Senator the Hon Mathias Cormann
Minister for Finance
Date: Wednesday, 26 March 2014
MATHIAS CORMANN: Good afternoon everyone. I’m pleased to announce that after careful consideration of the scoping study into a sale of Medibank Private and subject to market conditions, the Government has decided to proceed with the sale of Medibank through an initial public offering in the 2014-15 financial year.
The precise timing and structure of the IPO are yet to be determined.
The independently prepared Scoping study though has reaffirmed the Government’s long held view that there are no good public policy reasons for the Government to continue to own and operate a private health fund. Medibank is a commercial business operating in a well-functioning, well regulated, competitive market with 34 funds. Prudential regulation of private health insurance is effective and this regulatory environment will of course continue after any sale.
The sale of Medibank will not change the Government’s ongoing role in the regulation of the industry, including when it comes to the approval of premium changes. The Scoping study found no evidence to suggest that premiums will increase as a result of the sale. As it does now, Medibank would need to continue to compete against other funds for customers and will of course need to continue to comply with all of the relevant regulatory requirements around premium change.
The sale of Medibank Private will also remove the current inherent conflict with the Government as both the regulator of the private health insurance market and a very large market participant.
The Government will now proceed to the next stage of preparing for the initial public offering including the appointment of Joint Lead Managers as required to support the IPO preparation.
As part of the preparations for sale, the Government is keen to ensure stability on the Medibank Board as Medibank transitions to private ownership. That is why the Government has decided to appoint 3 new Directors into positions that have or will become vacant this year. Appointing new Directors will assist those Directors to be better positioned through a longer tenure to assist the sale process.
The new Medibank board members to be appointed are David Fagan, Linda Nicholls and Christine O’Reilly.
Mr Fagan is a highly experienced banking and major projects lawyer with over 30 years’ experience acting for a variety of major banks and corporate clients.
Ms Nicholls is a corporate adviser and a Director of a number of leading Australian companies and organisations including Chair of KDR and a Director of Sigma Pharmaceutical Group and Fairfax Media. Ms Nicholls runs her own corporate advisory practice specialising in business strategy and financial services and healthcare and brings a strong health background to the Board.
Ms O’Reilly has an excess of 25 years of financial and operational business experience with strong commercial, strategic and stakeholder management experience in domestic and offshore operations. Ms O’Reilly is currently a Director of CSL, Transurban, Energy Australia and Baker IDI and Deputy Chair of Care Australia.
I would like to take this opportunity, on behalf of the Government, to thank very much the departing board members, Mr Steve Vamos and Dr Leanne Rowe, for their outstanding service on the Medibank Board. I wish them all the best for their future endeavours.
I would also like to take this opportunity to thank the scoping study advisers Lazard, Herbert Smith Freehills, Ernst and Young, the Australian Government Solicitor and Newgate Communications and of course my own Department for their outstanding and professional service as we continue to progress this sale carefully, methodically and purposefully.
Happy to take any questions.
JOURNALIST: What’s Medibank worth? How long will this take and can you really guarantee that premiums won’t go up?
MATHIAS CORMANN: It wouldn’t be appropriate for me to speculate on what sale price may or may not be achieved. We’ve made a decision today to take the next step. We will now appoint joint lead managers. There will obviously be a process to go through. As I’ve said, the precise timing and structure of the IPO is yet to be decided. It is our intention to proceed with the sale, subject to market conditions in the 2014-15 financial year but we’ll continue to take advice and we will continue to monitor market conditions very carefully.
JOURNALIST: Without putting a precise figure on it, is it fair to say you think it’s about $4 billion? You must have a rough figure.
MATHIAS CORMANN: Very good try Eliza, I’m not going to put a figure on it. Obviously our objective is to maximise net proceeds from the sale as well as achieving a series of other objectives for the sale. Those objectives for the sale are all listed in the press release, we want to ensure that the sale contributes to an efficient and competitive health insurance market, we want to ensure that service and quality levels for Medibank customers will remain high, particularly in rural and regional Australia. We want to make sure that Medibank employees are treated fairly through this process and of course we want to minimise residual risk post-sale for the Commonwealth.
So there is a range of considerations and obviously in good time before the IPO, as is required under the relevant laws, there will be a prospectus and of course Australians will be able to make judgements on investing in Medibank as an asset.
JOURNALIST: Senator, you talk about maximising the sale value, will there be a discounted offer to employees of Medibank Private as some other IPO’s have done from the public sector.
MATHIAS CORMANN: Well that goes to the structure of the sale and as I’ve said we haven’t made decisions yet in relation to the structure of the sale. That will be decided closer to the actual time of the sale.
JOURNALIST: While there isn’t a firm timetable, would you hope to get it all sold in that one financial year and would there be any institutional investors?
MATHIAS CORMANN: As I’ve said today, our intention is to proceed with the sale in the 2014-15 financial year, but we think as a responsible Government, as a Government that processes these sorts of initiatives carefully and methodically, that we need to maintain some flexibility, in particular with a focus on evolving market conditions. We’ll make a judgement and when we are satisfied that the most appropriate window for a sale is present, to maximise net proceeds and achieve all of the other objectives the Government has in relation to that sale, then we’ll move ahead.
JOURNALIST: Any institutional investors?
MATHIAS CORMANN: Again, I’m not making any announcements today in relation to the structure of the sale but we would expect that there would be wide-ranging interest in the opportunity to invest in Medibank Private as a business. Obviously that interest will come from a variety of sources including retail and institutional investors, I would expect. I’ll just point out here though that we are progressing this sale consistent with the Medibank Sale Act 2006 and there is a limit in the Medibank Sale Act where no individual investor will be able to purchase more than 15% of Medibank.
JOURNALIST: So I suppose this goes to my question – will there be measures in there to ensure that competition in this sector is maintained, i.e. to stop other health insurers buying up this asset?
MATHIAS CORMANN: Well the advice that we’ve got from our business advisers and the findings of the scoping study indicate to us that this will strengthen competition in the health insurance market. We are conducting this sale consistent with all of the requirements in the Medibank Sale Act 2006 and one of those requirements is a limit on individual ownership of 15%.
JOURNALIST: Minister, in the Howard Government, the question came up about whether Medibank members had any rights to shares. I wonder whether the scoping study has considered whether the members should be issued shares and related to that, do you think there would be any grounds for giving Medibank members say a discounted right to shares since they do support Medibank now.
MATHIAS CORMANN: In relation to the ownership of Medibank, the Commonwealth owns Medibank. Medibank policyholders purchase private health insurance through a contractual arrangement. When they purchase health insurance through a contractual arrangement, they don’t buy a share, they buy health insurance.
Now in relation to incentives that may or may not be offered to Medibank policyholders, that goes to the structure of the sale and we will make those decisions closer to the actual sale time.
JOURNALIST: But isn’t it essentially a mutual organisation as most health funds were before; the only money that the Government put into Medibank originally was $100 million, which the fund paid back. Why shouldn’t members, as happened when MBF and other health funds demutualised get access to some of the capital that you’ve…
MATHIAS CORMANN: Medibank is not a mutual. Medibank is a company that is owned by the Commonwealth. So we are selling Medibank on behalf of taxpayers as an asset that is ultimately owned by taxpayers. Medibank policyholders purchase private health insurance through a contract with Medibank. They don’t purchase shares in Medibank as a company.
JOURNALIST: Will all the proceeds of the sale go to retiring debt? Every single cent?
MATHIAS CORMANN: We have been on the record that our stated intention is to recycle the capital that is freed up from the sale of Medibank Private to invest it in productivity enhancing infrastructure. Now the Treasurer Joe Hockey will have more to say about that in the context of the Budget.
JOURNALIST: On that issue, Alannah MacTiernan asked in the House today what kind of assets you might be looking at selling in Western Australia. Can you give a rough indication, would it be power assets, would it be ports that you’d be asking the Government there to sell off to fund infrastructure projects?
MATHIAS CORMANN: Well I’m here to announce that the Government, after careful consideration of the scoping study has decided to proceed with the sale of Medibank, a Commonwealth asset, subject to market conditions.
You’re asking me questions about state assets. I’m not going to comment here and now, except to say that the Treasurer, Joe Hockey, has been having conversations with his State counterparts for some time now about measures to incentivise them to recycle capital to invest it in productivity enhancing infrastructure to strengthen our economy moving forward.
JOURNALIST: Because that Government there though wants to, they are looking at selling some assets but they want to retire debt with that money, is that not a fair ambition for them to have?
MATHIAS CORMANN: Well that is a matter for the Treasurer, Joe Hockey to continue to pursue with his State counterparts.
JOURNALIST: Have there been any lessons from the difficulties Qantas has experienced as a result of its Sale Act, that you will apply to the sale of this asset, for example in terms of the way it has to operate in the future. You talked about equity limits in the Act, any of those things change from 2006 as a result of your experience with Qantas?
MATHIAS CORMANN: The Medibank Sale Act 2006 is not quite the same as the Qantas Sale Act. There is a limit on individual ownership of 15% in the Medibank Sale Act. However that limit automatically falls away 5 years after divestment. So the individual ownership limit of 15% remains in place for 5 years post sale.
JOURNALIST: Just a question on a different topic…
MATHIAS CORMANN: Sorry are we done with Medibank before we go to…
JOURNALIST: You’re being quiet on what amount of money you’ll want to raise on this, but you’ve always said $4 billion. What figure are you going to be putting in the Budget?
MATHIAS CORMANN: I think you’ll find that we, the Government, have never put a figure on it. There has been a lot of market speculation and I’m sure that tomorrow when you good people report on our announcement here today, I’m sure there will be a level of speculation then. Obviously from our point of view, we want to maximise the net proceeds from the sale on behalf of taxpayers. We will do that taking into account a whole series of other objectives with our sale that are not price related. Ultimately of course we want to achieve as high a price as possible while being sensible.
JOURNALIST: Will the sale require any legislative reforms?
MATHIAS CORMANN: No. We are able to proceed with the initial public offering in 2014/15 within the context of the current Medibank Sale Act and there is no need for any other legislative change to facilitate the sale.
JOURNALIST: Senator, I’m not sure this is in your bailiwick. Bill Shorten at the Press Club today said that the Opposition would be prepared to look at lifting the restrictions that are in place on employee share schemes from 2009. Is that something the Government is actually wanting to do?
MATHIAS CORMANN: We are always prepared to engage constructively on good ideas for Australia. You’re right, this is not in my bailiwick, so I’ll let the Treasurer deal with that particular issue.
JOURNALIST: What about other Asset Sales? Now that you have got this one underway have you got or are you considering a scoping study on Australian Submarine Corporation or any other Commonwealth assets?
MATHIAS CORMANN: David, I am here today announcing that the Government has decided to proceed after careful consideration of a scoping study into the sale of Medibank Private, with the sale of Medibank Private subject to market conditions. We don’t have a policy as I stand here today to sell any other assets. Obviously if that changes at any time in the future we will make the relevant announcements.
JOURNALIST: Senator what is in your bailiwick is the FOFA reform.
MATHIAS CORMANN: Sure.
JOURNALIST: In terms of the legislation, the regulatory impact statement says it saves about approximately $200 million a year. Was there ever any work done on the costs to consumers by lifting or making the change proposed under the regulations?
MATHIAS CORMANN: This is a very good question. So the Labor Party significantly increased regulation for financial advisers, unnecessarily pushing up the cost of advice for consumers. The cost of implementation of FOFA was conservatively estimated at $1 billion. The ongoing cost of compliance every year is conservatively estimated at $375 million. The previous government had a process requirement where any such change as the one that was pursued by then Minister Shorten had to go through a regulatory impact assessment to properly review the cost-benefit equation. To make sure that any regulatory change actually delivered a benefit that outweighed the cost that was imposed. Every time you push up the cost of advice, what you’re forcing people saving for their retirement to do is to pay more out of their savings for the advice than they otherwise could. So we always have to be very careful when we impose additional red tape, who it is that we are ultimately hurting.
Our proposition always was, if you impose unnecessary excessive red-tape, which pushes up the cost of advice, the person that will ultimately end up paying the price is the person saving for their retirement. Bill Shorten, despite that massive cost of that increased regulation, never submitted those FOFA changes ‘so-called’, to the Government’s own regulatory impact assessment processes. Bill Shorten asked then Prime Minister Gillard for an exemption and he received that exemption. My proposition is, that the reason that Bill Shorten asked for that exemption was because he knew that he was imposing excessive red-tape. That the cost benefit equation didn’t stack up when, quite frankly, the reason you have these regulatory impact assessment processes is to ensure that you don’t impose regulation that make things unnecessary complex and costly beyond what is justified on increased consumer protection grounds.
JOURNALIST: Just on my very good question, you didn’t quite answer. Did you ask for costings of what the impact, you’ve seen the cost of the red tape, but did you look at the cost to consumers? I think RiceWarner, in its research in this area suggests that the savings, there will be a fall in the price of advice that goes through to consumers and the absolute benefit was about $144 billion over 10-15 years. Did you ask for research or work in terms of what the benefits to consumers that are being lost because of this change?
MATHIAS CORMANN: Contrary to Labor we went through a full regulatory impact assessment, through the Office of Best Practice Regulation. I might just make the point that the public interest and the consumer interest here is to ensure that our financial advice laws facilitate the most efficient, the most transparent and the most competitive financial services system possible. Where people saving for their retirement can have access to affordable, high-quality advice that they can trust and have confidence in. Now imposing excessive, additional red-tape, which doesn’t make a tangible consumer protection difference, which pushes up the cost of advice for people saving for their retirement, in our view, is not appropriate.
JOURNALIST: Minister, Seniors Australia put out some legal advice that they received on Friday saying that there would be significant detriment to seniors from your FOFA plan as it currently stands. Now are you willing to, during this pause, to take on board those concerns and adjust your plan?
MATHIAS CORMANN: Firstly I don’t agree with your proposition. I am meeting with the National Seniors Association, obviously a highly regarded, well-respected organisation. We’ll be having a conversation about what the Government is actually doing as opposed to what some people are suggesting we are doing. Just in relation to the best-interest duty - of course we are committed to ensure that financial advisors act in the best interest of their clients. We have been committed to that from day one when the bipartisan Ripoll inquiry conducted its inquiry into the Storm Financial collapse and a series of other similar events. Section 961B(1) determines that financial advisers have to act in the best interest of their client. That particular section remains as is. There is a second part to that particular section, which provides a checklist on the steps that a financial adviser has to take in order to satisfy the best-interest duty. He has to be across the subject matter. He has to ensure that he is aware of the objectives, the financial position, the relevant circumstances of the client. He has to ask questions to identify all of the relevant facts. He has to make a judgement on whether or not he or she is qualified to provide the advice given the circumstances that are in front of them and decline to provide the advice if he is not. He or she has to research the products and provide advice in the best interest of the client. All of that remains. What we are saying is that compliance with all of these parts of the best-interest duty test is sufficient to ensure that the financial adviser is required to act in the best interest of the client.
You asked the question so I’ll just finish it. What Labor did after all those different parts of the test is say, we want to put another open-ended catch-all provision at the bottom to force the financial advisor to take any other reasonable steps. Now that open-ended requirement creates uncertainty for both consumers and for financial advisers. If you increase uncertainty, you increase costs. In our judgement the catch-all provision at the bottom of a very comprehensive checklist of the things that a financial adviser needs to do in order to satisfy the test that he is acting in the best interest of his client, that list is enough and the catch-all provision doesn’t provide a tangible additional consumer benefit that will justify the additional cost that would come with it. That is why we are proposing to scrap just that little bit at the bottom.
JOURNALIST: My question was, really, this is advice to Seniors Australia. This is what they say based on the current plan. Now, you seem to be suggesting, tell me if I’m right, but they are misunderstanding what you are doing. In which case you wouldn’t see any need to change your current plan.
MATHIAS CORMANN: A couple of points. I will not talk to Seniors Australia through the media. I will talk to them face-to-face. We have got a time set-up and we will be having a conversation at that point. Let me just make the general point. We took a policy to the last election to improve the financial advice laws with a view of restoring the balance between appropriate levels of consumer protection and ensuring that access to high-quality financial advice remains affordable for people saving for their retirement. That policy was extensively consulted on. It was based on evidence through a whole series of parliamentary inquiries at the time. We announced it in March 2012. So it was on the table for nearly 2 years in the lead up to the last election. So what I would say is that we are committed to the policy intent to ensure the right balance between consumer protection and access to affordable advice. However, if based on the consultations that I am currently undertaking, there is some feedback that the wording in the regulations could be more precise in order to absolutely make sure beyond doubt, that we are only pursuing what we said we would pursue, then obviously we would take that on board.
JOURNALIST: But Senator, there were some post-election changes to that policy in relation to commissions were there not?
MATHIAS CORMANN: Well firstly, we reject the assertion that we are reintroducing commissions. We are not...interrupted.
JOURNALIST: There were changes...
MATHIAS CORMANN: ...in fact, we released a 16-point plan before the election, as I said 2 years ago now and if anything one of the policies that we took to the last election after Senator Sinodinos conducted consultation post-election is now more limited than what we took to the last election. So contrary to the proposition that somehow post-election we went further than what we said before the election, the exact opposite is true. Having taken advice post-election and having consulted widely post-election, the exemption that is on the table around the capacity for product providers to incentivise their employees to provide general advice on their products, that exemption is more limited now than what we put forward in the lead up to the last election. These are the sorts of conversations that I am having with people.
JOURNALIST: Senator, can you confirm whether expected proceeds from this sale will be included in the May Budget?
MATHIAS CORMANN: The May Budget is going to be released on the second Tuesday in May and we will be having these conversations then.
JOURNALIST: If you are selling it in the 2014/15 financial year then technically you should be able to include it in…
MATHIAS CORMANN: We will be making the announcements on what is in and ...interrupted
JOURNALIST: That is what the Howard Government did with Telstra, but some of the proceeds were in Budget back in 06.
MATHIAS CORMANN: Our intention is to sell Medibank Private in the 14/15 financial year, subject to market conditions, and of course we will reflect that in the Budget in the appropriate way. I’m not going to here and today put a number on it and we won’t be putting a number on it in public until such time as we have reached the appropriate stage in the process.
JOURNALIST: I’m not asking you to put a number on it Senator, I’m just asking whether you will be able to include it as income on the Budget.
MATHIAS CORMANN: Well the implications for the Budget of a sale of Medibank Private in 2014/15 will be reflected in the Budget in the appropriate way consistent with how these things have been handled in the past. One more question.
JOURNALIST: One more FOFA question. You mentioned that after the consultation you might look at changing the wording of the regulation. Would you look at changing the corresponding changes in the legislation.
MATHIAS CORMANN: This is parliamentary processes at work. This is democracy at work. We have introduced some legislation to give effect to our election commitments into the House of Representatives last week to ensure that we restore the balance between appropriate levels of consumer protection and access to affordable advice. Now that legislation has been sent to a Senate inquiry. That Senate inquiry will no doubt receive submissions from many stakeholders from different perspectives. Let’s just see what comes out of that process. Let’s see what the Senate Committee recommends. Let’s see what comes out of my consultations with stakeholders and if there are some adjustments that need to be made in order to more precisely reflect in the text of the Regulations what our policy intent is then of course we will do that. That is just normal parliamentary process.
JOURNALIST: Why do it for just the regulation and not the legislation.
MATHIAS CORMANN: As I said, the legislation is proceeding through the parliament in its usual way. There is nothing unusual. With complex, technical legislation like this post-parliamentary inquiry, to be adjusted if and as required. But let me just reconfirm again. We remain committed absolutely, to deliver the commitments that we took to the last election, to restore the balance between appropriate levels of consumer protection and access, affordable access to high-quality advice. We took a very clear set of policies to the last election. Obviously if it comes down to making sure that the wording accurately reflects what we have said we would do and if there are some suggestions on how that can be improved. We will take that on board. Thank you so much everyone.