Chapter 5
Referrals and independent advice
5.1
Consumer protection advocates urge potential investors to seek
independent advice as a wise precaution before committing to a property
investment venture, especially a complex scheme. In this chapter, the committee
looks at the importance of independent advice and how this can be compromised. The
committee considers the payment of commissions and advice given by lawyers and
accountants who often had pre‑existing relationships with Market First
and 21st Century Group and benefitted from referrals.
Commissions
5.2
Mr McIntyre informed the committee that he received between 17 and 20 per cent
commission for selling options.[1]
The committee has received evidence that Mr McIntyre may have received
commissions much higher, but he insisted that 21st Century received
approximately 20 per cent.[2]
Mr Kingsley, Property Investment Professionals of Australia, was curious to
learn about the levels of commission that were being paid. He explained:
It is something that is debated heavily within the property
investment industry around what is an appropriate level of commission that
needs to be paid. I would suspect 17 to 20 per cent is excessive in the upper
end of the scale with regard to what would be an appropriate level of remuneration
for professional advice in our field.[3]
5.3
In his view, between two and five per cent would be a reasonable
commission. He knew of practitioners offering more than five per cent—between
five and 10 per cent but even these were 'very, very big numbers'. He observed:
If I was to buy a $500,000 investment property and I was good
enough to convince you it was a great investment, I could potentially take a
$50,000 commission.[4]
5.4
In this regard, it should be noted that as the principal marketer for
Midland, Mr McIntyre suggested that 21st Century would have received
commissions of between $2 and $3 million.[5]
5.5
In its current inquiry into forestry managed investment schemes (FMIS),
the committee has identified two areas of concern associated with high fees and
commissions—the incentive for an adviser to recommend a product for personal
reasons (better remuneration irrespective of the merits of a product); and the
siphoning of funds away from the investment. With regard to commissions
exercising a perverse influence, the committee has noted that the payment of
commissions has a tendency to compromise that advice.
5.6
Evidence from the FMIS inquiry indicates that the Future of Financial
Advice (FOFA) reforms, by removing conflicted remuneration, may well have
remedied one of the most pernicious incentives underpinning poor financial
advice. However, without prejudging the findings of the FMIS inquiry, the
committee makes the preliminary observations that commissions have the
potential to corrupt advice and it is important to ensure there are no loop
holes in legislation that would allow any form of incentive payments to creep
back into the financial advice industry. This same observation about the
propensity for commissions to compromise advice applies with equal force to
investment in property.
Committee view
5.7
As long as commissions remain an important source of remuneration for
the promoters of land banking schemes, particularly the payment of high
commissions and other inducements to sell the product which override the interests
of the investor, the potential for poor investment advice in this industry will
persist.
One stop shop: 'independent' legal and financial advice
5.8
In many cases, it appears that Market First and 21st Century
Group referred investors to service providers for advice on financial and legal
matters who had an arrangement with the operators and promoters of the land
banking schemes. ASIC informed the committee that it had identified 'many
instances' where the operator or promoter of a scheme had referred investors to
other professional service agents associated with those marketing or operating
the scheme. It cited the case of Midland Hwy where the administrators have
raised concerns as to a conflict of interest by a lawyer who acted for both the
operators of the scheme and the investors.[6]
5.9
By failing to disclose this relationship, the service providers allowed
investors to assume they were getting independent advice.
Slater and Gordon Lawyers
5.10
As discussed earlier, many investors in Market First's projects were
referred to Mr Zuchowski, who was then employed as a lawyer at Slater and
Gordon Lawyers and advised 197 clients on the Veneziane or Foscari projects.[7]
Alerted by the volume of Market First referrals, Slater and Gordon became
concerned about the quality of Mr Zuchowski's advice and that he may have
had a conflict of interest.[8]
5.11
In his legal advice to clients, Mr Zuchowski addressed the risks and
complexities around the investments 'to some extent' and advised clients that
the option fee was non-refundable; and, once paid, became the property of the
grantor to do with as it saw fit.[9]
Nonetheless, Slater and Gordon reported that Mr Zuchowski did not follow Slater
and Gordon's established risk management processes: Mr Zuchowski did not log
his work with the Professional Standards and Risk team or consult his peers in
relation to the substantive advice he provided to clients.[10]
Slater and Gordon told the committee that the adequacy of Mr Zuchowski's advice
should be judged by others, not the firm.[11]
5.12
Mr Zuchowski's potential conflict of interest appears, in part, to derive
from a personal relationship. As part of its investigations, Slater and Gordon
discovered that Mr Zuchowski is the brother-in-law of Mr Darren Eliau,
Principal Lawyer at Evans Ellis Lawyers. Evans Ellis Lawyers have been at
the centre of a number of land banking schemes, including, in this case, acting
for the vendors.[12]
5.13
On a number of occasions in late 2013 and early 2014, Slater and Gordon wrote
to clients, who were involved in Market First's projects, outlining several
concerns about the Market First developments and advising them to seek
independent legal advice on those matters.[13]
Market First contacted many investors directly, telling them that Slater and
Gordon could not handle the volume of referrals they were receiving and
suggesting that investors transfer their files to SK Lawyers.[14]
For instance, Mr Guy was told by Market First that 'Slater and Gordon was not
capable of dealing with the amount of enquiries and paperwork that was
associated with Market First generating the sale'.[15]
Also, Mr Hayne reported receiving phone calls from Market First, informing him
that Slater and Gordon 'were not doing us any good anymore and we have to
change to SK Lawyers'.[16]
5.14
Despite urgings from Slater and Gordon to seek independent advice, most
clients continued to follow Market First's referrals. Of the requests for
Slater and Gordon to transfer files, 18 clients sought independent advice from
Holding Redlich (who were nominated to provide legal advice by the Law
Institute of Victoria) and 91 sought legal advice from firms recommended
by Market First (namely SK Lawyers, Network Legal & Associate and
Summit Law).[17]
5.15
The committee received evidence revealing how promoters encouraged
potential investors to seek legal advice from a recommended law firm. At one of
its investment seminars, a 21st Century Property Direct spruiker
told potential investors that a 'bulk price' had been struck with Bazzani
Scully Brand lawyers, so that it would cost 21st Century Group
members only $600 per options agreement for legal advice.[18]
While potential investors were told they could choose to receive legal services
from another law firm, the 21st Century Property Direct
spruiker repeatedly stated that it would likely cost potential investors a
significant amount of money—$2,000 to $5,000 per options contract—if they went
to another law firm.[19]
5.16
Further, the spruiker indicated that most solicitors would not
understand options agreements, and even solicitors willing to take on the work
would charge substantially higher fees because they would need to read and get
across all of the details in the potential investor's contract.[20]
With the emphasis on the efficiency and cost benefits of relying on the
recommended law firm, it is not surprising that many investors would have
considered using the services recommended by the promoters of the schemes. The
committee makes no judgment as to the quality of the advice provided by Bazzani
Scully Brand lawyers, but this example illustrates the method used by spruikers
to direct investors to preferred service providers.
5.17
Many of the investors in Market First and 21st Century
Group's land banking schemes used external accountants recommended by the
promoters of the schemes. ASIC informed the committee that approximately 60 per
cent of investors in land banking schemes invested through SMSFs. Importantly,
ASIC noted:
The promoters or scheme operators refer investors to
particular companies to establish the SMSFs.[21]
5.18
For example, in promotional material, Market First noted:
Many Market First Members choose to invest in property
through their Self-Managed Super Fund.
As a member you can be introduced to a qualified advisor to
help you do this. Your advisor can also help you set up a Self-Managed Super
Fund, for very little cost, if you decide you want one.[22]
5.19
Typically, the investors had little actual contact with lawyers and
accountants other than to sign a standard document. Ms Monka, for example, told
the committee that she only received legal advice about her investment in the
Moira Park Green City development after the investment was finalised and the
money had already been transferred.[23]
Committee's view
5.20
Referrals by a company promoting a scheme to other service providers for
expert advice may be a genuine attempt by the promoter to assist their client in
finding such expertise. But in some cases, it appears that, because of links or
relationships with the developer or promoter of the scheme, the independence of
such advice may be called into question. The committee is particularly
concerned about the advice given by several lawyers and law firms to investors
in the schemes, as well as the role played by some law firms in the operation
of land banking schemes (described at various points throughout this report).
Most of those lawyers appear to be based in Victoria.
5.21
A common thread running through the land banking schemes investigated by
the committee was that the promoters of the schemes referred investors to
lawyers, accountants and lenders with whom they had a potential conflict of
interest because of their pre-existing (and often intertwined) business
relationships. In some cases, the professionals did not appear to alert their
clients to risks associated with the projects and seemed more to facilitate a
transaction in the interests of the promoter or developer and not their client.
Their advice could not be seen as independent.
Recommendation
5.22
The committee recommends that the Victorian Legal Services
Commissioner and Legal Services Board (and, where appropriate, other state and
territory legal professional bodies) investigate thoroughly the conduct of
lawyers involved in providing advice to investors in the land banking schemes
considered in this report, as well as those lawyers who provided advice, and
controlled trust accounts, for the operators of the schemes.
Recommendation
5.23
The committee recommends that Consumer Affairs Victoria
investigate whether Market First and/or other parties, including lawyers,
breached the requirements in the Sale of Land Act 1962 (Vic) in regards
to off-the-plan contracts of sale for the Foscari and Veneziane developments.
Conclusion
5.24
All investment strategies have risks, and it is important to understand
the risks to determine whether they are acceptable when considered as a part of
an investment strategy. The committee strongly suggests that potential
investors seek advice from professionals who are independent and not
recommended by spruikers: licensed financial advisers (who are listed on ASIC's
financial advisers register); lawyers who are recommended by state and
territory legal profession bodies; qualified accountants; and brokers who
disclose their ownership and commission structures. During discussions with
these professionals, potential investors should specifically ask for the risks
associated with the product or schemes to be clearly outlined.
Navigation: Previous Page | Contents | Next Page