The fallout from the banking Royal Commission

The fallout from the banking royal commission could force timeshare clubs to radically change their sales model.

The Treasurer and corporate regulator have confirmed the government would review whether it’s appropriate for timeshare companies to continue paying commissions to sales staff.

“The royal commission report and government’s response stated that as part of the government’s review of measures to improve the quality of advice, government will review the remaining exemptions to the ban on conflicted remuneration,” said a spokesperson for the Australian Securities and Investments Commission. “This would include a review of commissions on timeshare.”

This comes amid renewed pressure for the regulator to clean up bad practice in the timeshare industry, including lengthy contracts offering poor value, high-pressure sales tactics and poor terms on loans to fund the up-front cost of membership.

The Sun-Herald has spoken to a number of timeshare members from various clubs who say they were encouraged to take out finance then make the repayments with a credit card.

Last year ASIC fined timeshare club Ultiqa Lifestyle for breaches of responsible lending practices, and introduced new policies forcing all operators to offer longer cooling-off periods. ASIC was continuing to look at timeshare, a spokesperson said.

The Australian Financial Complaints Authority said it and its predecessors received about 173 complaints a year about timeshare schemes. Problems included breaches of the personal advice obligation, misleading conduct, failure to disclose cooling-off rights, failure to explain the key features, benefits and risks, and breaches of responsible lending practices.

The timeshare sales model involves offering prizes to prospective customers, usually married couples, on condition that they attend a sales presentation. A sales representative usually working on commission spends about 90 minutes with the couple, collecting personal financial information and making recommendations.

The Gillard Labor government banned most commissions for financial advisers as part of the Future of Financial Advice (FOFA) reforms in 2010, but granted numerous exemptions including for the timeshare industry.

Timeshare sales agents are also exempt from minimum education standards for financial advisers, but are still obliged to act in the best interest of the client.

Choice director of campaigns and communications, Erin Turner, welcomed the review of commissions but said the bigger problem was that the timeshare industry offered a poor value product.

“It's baffling that successive governments have written so many legal loopholes for this exploitative industry,” she said. “It is also unclear how timeshare advisers can be acting in the best interests of their clients when their recommendations are to always buy a specific timeshare product – the one owned by their company.”

Choice conducted mystery shopping at three of the big clubs, Accor Vacation Club, Wyndham Vacation Clubs South Pacific and Classic Holidays, which revealed numerous examples where the timeshare adviser did not consider their client's detailed financial position.

A Wyndham spokesperson said all its sales staff complied with their best interest duty, recommended timeshare only when appropriate, and followed responsible lending practices. Most Wyndham members organise finance elsewhere. Accor, Marriott Vacation Club, Classic Holidays and Ultiqa Lifestyle did not respond to requests for comment.

Timeshare clubs are legally regulated by ASIC as managed investment schemes though typically the operators market it as “lifestyle investment” – one that pays dividends in the form of affordable holidays rather than a financial return.

Labor’s federal spokeswoman for consumer affairs, Madeleine King, said the timeshare industry needed further reform.

“Under a Labor government, unfair contract terms – like those seen in some timeshare arrangements - would be illegal,” Ms King said. “Labor calls on ASIC to further investigate reports that timeshare schemes are utilising misleading sales tactics and providing inadequate financial advice to customers.”

The problem with timeshare finance
The upfront cost of timeshare membership ranges from $15,000 to more than $50,000.

Customers can also buy ‘‘secondhand’’ memberships from owners who want to sell – a $35,000 membership might resell for $7000.

Those buying direct can arrange privately to pay the joining fee or apply for finance through the timeshare operator. Rates are up to 14 per cent, similar to a credit card, but are typically secured against the value of the membership including sometimes credits that are already paid off.

A customer who borrowed $35,000 would have paid $48,800 plus fees after five years because of interest.