ASIC will soon tighten regulation around time-share schemes after a commissioned study found widespread misconduct in the sector leading to a flood of complaints and significant harm to consumers.
The regulator will release an updated version of its 2012 regulatory guide, Time-sharing schemes, in the next few months, which will incorporate a review of relief provided to the schemes from certain aspects of the Corporations Act.
An ASIC representative confirmed that the updated guidance is scheduled to be released towards the end of March or early April after a short consultation period.
“We have long been concerned about timeshare,” ASIC said in its December 2019 report, Timeshare; Consumers’ experience.
Time-share schemes (timeshares) are financial products involving fractional ownership of holiday accommodation and considered managed investment schemes (MISs), which puts them under ASIC’s purview. Despite representing only 0.42 per cent of all MISs, one fifth of all reported MIS complaints received by ASIC in FY19 involved time-share schemes.
“The reports of misconduct cover a broad range of issues, including pressure-selling practices, misleading and deceptive conduct, access to and use of accommodation, exit arrangements and responsible lending,” ASIC stated in the report, adding that it found “high levels of non-compliance with the best interest duty and related obligations”.
The Australian Financial Complaints Authority tells a similar story; in the 12 months to 1 November 2019, 13 per cent of all MIS complaints to AFCA involved timeshares.
The regulator indicated that the study’s findings will directly funnel into updating the “regulatory settings” for timeshares. A formal investigation is already underway, the report adds.
While some participants experience satisfaction with timeshare membership, ASIC stated, there was overall a “high level of discontent” among participants, whose feelings included “anger, frustration, disgust, despair and numbness”.
The situation is probably even worse than the study was able to glean, ASIC reckons.
“The sense that participants themselves had contributed to this situation seemed to contribute to a lack of motivation to tenaciously pursue redress, which suggests complaint statistics may understate the extent of consumer issues with timeshare memberships.”
Not reflective of the sector
The Australian Timeshare and Holiday Ownership Council (ATHOC), which is the industry body for timeshare operators, said it welcomed ASIC’s study.
ATHOC’s president, Ramy Filo, said it was already working with the regulator on “longer cooling-off periods, easier-to-understand explanations around fees and costs and clearer product disclosure statements”.
Ramy criticised the report, however, for not being reflective of the sector as a whole. Out of 180,000 timeshare owners, he noted, only 32 were interviewed.
“ATHOC’s own industry research shows that the vast majority of the 180,000 timeshare owners in Australia are happy with their timeshare product,” Filo stated in a media release.
This isn’t the first time ATHOC has felt the need to defend itself. In response to a flood of bad press in 2016 the representative group issued a press release stating that it does not “provide advice to customers on how to invest their money” or “represent timeshares as an investment opportunity”.
“Timeshare is one of the fastest growing and most popular segments of the Australian tourism industry,” the statement added.
A ‘lifestyle product’
While timeshares are run by AFSL holders and sit in the same regulatory bucket as financial advice, they enjoy a more relaxed set of parameters.
Timeshares were approved for a carve-out from the ban on conflicted remuneration as part of the Future of Financial Advice reforms by then-minister for financial services and superannuation, Bill Shorten, principally because they are sold as ‘lifestyle products’ and not designed to generate a return on investment.
The requirement to act in the client’s best interest, however, remained in force. This alone put timeshares in a unique regulatory position.
“Timeshare has always been a lifestyle product, but it is regulated as a financial product” stated ATHOC’s Filo. “Although it is classed as a managed investment scheme regulated by ASIC, timeshare should not be viewed as an investment that will yield high returns.”
Other regulatory differences between timeshares and financial advice – including areas like the frequency of scheme property valuation and the restriction on acquiring and holding interests by a responsible entity – are more technical.
Regardless of the carve-outs and exemptions, time share operators are still compelled to advise clients “efficiently, honestly and fairly”, as per the Corporations Act (s912A), and stay away from “misleading and deceptive conduct”, as well as “harassment or coercion”.
ASIC is trying to understand whether encouraging consumers to sign “20 to 99 year” membership contracts – after attending a two to three-hour presentation – fits within these parameters.
The Financial Adviser Standards and Ethics Authority (FASEA) will also be problematic for timeshare operators, given that the Code of Ethics takes a hard line on conflicts of interest. This may be difficult to gauge in the near term, however, as the licensees that run time-share groups are being asked to act as temporary ‘code monitors’ until the government forms their own enforcement body.
A further pressure for the timeshare industry will be the Design and Distribution obligations, which will come into play on April 5th, 2021 and force operators to take a consumer-centric approach to their products.
There are 16 registered timeshares operated by 10 operators in Australia. The largest, Wyndham Vacation Clubs South Pacific, had 267 AFSL holders on ASIC’s Financial Adviser Registry in Professional Planner’s 2019 licensee owner’s list – down from 373 in 2018.