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A hot button issue right now in the property-investing world is that of regulation. More specifically, regulating property investment advice.
You might be surprised to learn that property investment advice is not currently regulated. Real property fails to meet the definition of ‘financial product’ under the Corporations Act so property investment advice currently falls in a gray area as far as the law is concerned.
The problem, as many in the financial and property industries see, is that anyone can sell as a property investment specialist.
An individual isn’t required to have any educational qualifications whatsoever. He or she doesn’t have to pass a background check, carry a license, hold a certificate – any Tom, Dick or Harry can walk off the street and start lecturing people on where and how to invest.
Do We Really Need to Regulate Investment Advice?
This is a very good question. Certainly, there are a number of financial regulations already in place to prevent customers from being defrauded by their real estate agent or financial planner. Even a hair stylist has to keep up his or her license and insurance.
Are all of these licenses and regulations necessary? While they may make us feel safer or more secure, do these requirements keep us from buying a lemon, purchasing a losing stock or getting a bad haircut? No, not really.
Now am I saying that regulations are never necessary? Certainly not. We do need to have protections in place and penalties for individuals who conspire to do financial harm to consumers.
The real question is whether regulating the property investment advice industry will actually minimise the number of individuals harmed by wrong or misleading advice.
After all, this is why regulations are proposed in the first place – to keep consumers from being defrauded.
The Case For Regulation
One of the most vocal proponents of regulation efforts is the Property Investment Professionals of Australia (PIPA). Ben Kingsley, reports Samantha Hodge from Investor Daily, “said that professionals active within the property investment space should at least become a member of its association so the public can identify them.
“However, best practice would be to become formally qualified as to a QPIA to give sound property investment advice,” continued Mr. Kingsley.
“Australians deserve accurate property investment advice and a directory of appropriately qualified professionals they can trust.”
Momentum Wealth managing director Damian Collins – who is also a director of PIPA, believes that any potential conflicts (as in remuneration by a developer) a property investment advisor may have, need to be out on the table.
“There’s no doubt we need regulation,” he says. “At the moment anyone can get up there and spout what they like about investing in real estate – regardless of whether the property is right for the client or whether it’s a good investment or not. Ultimately there’s no real accountability because it’s not currently a regulated area.”
What Would Regulations Look Like?
In order to regulate something it needs to be well defined, at least theoretically speaking. So how would we define property investment advice? What are the clear markers we would look for to see if someone is engaged in delivering “advice” about property investing?
In my opinion, without nailing down the parameters it would be difficult if not impossible to enforce any regulations.
Lang Thai, Lecturer, School of Law, Deakin University; BSc, LLB (Mon), Grad Dip Ed (Melb), LLM (Mon). Barrister and Solicitor of the Supreme Court of Victoria and High Court of Australia, in the Australian Property Law Journal, 2008, discusses the problems and possible solutions to this dilemma.
“One of the main factors for the ineffectiveness of the law in protecting consumers in property investment advice is that there are too many existing Acts dealing with consumer protections generally, coupled with the lack of reference to property investment advice. Currently, the system appears to be a ‘one size ﬁts all’ protection. Arguably, given the discussion so far in this article, this system is outdated.”
Lee goes on to explain why he is recommending these changes. “In this Part” Lee writes, “the author argues that the only way to move forward in this area and to improve the system would be to have a co-operative national legislation designed primarily for the regulation of real property investment advice.”
“A new government authority at the federal level should be set up to administer the new proposed law. This new proposed law should not blend with the currently existing financial services laws under Ch 7 of the Corporations Act.”
Why doesn’t Lee follow common thought that modifications to the Corporation Act will achieve the necessary results?
Lee says, “It has been suggested by a few commentators in the industry that property investment advice and marketeering should be incorporated into the currently existing financial services laws in Ch 7 of the Corporations Act and be regulated in the same way by ASIC because property investment advice is in actual fact a form of financial service. The author hesitates to go down that path for the following reasons:
- The financial services laws in Ch 7 of the Corporations Act and the ASIC Act are still relatively new. The Financial Services Reform Package was introduced in March 2002 and came into full force in March 2004. Many of the principal sections have not been tested in court for their validity. There is a chance that if the court strikes down the Financial Services Reform package for lack of clarity or for whatever other reasons, the property investment advice component may also be struck down with it.
- Traditionally, the Corporations Act has always been an Act regulating companies, shares, bonds, securities and all other intangible products and choses in action. The Corporations Act was designed specifically to deal with all matters relating to and incidental to companies and was not intended to have a sense of consumer protectionism. Given the current structure of the Corporations Act and the current view of the High Court on s 51(xx) of the Commonwealth Constitution,45 it may be argued that ASIC may not have the power to regulate matters in relation to real property.
No Clear Consensus
In an effort to gauge support for the creation of regulations for property investment advice, SMSF Adviser conducted a survey asking respondents for their opinions on the topic.
The results reveal that support for measures to regulate the practice of giving property investment advice is mixed.
Of the 469 respondents, slightly more than half (61.2%) agreed that property investment advice needs regulation whereas nearly half (38.8%) said that no regulation was needed.
So why the dislike of regulation efforts? PIPA’s Ben Kingsley believes “red tape” is the issue.
“In my reading of those numbers it is my view that, with so much compliance and regulation, there is no doubt that many people on the front line are getting frustrated by the amount of paperwork that needs to be done and they know what is involved when you do bring in regulation,” he said.
“A lot of people will be thinking that if it’s unregulated, it’s just one area where they don’t have to do all that paperwork.
“The other reason is because there are people who make easy money on commissions and kickbacks and to remove that easy stream of referrals and income would obviously worry them.”
As stated previously, Kingsley believes that industry professionals should obtain certification from his organisation, however Kevin Lee, broker and property investment advisor based in Sydney is not so sure that this is the way to go.
Sydney-based broker and property investment advisor, Kevin Lee, told Mackenzie McCarty with Australian Broker Online “that he’s concerned brokers may be rushing into an area they know little about and which is largely unregulated compared to other branches of the financial services industry. Given the lack of Federal Government-initiated regulation, he says, how can brokers be sure that the education they receive in the area is valid?”
“It looks like [PIPA] are holding themselves out as an organisation qualified to provide credentials to brokers…If so, who accredits the accreditors?”
Good question, I say. Who indeed?
Kingsley maintains that the QPIA course will give brokers the skills they need to deliver good property investment advice.
As Australian Broker Online reported, “Lee remains skeptical, but says it essentially comes down to the following: “Free advice is worth the price you pay; if you’re going to provide professional advice and charge for that advice, then that’s a whole new ball game.”
Regulation, Education or Both?
Josh Atherton, managing director of Portfolio Property Investments shared a story with Property Observer that should concern every professional involved with mentoring property investors.
“Just this week a property investor contacted me, she wished to discuss our buyers agency service arm of our business. The conversation started with this statement: “I just want someone to tell me where to buy, can you do that?”
“I had not met this investor before, nor had they had anything to do with our financial planning services,” said Atherton. “So, initially I went to take the client back a few steps and obtain some more information before I had to tell her, unfortunately, I cannot tell you exactly where to buy with a simple phone call.
“If you would like to know where I am personally buying I can give you that; however, none of us have any idea at this point if what I buy, or where I buy, is at all appropriate for you or your strategy.
“The client pushed even further and mentioned some competitors who have told her where to buy and was frustrated I too could not give her my opinion. Chances are she was going to make a very large financial decision based on the opinion of the best salesman she talks to.”
Josh goes on to discuss the problem that we in the property investing education business have witnessed and tried to correct through educating our clients.
“For too long we have been hearing about unlicensed people providing advice to investors. I get that many people put on the shiny suit and hit the road to convince people that the opportunities they present are the best the market has seen for years, but let’s be honest; this is the minority of property buyers that accumulate property this way.
“Whilst I’m not for it, you have to take a moment to understand why sellers would choose this path to make commissions; there are far too many investors that will trust anyone and make financial decisions from a vulnerable and uneducated position.”
This shouldn’t be. There are way too many resources for property investors to make use of – both free and paid.
At the end of the day, whether regulations do become a part of the financial landscape or not, it’s up to each individual investor to educate themselves about investing in property and to seek out qualified, knowledgeable professionals who can help them choose the best course of action for their individual situation.
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Australian Property Investment Advice: An Unregulated .., http://gcbe.us/2009_OBEC/data/Lang%20Thai.doc (accessed March 6, 2014).
Poll reveals limited support for property regulation, http://www.smsfadviseronline.com.au/news/12025-alarming-rejection-of-property-re
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