-regulation by the industry.
4.3
The Committee took the view that the best scheme would
be one which retained, and possibly extended, current protection for consumers
while minimising the compliance burden for the timeshare industry.
4.4
The latter two proposals, consistent state legislation
and self-regulation, attracted little support, and are considered briefly
below.
Consistent state legislation
4.5
One option to regulate timeshare would be for all
states and territories to introduce consistent legislation which would then be
administered by the states. This would allow for nationally consistent
legislation albeit via a series of identical regulatory schemes.
4.6
Possibly because of the amount of timeshare activity in
Queensland, the Queensland
Government is the leader in the development of state-based timeshare
regulation. The Queensland Department of Tourism, Fair Trading and Wine
Industry Development (TFTWID) informed the Committee that it is in the process
of considering a proposal for dedicated timeshare provisions incorporated into
the Queensland Body Corporate and Community Management Act
1997. The objective of these provisions would be to address differences
between timeshare schemes and other collective investment schemes in the state.[108] The TFTWID submission reported the
findings of a public consultation on body corporate issues commenced in July
2004. Submissions to the consultation indicated a lack of knowledge about the
interrelationship of state and federal laws in the area, in particular the
effect of the Corporations Act. The TFTWID submission concluded that the case
for education to clarify the current arrangements for consumers was
'overwhelming'.[109]
4.7
There was no evidence before the Committee which
suggested that consistent state-based legislation is the best way to regulate
timeshare. The Committee would observe that such a scheme may seem to be
cost-shifting by the Commonwealth, because the states would become responsible
for the regulation of timeshare within their state borders. Additionally, it is
reasonable to consider whether states and territories such as the Northern
Territory and South Australia,
with relatively little timeshare activity, would be inclined to adopt new
regulatory structures for an industry which has not attracted great attention
within their jurisdictions.
4.8
The Committee concluded that any regulatory scheme
should be a Commonwealth scheme.
Self-regulation
4.9
In its terms of reference the Committee canvassed the
possibility of self-regulation as one regulatory option. This option received
virtually no support in evidence, and attracted criticism from both within and
outside the industry. For instance, Ms Catherine
Wolthuizen, Senior
Policy Officer of the Australian
Consumers Association (ACA), stated:
In our view, self-regulation of this industry would be
ineffective in ensuring consumer protection. There is little evidence that the
industry is capable of self-regulating to an adequate degree. Voluntary codes
would simply mean that better operators would comply and the rogues would opt
out, and consumers would generally be unaware of the difference. We also
believe that as time share is often sold as an investment it should be
regulated as such. The risks that exist are similar to those of other forms of
investment and they require transparency, accountability and access to
independent redress to overcome. In our view, without requirements to disclose
commissions, refrain from inappropriate hawking activity and provide access to
satisfactory dispute resolution, there is little evidence the industry would do
it voluntarily.[110]
4.10
Mr Martin
Kandel, Chief Executive Officer of Accor
Premiere Vacation Club (APVC), stated:
Finally, we are not in favour of self-regulation or separate
state and territory legislation, as we believe that time share should be
regulated by the Commonwealth within the overall framework of the Corporations
Act but without labelling it as a managed investment scheme or a financial
product.[111]
4.11
Australian Timeshare and Holiday Ownership (ATHOC)
which did not directly call for self-regulation, saw a greater role for
industry as a co-regulator, particularly through its code of ethics and dispute
resolution scheme:
...approximately 5 years
ago, ATHOC made an application to ASIC for approval of
it or an independent body incorporated by it as an external complaints scheme
('EDR') so that ATHOC members could have complaints dealt with by
a scheme familiar with timeshare regulation rather than having to be a member
of a scheme (such as the financial industry complaints scheme) which has little
or no familiarity with timeshare regulation. The application by ATHOC was not approved by ASIC. The matter is
currently before the administrative appeals tribunal for determination.[112]
4.12
Obviously the Committee has no intention of interfering
in a matter before the Administrative Appeals Tribunal (AAT). The Committee
did, however, receive some evidence in relation to ATHOC's
dispute resolution scheme from another witness, Mr
Paul O' Shea of the University
of Queensland, who stated:
ATHOC put up a comprehensive
proposal which, in its documentary form—in its final form—was quite a good
proposal in that the scheme it proposed, the Australian timeshare industry
complaints scheme, did have an independent board of management and an independent
complaints panel. But, on its face, it was not given sufficient funding to
allow it to stand alone with respect to the use of resources. So these probably
would have to have been shared with ATHOC,
which would have been unsatisfactory. And there were doubts about its long-term
viability with respect to things like advertising and the three-year regular
reviews, which are a requirement of PS139 approval. So ASIC has refused it.[113]
4.13
It should be noted however that Mr O' Shea was also
optimistic about the overall performance of the dispute resolution scheme:
On an operational basis, at least in the last two or three years
of the scheme when I have been the consumer representative on the CRC, its
outcomes for consumers have been favourably comparable with other better
constituted schemes in the financial services sector.[114]
4.14
The Committee supports ATHOC
in its attempts to increase continually the prevalence of professional conduct
within the timeshare industry. The development and improvement of a dispute
resolution system is an important component of that. However, the Committee
makes no reflection on ASIC's decision regarding ATHOC's
application to become an independent dispute resolution service provider, nor
on any review of that decision by the AAT. On balance, the Committee prefers at
this point to propose a government-based regulatory scheme.
Alternative statutory approaches
4.15
Having eliminated state-based regulation and
self-regulation, two approaches remain: regulation under the Trade Practices Act 1974, and regulation
under the Corporations Act 2001.
4.16
During its inquiries, the Committee arrived at the view
that the nature of timeshare should be the factor deciding which of these Acts
are appropriate. If timeshare is a consumer product in the nature of a consumer
durable or a long term service contract, then regulation under the Trade
Practices Act would appear to be more appropriate, as this is the source of
Commonwealth protection for consumers of other like products and services. If,
on the other hand, timeshare continues to be regarded as a financial
instrument, then it should be regulated under the Corporations Act along with
other financial instruments.
The legal nature of timeshare
4.17
One function of the Trade Practices Act (TPA) is to
provide the Commonwealth framework for consumer protection. In particular:
-
Part IVA of the TPA prohibits unconscionable
conduct in trade and commerce by corporations (but does not apply to the supply
of financial services);[115]
-
Part IVB of the TPA allows for mandatory
industry codes of conduct to be given the status of subordinate legislation;
and
-
Part V of the TPA contains a wide range of
provisions essentially prohibiting misleading or deceptive conduct, and false
or misleading representations (again, this Part does not apply to financial
services).
4.18
Services, under section 4 of the TPA, are defined as
follows:
services includes any rights (including rights in relation to,
and interests in, real or personal property), benefits, privileges or
facilities that are, or are to be, provided, granted or conferred in trade and
commerce...[116]
4.19
Timeshare would certainly appear to fall within this
definition. As noted above, however, most of the consumer protection provisions
exclude financial products and services.
4.20
Currently, timeshare is specifically defined as a
financial product and is excluded from the relevant provisions of the TPA by a
somewhat complex series of cross-references:
-
Section 4 of the TPA gives 'financial product'
and 'financial service' the meanings given to them in Division 2 Part 2 of the ASIC Act 2001;
-
Division 2 Part 2 (section 12BA) of the ASIC Act
gives 'financial product' the meaning given to it in section 12BAA and
'financial service' the meaning given in section 12BAB;
-
Subsection 12BAA(7)(b)(i) of the ASIC Act makes
an interest in a managed investment scheme a 'financial product';
-
The meaning of 'managed investment scheme' in
turn is taken from s.9 of the Corporations
Act 2001 in which the definition of managed investment scheme includes
paragraph (b) specifically describing 'a time-sharing scheme' as a managed
investment scheme.
4.21
While this describes the current state of the law, the
Committee need not necessarily be bound by this series of definitions. The more
general definition of 'managed investment scheme' given in section 7 of the Corporations Act 2001 is as follows:
managed
investment scheme means:
- a scheme that has the following features:
- people contribute money or money's worth as
consideration to acquire rights 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 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)...
Timeshare also appears to fit well within this definition.
Consequently, on an initial reading, timeshare could adequately fall within
either the TPA definition of 'services' or the Corporations Act definition of a
managed investment scheme.
Evidence on the legal nature of
timeshare
4.22
The Committee tested this question of the proper nature
of timeshare with a number of witnesses. ATHOC
agreed with the view that timeshare is more like a consumer durable product or
service than like a managed investment:
Not only is timesharing a long-term consumer durable product, it
is also unique amongst consumer products and therefore requires legislative
recognition which addresses its unique nature. Though a motor vehicle and
washing machine are consumer products and an admission ticket to a football
match and an airline ticket are consumer services, they are different consumer
products and different consumer services but are more similar than they are
different in terms of their essential component parts. There is widespread
public recognition as to the nature and purpose of each of these consumer
products and services. Accordingly, there is no particular need for licensing
or disclosure.[117]
4.23
Mr Paul
O' Shea pointed out some differences between the nature of what is 'purchased'
by a timeshare member, and a more customary purchase of goods or services:
the legal nature of the interest is that it is now more akin to
a share. It is a floating point product: it does not actually relate to any
specific piece of real estate. So, whatever pretensions the old product had to
being a kind of title—and I am sure that you have been amused by some of the
elaborate certificates that used to be given to people when they bought them in
the old days—the modern product has no such relationship to a particular piece
of real estate. In fact, the actual resort theoretically could cease to exist
yet there would still be the right to use, say, resorts that were in the same
group in the hands of the time share owner.[118]
4.24
Associate Professor Mike
Dempsey of Griffith
University came to the centre of
this difficulty by pointing out just how blurred is the line between
'investment' in timeshare and 'consumption' of a vacation:
But if you have what you referred to as an ongoing consumable
that lasts for 20 years, it starts to have those characteristics of an
investment. If you suddenly decide that it is not what you want after all—we
all change our minds two, three or five years later—then as much as you may
have thought of it as a consumable at the time, when you come to part company
with it for a very disappointing price, for all intents and purposes, at that
point in time it is now an investment that in your own thinking went badly
wrong. The distinction between a consumable and investment in the case of time share
is not quite as distinct as it may be normally. A holiday in Bali
is a consumable; putting extra money into my superannuation fund is an
investment. But what we call a consumable over many years can have
characteristics of an investment when you part company with it, especially if
you did so prematurely—meaning that you do not wish to keep it for life after
all.[119]
Conclusions
4.25
Regrettably, this definitional question is not one
which will admit of an easy and self-evidently correct answer. As Professor
Dempsey has pointed out, timeshare can be seen either as a long term service
contract, or as an investment which is unlikely to create a capital return, but
which provides benefits (in the form of vacations) for so long as the investment
is held.
4.26
The Committee noted, however, the important fit between
timeshare and subparagraphs (ii) and (iii) of the definition of a managed
investments scheme.
4.27
Subparagraph (ii) notes that managed investments are
pooled or used in a common enterprise. One of the key characteristics of
timeshare—perhaps the definitive feature of timeshare—is that it is a pooled system, where timeshare members
join with one another to acquire, through a trust or a company, ownership over
a resort or a series of resorts. In the case of the larger players, the pool
may have many thousands of members, and may have a portfolio of property worth
many millions of dollars. The very reason why timeshare members are able to
holiday in countries around the world is because they have pooled their
contribution with the contribution of many others. The definition of managed
investment schemes captures the pooled nature of timeshare far better than does
the TPA definition of a service.
4.28
Subparagraph (iii) notes that in managed investments,
the investor gives up day-to-day control of the investment—this gives the
investment its 'managed' character. This is also the case for timeshare, as
ASIC pointed out:
It is not a consumer durable in a narrow sense, because, while the
consumer has use access to the underlying asset, the asset in many cases
continues to be managed by another person. Your ability to enjoy that asset
going forward depends on the way it is managed by another person. That
distinguishes it from many consumer durables.[120]
4.29
On the basis of these observations, the Committee
concludes that the Corporations Act 2001
will continue to be the best legislative 'vehicle' for the regulation of
timeshare.
Recommendation 1
4.30 The Committee recommends that timeshare should continue
to be regulated under the Corporations
Act 2001.
Regulation under the Corporations Act
4.31
While the Committee has recommended that timeshare
should continue to be regulated under the Corporations Act, the Committee is
not simply supporting the status quo. In Chapter 3, the Committee canvassed
some of the difficulties associated with the current regulation of timeshare
under the Corporations Act. The current process has led to substantial costs of
compliance for timeshare operators, and has not necessarily delivered
successful protection for consumers as a result.
4.32
In particular, the paradox of regarding timeshare as a
managed investment and yet forbidding timeshare operators from selling it as an
investment, is exasperating both for the industry and the Committee. Mr
Ramy Filo, ATHOC
President, neatly outlined the paradox in terms of the 'investment' training
the current regulations require for staff:
I have just finished doing a training session for a couple of
people. At the end of it I said, 'You've got to learn all of this to pass but
once you've passed I want you to forget everything you've learnt here—just
understand what time share is about and make sure you never say that it is an
investment.' It is an investment in lifestyle, but you should not use the word 'investment'.[121]
4.33
Evidence before the Committee from within the industry
called for continued treatment under the Corporations Act, but called for
separate provisions within the Corporations Act. Mr
Kandel from APVC, for instance, stated:
[Timeshare] should have a separate chapter within the
Corporations Act with relevant consumer protection provisions but dispense with
the irrelevant financial product related requirements.[122]
4.34
ATHOC in its
submission made a similar argument based on securing appropriate exemptions
from the current Corporations Act provisions.[123]
The Committee notes that providing a separate chapter for timeshare would have
the same effect as selectively providing exemptions from current arrangements,
but would be far neater from a regulatory perspective. In evidence, Mr
Filo from ATHOC
stated:
The timeshare industry is regulated within legislation that fits
our industry like a square peg in a round hole. Although the corporations
legislation is the best overall framework for our industry, there are key
aspects that need modification and/or review for their appropriateness. We have
detailed these aspects in our submission. Our industry is the most regulated
consumer product in Australia.
Even as a financial product, time share is subject to more regulatory
requirements than many other financial products.[124]
4.35
The Committee accepts these views. While timeshare is
more like a managed investment than a service, there remain some important
distinctions between managed investments and timeshare. An investor in a
managed investment is attempting to gain a return on the capital invested. The
expected return will almost certainly be financial in nature. A timeshare
purchaser, on the other hand, will almost certainly not realise a financial
return on their investment. Indeed, price signals from the timeshare resale
market[125] suggest that the initial
timeshare entry price should be regarded as virtually a sunk cost, which cannot
be recovered.
4.36
It is clear to the Committee that continuing to
regulate timeshare as a managed investment is inappropriate. However, any
separate chapter on timeshare in the Corporations Act must ensure that
consumers receive the same levels of protection as are currently provided. The
regulatory regime may be tailored differently, to suit the special nature of
timeshare and to minimise compliance burdens, but it must be no less rigorous
than the scheme which currently applies.
4.37
In the next chapter, the Committee will outline some of
the issues which should be addressed in a Corporations Act chapter on
timeshare.
Recommendation 2
4.38 The Committee recommends that:
-
timeshare
should be removed as a definitional element of managed investment funds under
s.7 of the Corporations Act 2001; and
-
a
separate chapter should be inserted into the Corporations Act 2001 to deal specifically with timeshare.
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