NSW Government Response: IPART’s Review of the efficiency and effectiveness of the NSW home building compensation fund

June 2022

Executive Summary

In December 2020, Independent Pricing and Regulatory Tribunal (IPART) published the final report of the Review of the efficiency and effectiveness of the home building compensation fund (the Final Report). The NSW Government thanks IPART for its analysis and recommendations to improve the home building compensation scheme (‘the scheme’), as well as industry and community stakeholders who took the time to make submissions to IPART or participate in its public hearings.

The NSW Government supports in full or part, or will further consider 19 of IPART’s 22 recommendations. The NSW Government does not support one of the recommendations. A table summarising the response to each of the recommendations is included at Appendix A.

Key actions that the NSW Government has agreed, include:

Legislating to simplify the insurance claim process: homeowners will no longer need to lodge a ‘notification of loss’ with icare HBCF to preserve their ability to claim on the scheme.
icare HBCF will implement administrative reforms including to:
- simplify insurance eligibility processes for most of icare’s building business customers, particularly small businesses; and
- review opportunities and benefits of giving building businesses the choice whether to use a broker or deal direct with icare HBCF to arrange insurance; and
The State Insurance Regulatory Authority (SIRA) will develop and publicly consult on:
- a discussion paper about redesigning the insurance scheme, and
- a consolidated re-write of SIRA’s Insurance Guidelines to remove unnecessary impediments for APRA-authorised insurers to enter the home building compensation market and to improve the regulatory oversight of the current sole insurer ‘icare HBCF’.
The Department of Customer Service will also consider relevant IPART recommendations as a part of its current review of the Home Building Act 1989.

Simplify the claim process for homeowners:

When a homeowner has a problem with work done to their home that is covered by warranty, their first resort is to try to get the responsible business to address the issue. However, some homeowners may go through months or years of court or tribunal processes to pursue a business, only to find the business becomes insolvent before they can get a remedy. The insurance scheme currently accepts claims up to four years after the end of the six-year statutory warranty period. This allows time for the completion of such legal proceedings. However, these ‘delayed claims’ are only available to homeowners that take the procedural step of notifying the scheme insurer of their loss before the warranty period expires. This requirement results in:

some homeowners lodging a ‘notification of loss’ that is unnecessary, e.g. because they resolve the matter with the responsible business, or are able to claim within the warranty period; and
some homeowners may have claims denied, solely for failing to lodge ‘notification of loss’ documentation with the scheme insurer.

The NSW Government has agreed with IPART’s recommendation to remove this procedural step. This will provide a simpler and more consistent customer experience for homeowners making an insurance claim. Legislative amendments to achieve this outcome will be implemented as part of the Department of Customer Service’s review of the Home Building Act 1989.

Simplify the insurance eligibility process for building businesses:

The NSW Government has agreed with IPART’s recommendations that icare HBCF should adopt a simpler and more transparent eligibility model. From 1 July 2022, icare HBCF will implement new eligibility arrangements for more than 90% of building businesses that are insured under the scheme (most builders with less than $5 million in contracts on hand, which make up approximately 19,000 businesses of the around 22,000 icare HBCF customers). This is expected to significantly improve customer experience without changing the overall insured risks through icare HBCF. It will also enable icare to focus underwriting effort on higher risk business. It will be simpler to apply for insurance, with less information or documents needing to be supplied, and there will be faster eligibility decisions (typically within 48 hours).

Give building businesses the choice whether to use a broker

The NSW Government has agreed in principle to IPART’s recommendation that icare HBCF should give building businesses the choice to directly arrange eligibility and purchase insurance with icare HBCF. icare HBCF will also continue to offer the option for businesses to use an insurance broker. The change is expected to result in lower costs for some businesses and their customers for arranging insurance, while ensuring that expert broker advice continues to be available.

As a first step, icare HBCF has conducted an open tender for a new insurance claims policy and billing solution, that will ensure icare has the systems necessary to deliver this reform. This will be followed by development of a robust business case that identifies full industry impact and costs. Subject to identifying unmitigated consumer risks, icare HBCF will provide further updates to industry by the end of 2022 about progress and timing to implement this reform.

Redesigning the home building compensation scheme

SIRA is releasing a discussion paper to help inform the design of some regulatory reforms flowing from IPART’s review and to address some other issues that have been identified with the scheme. The paper will seek public feedback on potential reforms to:

expand some aspects of the scheme to better support some homeowners;
narrow some aspects of the scheme to lower the cost of some work on homes and reduce regulatory burdens or costs; and
reconsider who should provide cover in the scheme and how they should be regulated.

This work is being done in parallel with the NSW Government’s ongoing work on wider building and construction reforms. This includes the Department of Customer Service’s review of the Home Building Act 1989, and a Ministerial Advisory Panel advising on options to introduce a decennial liability insurance safety net for consumers in the multi-unit high rise sector.

Make the scheme more attractive for private underwriters:

Previous reforms to the scheme in 2018 allowed for private sector insurers or ‘alternative indemnity product’ providers to enter the scheme alongside the Government-operated insurer: icare HBCF. However, this has not resulted in any new insurers or providers entering the scheme. IPART has recommended further reforms to the scheme’s regulatory framework to make it more attractive for private-sector participation in the scheme. The NSW Government has agreed that SIRA will develop and publicly consult on revised Insurance Guidelines to achieve this outcome.

As a first step, SIRA implemented in December 2021, interim updates to its Insurance Guidelines to enable reforms to simplify pricing and business eligibility for insurance. SIRA will release new draft Insurance Guidelines for public consultation before the end 2022, which will refocus SIRA’s regulation on the state insurer, icare HBCF, while simplifying or removing regulation of prudential matter, eligibility and pricing for any new private-sector entrants to the HBC market.

Appendix A

Government response to IPART’s recommendations.

#	IPART Recommendation	NSW Government Response
1	SIRA report on costs as part of its annual performance monitoring review so that icare’s costs can be more easily tracked over time and compared with costs of the schemes in other states.	Support – SIRA will develop suitable cost metrics that it will require icare to report and will be included in SIRA’s annual public reporting no later than FY2022-23.
2	That Fair Trading develop a program of proactive investigations and audits of building work in the low rise residential sector, similar to the approach being taken by the Building Commissioner in relation to apartment buildings.	Support – A priority project for the Department of Customer Service in 2022 is embedding the ‘six pillars’ of Construct NSW into the Better Regulation Division inclusive of Fair Trading. The program includes the implementation of a proactive program of work targeting complaints and non-compliance relevant to the low-rise sector including class 1 (e.g. houses) and class 2 (e.g. low-rise apartment block) buildings.
3	Fair Trading and NCAT should collect information and publicly report on the number and type of complaints (including construction type, issue type, value of rectification and other costs), and the time taken to resolve them.	Support in Part –In 2021, the Department of Customer Service, Better Regulation Division prioritised making data publicly available on its website in relation to the Department’s ‘Fair Trading’ functions for complaints received across various industries, including construction. With respect to construction related data, the Department of Customer Service, Better Regulation Division is looking to provide data on construction type, issue and handling of the matter. Data in relation to the cost of repairs, and overall time taken for the homeowners to reach a resolution on those repairs cannot be provided due to the variables in that kind of data. This includes that an issue may continue to be in a resolution pathway after the Department’s involvement ends. NCAT, as an independent statutory body, determines its own data collection and reporting priorities across the range of matters for which it is responsible. NCAT provides a copy of all Orders made in Home Building matters to the Department of Customer Service and publishes the following information in its Annual Report in relation to the Home Building List: Number of applications Number of finalisations Clearance ratio. However, the Tribunal does not currently collect or publicly report on all of the construction-related information listed. The data collection that is being suggested, due to the level of granularity and specificity, could not be readily obtained or tracked.
4	That the NSW Government amend section 8 of the Home Building Act to cap the deposits for residential works over $20,000 at 5%.	Noted – The Department of Customer Service is reviewing the Home Building Act 1989 for potential replacement with new legislation to regulate building work in NSW. This is anticipated to include a range of enhancements to consumer protections for residential work.
5	That the NSW Government amend section 8A (2)(a) of the Home Building Act so that the value of progress payments paid upon the completion of specified stage of work (as a proportion of the total value of the contract) must reflect the costs of completing that stage of work (as a proportion of total costs).	Noted – The Department of Customer Service is reviewing the Home Building Act 1989 for potential replacement with new legislation to regulate building work in NSW. This is anticipated to include a range of enhancements to consumer protections for residential work.
6	Service standards should be introduced for Fair Trading for the time taken to resolve disputes, for example, 80% of disputes resolved within 28 days, average length of time to resolve disputes is 28 days or less. The service standards for NCAT hearing and resolving a dispute should include shorter time frames, for example, 80% of matters are finalised within 6 months (instead of 18 months, as is currently the case).	Support – For Fair Trading matters, the Department of Customer Service currently has a service standard of 85% of complaints resolved within 30 days. If a complaint is referred for intervention by Fair Trading Building Inspections team, which by definition occurs only for more complex or protracted disputes between parties, the service standard is that all matters are resolved within 90 days of referral. The Department of Customer Service is reviewing the Home Building Act 1989, including disputation processes under that Act. NCAT, as an independent statutory body, determines its own priorities within its budget across the range of matters for which it is responsible.
7	The lodgement of a complaint or dispute with Fair Trading or NCAT for a specified defect within the warranty period preserve a claim for insurance in relation to that defect.	Support – this will be achieved via legislative amendments so that homeowners are not required to take the procedural step of lodging a ‘notification of loss’ with their insurer, in order to make a ‘delayed claim’. This will be progressed as part of the Department of Customer Service’s wider review of the Home Building Act 1989.
8	The NSW Government amends section 104A of the Home Building Act 1989 and associated Regulation to allow alternative indemnity providers to offer a discretionary (non-insurance) product.	Noted – SIRA will release a discussion paper to consult on reform options for the HBC scheme, including this matter.
9	That the Government amends section 105F of the Home Building Act 1989 to provide that SIRA is not required to consider specified prudential matters where such matters are also required to be considered by APRA in determining an authorisation to carry on an insurance business under the Insurance Act.	Support – SIRA will reform prudential requirements for APRA-authorised insurers by amending Insurance Guidelines issued under section 103EC of the Home Building Act 1989. SIRA will publicly consult on the revised draft Guidelines before they are implemented.
10	That the NSW Government: (a) Limits the application of sections 103BD to 103BG of the Home Building Act 1989 that regulate premium pricing to the default market incumbent, icare. (b) Removes the requirement for SIRA to approve private insurers and providers’ eligibility models, in favour of a market monitoring arrangement where SIRA reports on market participants’ performance against high-level principles (c) This should be reviewed in five years or earlier if the market composition has changed considerably.	Support – SIRA will reform requirements for premium pricing and eligibility models by amending Insurance Guidelines issued under section 103EC of the Home Building Act 1989. SIRA will publicly consult on the revised draft Guidelines before they are implemented.
11	That the NSW Government requires icare to make available separate cost-reflective construction period and warranty period products so that a new entrant could provide cover for one period only.	Support – Following the outcome of SIRA’s consultation on competition and product options, icare will develop and submit proposed products to SIRA as part of a filing.
12	That the NSW Government amends the Home Building Act 1989 to require an independent regulator to determine icare’s premiums for the HBCF to ensure they reflect efficient costs. SIRA’s role, as the scheme regulator, could be expanded to provide it with determination powers. Alternatively, IPART, as the NSW pricing regulator, could be given the on-going role of determining icare’s HBCF premiums.	Not supported – SIRA will instead: publicise SIRA’s existing role to independently review icare HBCF’s premiums to ensure they are not inadequate or excessive; enhance and publicly report on SIRA’s supervision of icare HBCF’s performance; and consider opportunities to reduce pressure on premiums as part of SIRA revising its Insurance Guidelines
13	The NSW Government amends the Home Building Act 1989 to require SIRA to determine icare’s builder eligibility assessment and claims handling processes.	Support in Part – SIRA will: consult on changes to the regulation of icare’s eligibility and claims models as part of a discussion paper about HBC scheme reform and updates to SIRA’s Insurance Guidelines that regulate some of this matter.
14	SIRA establishes appropriate KPIs against which it can measure and publicly report on icare’s performance in resolving eligibility issues and finalising claims in a timely manner.	Support – SIRA, in consultation with icare, will develop suitable KPIs to measure and publicly report on icare’s performance in respect of eligibility and claims matters, and will also consider opportunities for KPIs on other aspects of icare’s performance. These will be included in SIRA’s annual public reporting no later than FY2022-23.
15	icare provides greater transparency in how it undertakes its eligibility assessments and how it determines individual builder loading/discounts used in risk-adjusted premiums.	Support – icare HBCF will implement from 1 July 2022, simplified eligibility arrangements for more than 90% of building businesses that are insured under the scheme (approximately 19,000 businesses). This will reduce complexity, processing time and cost involved in insurance eligibility for small businesses.
16	icare:
	(a) Provides information in plain language in the Builder Eligibility/Change application form or the Builder Self Service Portal, why particular information is sought and how it would be used in determining a builder’s eligibility.	Support – icare HBCF will implement from 1 July 2022 for small builders. icare HBCF will implement this recommendation for larger builders following implementation of Recommendations 15 and 16(d).
	(b) Provides information in plain language on how the information provided by building businesses was used to determine their eligibility profile and their individual loading/discount, including any conditions of eligibility.	Support – icare HBCF will implement from 1 July 2022 for small builders. icare HBCF will implement this recommendation for larger builders following implementation of Recommendations 15 and 16(d).
	(c) Makes clear any adjustments that have been made to take into account any industry specific circumstances, for example, the adjustment for a pool builder in determining their eligibility to account for ‘sleeper pools’.	Support – icare HBCF will implement from 1 July 2022 for small builders. icare HBCF will implement this recommendation for larger builders following implementation of Recommendations 15 and 16(d).
	(d) Periodically updates the work undertaken by the Data Analytics Centre in 2016, to examine whether the factors previously identified and currently used, continue to be significant in predicting builder insolvency, and if there is scope to reduce the amount of information sought without necessarily increasing risk.	Support (and Completed) – icare HBCF has re-assessed the factors it uses for eligibility and is implementing simplified eligibility arrangements for most builders from 1 July 2022. These will significantly reduce the amount of information that most building businesses need to provide icare to support their eligibility for insurance, while continuing to manage risk.
17	icare reviews its dispute resolution processes to resolve eligibility issues in a more streamlined and timely manner.	Support icare HBCF has simplified its dispute resolution process to reduce timeframes by 15 days as of 1 April 2022, and will work towards further streamlining as of 1 July 2022; and SIRA will consider changes to the regulation of disputes as part of SIRA’s updates to Insurance Guidelines issued under section 103EC of the Home Building Act 1989.
18	icare’s premium calculator provide the estimated premium for each building business to help homeowners better manage their costs.	Support – icare HBCF is working towards digital implementation by 1 July 2022
19	icare changes its operating model to allow for building businesses to apply for eligibility and purchase certificates of insurance directly, rather than require that a broker is used for these functions. This would allow the use of brokers to become voluntary under the scheme, providing building businesses with more options on how they manage their HBCF obligations.	Support in Principle – This recommendation requires no legislative or regulatory changes. icare HBCF will implement digital systems changes to facilitate more choice for builders in purchasing their insurances. By December 2022, icare will also consult with industry and make a determination as to the insurance distribution model based on a specific business case clarifying the additional scheme costs for the transition. Unless there are additional costs to consumers identified, icare will offer building businesses the choice to deal directly with icare HBCF or via a broker by FY2023/2024.
20	The NSW Government amends the Home Building Act 1989: (a) to make clear that soft-scape landscaping works are not residential building works (b) to make clear that contracts can be separated or itemised so that HBCF cover is only required for residential building works so that the threshold for requiring HBCF cover refers to the value of residential building works, rather than the contract price. (c) so that the threshold for requiring HBCF cover refers to the value of residential building works, rather than the contract price.	Support in Principle –The Department of Customer Service is reviewing the Home Building Act 1989 for potential replacement with new legislation to regulate building work in NSW. This is anticipated to include changes to the scope of work regulated. SIRA will also release a discussion paper to consult on reform options for the HBC scheme, including updating thresholds for requiring insurance.
21	SIRA produces guidance for the building industry that addresses the following questions: (a) For contracts that require HBCF cover, whether items such as soft-scape landscape works and pool equipment can be excluded from HBC requirements (b) How to allow for variations in the cost of HBCF in contracts, if the exact contract price is not known at the time the contract is signed (c) Whether head contractors can require subcontractors to also purchase HBCF cover for subcontracted residential works exceeding $20,000 (d) Whether HBCF cover is required for alterations and renovations for multi-units above three storeys.	Support and partially implemented – SIRA published industry guidance responding to recommendation 21(c) on 13 April 2021.The Department of Customer Service’s review of the Home Building Act 1989 is considering changes to the scope of work regulated and contracting requirements. In addition. SIRA’s discussion paper about HBC reforms will consider options to clarify the insurance exemption for multi-storey buildings. Resulting regulatory reforms will be supported by guidance to industry.
22	The NSW Government exempts single dwellings from mandatory HBCF cover if the value of residential building works is greater than $2 million, or other amount as determined by the Minister. icare would continue to offer cover for these dwellings, which could be purchased on a voluntary basis.	Noted – This will be considered and consulted on as part of SIRA’s discussion paper about HBC reforms.