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Total overhaul of real estate industry announced

6 November 2007 Media Statement
Total overhaul of real estate industry announced

Associate Justice Minister Clayton Cosgrove has today announced the government’s decisions reforming real estate law, which include an end to the industry’s self-regulation and a range of new consumer protection measures such as an independent complaints body and compensation for people who are ripped off by agents.

Mr Cosgrove said the government is delivering on its promise to bring accountability and transparency to the real estate sector, and to establish an independent complaints system that protects consumers and supports honest real estate professionals. He said the 597 submissions he received on The Government's Preferred Options for Reform of the Real Estate Agents Act 1976 document released in May revealed the depth of feeling on the issue.

“New Zealanders' greatest asset is often their home, so it is paramount that people have access to an independent, transparent and effective disciplinary process should they feel they have been ripped off. Good honest agents also need an independent body that will review complaints efficiently, fairly and objectively. Currently that does not exist.”

Mr Cosgrove said the industry’s "closed shop" practices for dealing with complaints were a major factor behind the government’s decision to remove its privilege of self-regulation. The changes announced today will:
- Remove regulatory functions from the Real Estate Institute of New Zealand (REINZ), and agents would no longer be required to be members of REINZ
- Create an independent Real Estate Agents Authority, to oversee licensing, complaints, disciplinary and enforcement processes and provide information for consumers. The Authority will have wide investigative powers and will be able to order a wide range of penalties and remedies
- Create a Disciplinary Tribunal to deal with serious cases and be able to order the cancellation of licences and award compensation
- Establish a public register of real estate agents and salespeople that records any breaches of the industry standards against the names of those involved
- Require licensees to undergo ongoing professional development training
- Require real estate professionals to give consumers educational information provided by the Authority about their rights plus a written statement to disclose any conflicts of interest that they may have before they sign either an agency agreement or a sale and purchase agreement.

Mr Cosgrove said the reforms would restore the confidence of consumers and honest real estate professionals. "Consumers will be better protected by an independent disciplinary process with effective redress for breaches of a new code of conduct and of the law. Honest real estate professionals will no longer be tarred by the same brush as the last land shark who rips someone off and brings the entire industry into disrepute."

Mr Cosgrove said the new structure would be funded by the industry, not taxpayers, and it will not cost consumers anything to lodge a complaint. A Real Estate Agents Bill is expected to be introduced to Parliament by the end of the year and passed next year.

Background Information

Why does the Real Estate Act 1976 need to be overhauled?
A range of problems currently exist with the self-regulatory system under the Real Estate Agents Act 1976. Concern has been raised by the public and by real estate agents themselves about how effectively the industry deals with complaints and disciplinary matters, and how the process lacks independence, transparency and accountability.
Another problem is that the Act's provisions relating to complaints and discipline are not being fully utilised by the industry.
While the overwhelming majority of real estate professionals are good, decent people, there is an unethical minority who have caused great financial hardship and anguish for some consumers. The risks associated with real estate activity include mishandling of funds, poor contractual advice, misleading representations, conflicts of interest, abuse of rights to access to property, misuse of information and fraud. Given these risks, it is essential that the regulatory framework governing the conduct and work of estate agents provides for independent resolution of disputes, holds agents to account, and is transparent and fair to consumers and real estate professionals.
The legislation is also 31 years old. Since its introduction there have been substantial advances in regulatory frameworks for consumer protection. Currently the real estate industry lags behind other occupations in this area, such as lawyers and conveyancers, and motor vehicle traders.

What is wrong with disciplinary process currently run by REINZ?
Concerns with the REINZ's current disciplinary process include:
- REINZ acts as gate-keeper and decides if complaints are referred to the Licensing Board, which has the power to suspend or cancel registration, plus impose up to a $5,000 fine on agents. Relatively few complaints are referred to the Licensing Board. For example, between 2004 and 2006, REINZ received 507 complaints from members of the public but only 9 of these were referred to the Licensing Board
- Most complaints are dealt with at REINZ sub-committee level, which means decisions about disciplinary action are made by fellow real estate agents, and a $750 is the maximum imposable fine
- Long delays in processing complaints, and complainants not kept informed of progress
- Concerns about the quality of investigations
- Limited information available about the complaints process
- The current regime provides no compensation for complainants when agents or salespeople are found to be at fault, except in cases of fraud
- The industry's current Code of Ethics inhibits agents from expressing their concerns publicly, as it states "Members shall never publicly criticise fellow members”

How many complaints have been referred to the Licensing Board by REINZ?
REINZ has provided information to the government showing that nine of the 507 public complaints that it received between 2004 and 2006 were referred to the Real Estate Licensing Board – which is the only body with real “teeth” under the current structure, as it can suspend or strike off agents’ or salespeoples’ licenses. In addition to these are an unknown number of complaints that REINZ has received from the police, insurance companies and other agents, with no transparency as to the nature or outcome of those complaints.

What are the key reforms proposed for the new legislation?
 That the Real Estate Agents Act 1976 be repealed and replaced by a new Real Estate Agents Act.

--> New Regulatory Structure: The Bill will remove the regulatory functions from the Real Estate Institute of New Zealand (REINZ) and abolish the existing Real Estate Licensing Board, which will be replaced with a new Real Estate Agents Authority ("the Authority") This means REINZ’s current complaints and disciplinary system, which includes District Investigation Subcommittees and Regional Disciplinary Subcommittees, will cease to exist.

--> The Authority will oversee modern licensing, complaints, disciplinary and enforcement processes and provide information for consumers. The Authority will be required to report annually on its activities, which will ensure that its actions are transparent.

--> The establishment of a two tier disciplinary process:
- A Complaints Assessment Committee, made up of members of the Authority, to consider complaints and impose penalties and remedies in cases involving unsatisfactory conduct
- The Real Estate Agents Disciplinary Tribunal that will deal with serious disciplinary cases and be able to order a wide range of penalties and remedies, including cancellation of licences and awarding compensation.

--> The Minister of Justice will be responsible for:
- appointing members of the Authority and Disciplinary Tribunal
- approving educational qualification requirements, on advice of the Ministry of Justice
- approving professional rules and any changes to those rules, on advice of the Authority

--> As the disciplinary function of the REINZ would move to the new Authority, real estate agents would no longer be required to be members of REINZ. However they will be required to be licensed under the new Authority.

--> Qualifications: Currently only real estate agents must hold a licence, and branch managers and salespeople must hold a certificate of approval. The new legislation will provide for three categories of licence:
- Agent’s licence: to permit a person or company to run a real estate business
- Branch manager’s licence: to permit a person to run a branch office for a licensed real estate agent business
- Salesperson’s licence: to permit a person to work for an agent as a salesperson.

--> Licencees will have to meet a fit and proper person test: an applicant with specified convictions (such as convictions for dishonesty offences within the last 10 years, or breaches of the Fair Trading Act 1986) or subject to certain statutory orders will not be able to be licensed. The Bill will include transitional provisions allowing existing licence and certificate holders to be registered under the new Act, as long as none of the disqualifying criteria apply.

--> Education requirements: Currently, to obtain a real estate agent’s licence in New Zealand a person must first pass exams under a syllabus prepared by REINZ and there is no requirement for ongoing training for estate agents or salespeople once a licence or certificate of approval has been granted.

--> Requirements for qualifications required by real estate professionals will be set out in regulations to be made under the new Act. Real estate professionals will also be required to undertake ongoing professional development training. The Minister of Justice will approve the minimum qualifications required, and the training unit standards will be developed by the Real Estate Industry Training Organisation.

--> The new Act will not prevent people from being licensed as a real estate agent in Australia and subsequently applying to be an agent in New Zealand. The Trans-Tasman Mutual Recognition Act 1997 and related treaty obligations require New Zealand to recognise persons registered as agents in Australia. They will be barred from registration where they do not meet the fit and proper person test. In addition, they will need to comply with continuing professional development requirements in order to retain their license as well as being subject to all other ongoing duties of agents in New Zealand.

--> Conduct: The Bill will modernise the rules that real estate agents, salespersons and branch managers must comply with in order to provide a higher level of protection to consumers, including:
- Improved disclosure rules around conflicts of interest
- Introducing mandatory safeguards to reduce the risks associated with sellers entering into a sole agency agreement, such as a 24 hour cooling off period, which will allow the seller to cancel the contract without being required to give a reason, and giving either party the right to cancel the sole agency contract after 90 days
- Requiring agents to provide buyers and sellers with mandatory standard information from the Authority before they sign a Sale and Purchase Agreement
- Introducing new mandatory requirements for the conduct of real estate auctions, including controls on vendor bidding

What is the situation with salepeople who work as contractors?
Salespeople can currently be engaged as independent contractors or employees, but section 51A of the Act provides that where the contract states that salespeople are engaged as independent contractors, the tests in the Employment Relations Act 2000 for determining whether a person is an independent contractor or employee will not apply. The provision will be retained, but it will be reviewed within five years after the new Act comes into force to consider whether there is any justification for the real estate industry not being subject to the same employment tests as other industries.

What will be the cost of these reforms to the industry?
Based on current estimates, the annual licence fee, which will include a levy to fund the Disciplinary Tribunal, could be about $500 for an estate agent, $350 for a branch manager and $300 for a salesperson. These are indicative only and figures can only be finalised once the Act is passed. As the REINZ’s regulatory functions will move to the new Authority, that should reduce the cost of membership for those who choose to continue to remain members.
These fees are considered modest when compared to the average commission fee for a house sale of $350,000 is approx $15,000. It is not thought there is any justification for passing on this modest fees increase to the consumer through higher commission fees.


How will the new complaints system work in practice?
A new system that is independent of the industry will replace the current inhouse structure.
The Real Estate Agents Authority will appoint a Complaints Assessment Committee (CAC) which will receive and access all complaints. The CAC will have the power to impose a range of sanctions on those it finds guilty of misconduct. It will investigate complaints in a timely manner, and publicise its finding and the sanction imposed.
Small and vexatious claims will be dealt with swiftly by the CAC, which will mean a quick resolution for complainants and honest real estate professionals, whose names will not be under a cloud. It will refer more serious cases of misconduct to the Disciplinary Tribunal. It is anticipated that the majority of complaints will be dealt with by the CAC.
The Disciplinary Tribunal will be independent from the Real Estate Agents Authority. It will investigate all charges laid before it by the CAC. It will have the power to impose wider sanctions, including the suspension or cancellation of a licence, and it will have the power to award compensation where a claimant has suffered a financial loss. It will make its finding and the reason for it public.

What is an example of this?
A homeseller finds out his real estate agent sold his house to a friend, despite receiving an undisclosed higher offer from a third party. The seller was also not aware of the relationship between the agent and the buyer. He lodges a complaint with the Real Estate Agents Authority. The CAC conducts the initial investigation, and makes a finding that it considers that there has been misconduct on the part of the agent. The CAC would then lay charges with the Tribunal, who would hear the case and make its decision. If the agent was found guilty, the Tribunal would make an order imposing sanctions against the agent, and may award compensation towards any loss suffered by the seller as a result of that misconduct.

Will it cost anything to lodge a complaint?
No. The complaints system will be free to access.

What are the sanctions that can be imposed?
Limited sanctions are available at present, with maximum fine levels set at $750 (before Subcommittees) and $5,000 (before the Licensing Board). The CAC will publicise its decisions and have a wide range of sanctions available to it. These are:
- Ordering the terms of an agreed settlement.
- Censure or reprimand.
- Requiring an apology to be made to the claimant.
- Ordering the reduction of estate agent’s fees.
- Ordering remedial training or education to be undertaken.
- Imposing fines of up to $10,000 for individuals and $20,000 for a company.

The Disciplinary Tribunal can impose all the sanctions available to the CAC, and additionally it will be able to:
- Order the suspension and cancellation of an agent’s licence
- Order the employment or engagement of a person by a real estate agency business to be terminated and order that person not be employed in connection with real estate agency work.
- Impose a fine of up to $15,000 for individuals and $30,000 for a company.
- Award compensation
- Publicise its decisions.

Can an agent or salesperson also be charged with criminal offences?
Yes, the maximum penalty for criminal offences under the Bill, such as selling real estate while unlicensed, will be raised to $40,000 for individuals and $100,000 for a company. This compares to the current maximum penalty for a criminal offence under the current Act which is $2,000.

What sort of compensation will be made available?
The Disciplinary Tribunal will be able to award compensation where a complainant has suffered a financial loss. Compensation levels will be dependant on the amount of that loss. The maximum amount of compensation the Disciplinary Tribunal can award will be set by regulation.

Are these reforms creating more bureaucracy?
No. The new structure replaces the current inhouse system run by the real estate industry and provides an independent, transparent and efficient way of dealing with and resolving complaints against real estate industry members. The new system has been designed to be as streamlined as possible.
The government has decided not to extend the new regime to letting, leasing and property managers. Property managers pose considerably less risk to consumers than other real estate services, as the sums of money are smaller and the transactions are frequent so any transgressions become apparent quickly. There has not been significant evidence of widespread problems with how unlicensed property managers handle funds, and issues are more likely to relate to the landlord / tenant relationship.
This also stops duplication. There is already legislation that reduces the risk to consumers - the Residential Tenancies Act 1986, which sets out minimum rights for tenants and landlords, and the Law Practitioners Act 1982, which limits the type of tenancy agreements that can be drawn up by persons other than lawyers.

What will happen to the Fidelity Guarantee Fund?
The REINZ advise that this fund has about $2 million in it. In the last 10 years very few claims have been made against the Fund. The REINZ advises that the last payout was in 2003. Although few claims have been made, the costs of running it are reasonably high. It is therefore appropriate to abolish the requirement to have this Fund, as too few people benefit from it to justify its running costs. The Fidelity Guarantee Fund will be wound up. The funds will revert to the REINZ after winding up.

What was wrong with the proposals put up by the REINZ?
The Minister asked the industry to improve the self-regulation system by making it transparent and accountable, with an independent complaints structure. The industry failed to do this. The original proposal put up by the REINZ in December 2006 did not revamp the industry's Code of Ethics as requested, nor did it provide a complaints structure that was independent of the industry, transparent and responsive to consumers. It left control largely in its own hands.

What is the timing around these proposed reforms?
Legislation is likely to be introduced by the end of the year, with the aim of passing the legislation next year.

ENDS

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