Senator the Hon Mathias Cormann
Minister for Finance
Date: Thursday, 23 October 2014
ALAN JONES: Correspondence and I answer over 100 letters every day. That way I know what you are talking about. And to those of you who are writing in volumes about the Bronte RSL, I am getting on top of that, don't worry. Others of you are still writing about financial planners and desperately concerned about where you might go. And then lately a welter of correspondence on the privatisation of Medibank. Mathias Cormann is the man who heads two of those issues, the Finance Minister. And I spoke to him at the end of last month. We were talking about the financial planning issues and the rules that govern the behaviour of financial planners. You might remember the controversy over the Commonwealth Bank and many of those clients are still waiting for satisfaction. The Commonwealth Bank financial advisers were found basically by a Senate Committee to have been so corrupt to the point that the Senate Committee recommended a Royal Commission. The words of the Senate Committee Chairman, Labor's Mark Bishop, no longer a Senator, said quote: "the evidence that the Committee has received is so shocking and the credibility of both ASIC and the Commonwealth Bank is so compromised that a Royal Commission is warranted." I had Ian Narev, the boss of the Commonwealth Bank on here, I asked him to come on again; he has asked if he can see me off air. I will be seeing him. But these matters are unresolved. I have has a lot of calls and a lot of emails on the thrust of what they felt following the earlier interview with the Finance Minister Mathias Cormann, a good man. But one said: "great to you see standing up for the past, current and potentially future victims of financial planners. Mr Cormann was not convincing, but you were. Anyone who applies the commonsense test to your interview could see that." Now as I spoke, Mathias Cormann was introducing legislation into the Senate. I don't want to spend a lot of time on that this morning because I
want to look at this issue of the privatisation of Medibank and one or two other things as well. But Senator Cormann is on the line again. Mathias Cormann, good morning.
MATHIAS CORMANN: Good morning Alan and good morning to your listeners.
ALAN JONES: Thank you very much. Has that legislation on financial planners been introduced?
MATHIAS CORMANN: Well it has been before the Parliament for some time. In fact, there have been two Senate Committee inquiries into it which have both recommended its passage. And since we last spoke, there has been another vote in the Senate supporting the improvements to Future of Financial Advice laws that we are making.
ALAN JONES: Improvements is definitional isn't it? Now look, are people out there, still today, giving financial advice with four days training so long as they can sign up as a member of one of the financial planning associations? So you can still get a diploma of financial planning in four days and go out there and advise me on what to do with $900,000?
MATHIAS CORMANN: So the improvements that are in the Parliament at the moment do not relate to this. The issue that you raise is a separate issue, which goes to the educational standards of financial advisers. We are currently working with stakeholders across the industry on how we can sensibly lift educational standards. I might just make a general point though, what I am most concerned about is that financial planners providing financial advice have the right competencies. In a way I am less concerned about whether they spend one year, two years or five years pursuing a degree or even if it is five or six months. What I want to know is whether they have got the required competencies to provide competent advice...interrupted
ALAN JONES: Right but see what I am concerned about you is that you say: oh well it has gone to all these committees and your legislation has been analysed. You have got someone like David Murray, who is already the Chairman of your own Financial Systems Inquiry, a former head of the Future Fund, a former boss of the Commonwealth Bank...interrupted
MATHIAS CORMANN: A very good man.
ALAN JONES: Right, exactly. Well he is saying consumers are at a disadvantage when dealing with planners offering complex products. That's what my listeners are writing to me about.
MATHIAS CORMANN: And that is exactly right. I don't disagree with him on that at all. Financial planners at their best help people with their financial health and wellbeing. They help people manage financial risks through life and they help people maximise opportunities. But of course, they are dealing with other people's money and of course that is why appropriately, there is a robust regulatory system in place...interrupted
ALAN JONES: But there isn't.
MATHIAS CORMANN: Well there is. But we also need to make sure...interrupted
ALAN JONES: But Mathias, look you're using words here. Let's just get to the guts of it. Okay, your mother died and you have sold her home. It got you $900,000 bucks. You are really out there only on about $80,000 a year, you don't really know how to handle $900,000 bucks and your mate says: go to a financial planner. You know nothing about financial planners. So you walk in, says financial planner and you sit down. And this bloke is telling you from the Commonwealth Bank or whoever what to do with your money. What guarantee have you got a) about his qualifications and b) that he isn't getting a commission on the product that he is going to sell you and tell you where to put the $900,000?
MATHIAS CORMANN: Well, any commission that would conflict the advice given and that would get the advisers to recommend a product that is not in the best interest of the client is now unlawful. That is the point that I was trying to make when we last spoke. Since the events at the Commonwealth Bank, the laws have changed. So there are two very important aspects that have changed. Firstly there is now a statutory requirement for advisers to act in the best interest of their client. That remains in place under our reforms. And there is also a ban on all remuneration arrangements that would conflict the product advice given by the financial adviser. That remains in place as well. In fact we have tightened it.
ALAN JONES: But Mathias, I don't know whether this bloke is getting a commission or not. He is just telling me to put all my money in this product. I don't know. Shouldn't he have to say to me, I mean it is commonsense here; shouldn't he have to say to me now I am recommending this product for your money?
MATHIAS CORMANN: Here is the point though. This is just what I am at pains to explain again and again. In the regulations that I have put forward, we have explicitly prohibited commissions that are paid just because a product has been sold. And we have banned all ongoing payments; all ongoing commissions have been completely banned.
ALAN JONES: So if I am working for the Commonwealth Bank and I am advising you and I am selling a product to you, the Commonwealth Bank know now that they cannot pay me a commission on the product that I am selling?
MATHIAS CORMANN: That is right. The Commonwealth Bank cannot pay its employees a commission just because...interrupted
ALAN JONES: And who monitors that?
MATHIAS CORMANN: Well let me say to you what I put to the Senate Estimates Committee yesterday. A publicly listed company like one of the major banks or whoever, they actually do everything they can to comply with the law. Obviously ASIC's job is to monitor compliance with corporate law. But it is not as if a major bank, given the reputational risks that come with breaking the law, a majorly publicly listed company actually does go out of its way to comply with the law of the land.
ALAN JONES: Well it didn't with the Commonwealth Bank. They lost millions. And indeed there is an argument that there is about $37 billion over the last 10 years that has been lost. I read a letter that you had written, or that you have signed in relation to this Commonwealth Bank's ongoing Open Advice Review Program. And the fourth paragraph of your letter to one of my listeners said "I have made it clear to the Commonwealth Bank that the Government considers that the most important focus must be on resolving any legitimate outstanding grievances from affected customers. The Government is carefully the monitoring the implementation of the Open Advice Review Program and whether legitimate customers concerns are adequately addressed." And so far that hasn't happened. But then your sixth paragraph which is basically about my listener's request to get ASIC into action, you say one of the reasons ASIC was established as an independent body is to ensure its decisions are and are seen to be independent of the political process.
MATHIAS CORMANN: That is true...interrupted
ALAN JONES: "As Minister, I have only limited powers of direction over ASIC and I am unable to intervene in individual matters within its statutory responsibilities. As such, I am unable to direct ASIC to take a particular course of action in relation to the Commonwealth Bank's financial planning."
MATHIAS CORMANN: That is true. I mean it is the same as with the Police. Can you imagine if a Minister for Police was able to tell the Police Commissioner you have to investigate the person over here or the person over there? These matters appropriately are beyond the realm of politics. And we would want them to be. ASIC is essentially the corporate police man.
ALAN JONES: I know but you have got the Financial Planning Association of Australia Chief Executive Mark Rantall has said ASIC's entry requirements were hopelessly too low. The Financial Planning Association said we have been calling on ASIC for a number of years for approved, relevant university degrees for financial planners. The Association for Independently Owned Financial Professionals, Chief Executive Peter Johnston said ASIC's planning guidelines are pathetic, quote, "financial advisers should have minimum of three years work experience within the industry before they can even start seeing clients." Now that comes within your purview.
MATHIAS CORMANN: Indeed, indeed and these are all good people. And I am working with all of them through an industry working group on dealing with exactly these issues.
ALAN JONES: So there could still be financial planners out there giving me advice who have just got a primary school qualification? Because under the current laws, a person with pre-qualifications would just include finishing primary school, can get a diploma of financial planning in as little as a week and begin advising me as to what to do with my $900,000.
MATHIAS CORMANN: Well Alan, we didn't start with a blank sheet of paper here. We are working to lift professional, ethical and educational standards. We initiated the inquiry through the Parliamentary Joint Committee on Corporations and Financial Services on these matters. We are running our own working group with relevant industry stakeholders, and you have mentioned two of them just now, to work through these issues. But I say again though and I think that we need to really carefully reflect on this, it is from my point of view not as important what the input is like in terms of how much time you spend going through a degree or whatever. My concern is what the output is. To what degree can somebody that wants to advise clients demonstrate that he or she has got the competencies required to provide good advice that is in the best interest of clients to people across Australia.
ALAN JONES: Right. Let's just go to this Medibank Private. The Government have contributed not a single cent to Medibank Private except for when they lent two sums of money which have been paid back. But the Government then expects to get $4 billion from selling Medibank Private. It is one of the biggest revenue earners that you have got. It pulled in $315 million in 2013. But section 65 of the constitution of Medibank Private says if on the winding up of the company there remains any property whatsoever, the property must not be paid to shareholders but must be paid to one or more registered health benefit organisations nominated by the Minister. Now Medibank sole shareholder is the Government. So the Constitution, section 65 says it is not entitled to the proceeds of any sale.
MATHIAS CORMANN: Well that is inconsistent with our advice. It was the Commonwealth that set up Medibank Private as a business. Medibank Private as you say, the Government is the only shareholder in Medibank Private and as the Minister for Finance I hold all of the Commonwealth shares. And that is of course why in the period of the previous Government, all of the dividend payments from Medibank Private went to the Commonwealth. I make just make this general point Alan, because people put this proposition to me from time to time...interrupted
ALAN JONES: Well this is a big argument. This has been going on a legally for years and years. John Howard called off the sale of Medibank Private in 2006 because of this.
MATHIAS CORMANN: Well he didn't call it off. The legislation was passed...interrupted
ALAN JONES: He didn't go on with it.
MATHIAS CORMANN: Because by the time it was due to happen we lost Government.
ALAN JONES: But again the common sense rule Mathias. All the capital in Medibank Private has been raised by policy holders. All the capital has been raised by policy holders. And management invests each year to grow the business. The argument that the Government owns this is nonsense.
MATHIAS CORMANN: Well the argument that you are putting, so what you are saying is that if somebody goes and buys a burger at McDonalds, because they are contributing to the equity of McDonalds, that somehow they buy a share in McDonalds. Well no.
ALAN JONES: Whoa, whoa Mathias, whoa, the bloke who owns the McDonalds shoved the capital in and continues to shove the capital in. The capital in Medibank Private has only come from policy holders. You're not shoving any money in there.
MATHIAS CORMANN: Somebody who purchased health insurance, purchases private health cover, they don't buy a share in the business.
ALAN JONES: Wouldn't matter. You haven't put any money in it…interrupted
MATHIAS CORMANN: Well that is actually not true either…interrupted
ALAN JONES: Well the money you've put in, Malcolm Fraser put $10 million to start. That money has been paid back. That money has been paid back. So the money that has gone in has come from policyholders.
MATHIAS CORMANN: There were some other equity injections along the way.
ALAN JONES: They have been paid back Mathias, they have been paid back. Here I've got a listener saying: "Alan, I've been with Medibank since I was 18. I'm now 53, so I've been with them for 35 years and the Government is saying I'm get nothing from the sale for loyal all this time. Bloody disgraceful. How can we stop the sale or change it so that loyal members get at least some free shares? I'm also carer and paying..." blah blah. Now I noticed the prospectus for the Medibank Private Share Offer has been lodged and it is now available I might add on medibankprivateshareoffer.com.au but the indicative range for Medibank Private shares has been set at $1.55 to $2 a share. More than 750,000 people have received the Medibank Private Share Offer, but all the Medibank Private policyholder gets who pre-registered and applies for shares, all they get is a number of shares which will be 30 per cent more the general public will get.
MATHIAS CORMANN: If that's what they want, that's right.
ALAN JONES: So they are getting absolutely nothing. Then I learn today that a number of Australian superannuation fund managers say that the three investment banks marketing the Medibank float will get higher fees if they sell the shares to international funds than if they sell the shares to local funds. So this damn thing could finish up being owned by foreigners because those set back to commissions again Mathias. Those managers say that the investment banks, if they sell to international funds will get a commission of 0.6 of a per cent, if they sell to local funds they'll get 0.3 of a cent. The incentive is to sell to international funds and if enough of them buy up the shares, this blasted thing is owned by foreigners.
MATHIAS CORMANN: That is actually not right because the sale is being conducted under the provisions of the Medibank Private Sale Act 2006 as you've mentioned earlier which was passed under the Howard Government and there is a prescribed limit to how much of Medibank an individual investor is able to own and that limit is 15 per cent. Of course we have not made any decisions yet as a Government about the distribution between retail and institutional investors. These decisions are yet to be made and obviously the Government is very mindful of making sure that these things are appropriately balanced.
ALAN JONES: Hang on, just answer my question. Is it true that the investment banks who are marketing the Medibank float will get a higher fee if they sell shares to international funds than if they sell them to local funds?
MATHIAS CORMANN: The remuneration arrangements in the context of the sale of Medibank are entirely consistent with what has been in place for similar…interrupted
ALAN JONES: Yes or no?
MATHIAS CORMANN: It is yes.
ALAN JONES: Right, okay, now next question. So what proportion of Medibank will be offered for sale to foreigners?
MATHIAS CORMANN: That is not yet decided. Obviously we are going through the process now. We expect strong interest domestically, we expect strong interest internationally and from the point of view of Medibank, it is very important that we have a good balance of retail, institutional domestic and institutional overseas investors, because that will help strengthen the company into the future. And of course we are very mindful of the need to give Medibank the best possible flexibility to access capital markets into the future in order to pursue growth opportunities.
ALAN JONES: Yes that is all very well. What about the private members? Are you anticipating legal challenges to all of this? By the way, is it true that Lazard Australia is advising the Government on this?
MATHIAS CORMANN: Lazard Australia was the initial business adviser, that's exactly right.
ALAN JONES: And their directors include Paul Keating and Lindsay Tanner.
MATHIAS CORMANN: That might well be so, but they won the contract through a competitive tender.
ALAN JONES: So what are you saying, I can't understand how you can just stand up and we are going to sell this thing because Medibank Private members then get nothing, other than the fact than oh well, you get can get in early on the shares and you can get 30 per cent than the average Joe public will get. This John Deeble, who is the founder of Medicare and Medibank, Deeble said under the not for profits structure, and I concede that it is now, Rudd made it a for profit outfit, but he said under the not for profit structure quote: "there was an arguable case that the members had rights in the reserves that had been built up from the contributions of the members, 1.3 billion in fact." So are you saying that just because it has now become a for profit fund, that those members' rights have been extinguished, and the reserves are extinguished and you just go whistle around and hope you can pick up a couple of shares.
MATHIAS CORMANN: Not just because of that and Deeble was not a part of setting up Medibank Private. Medibank Private was set up by the Fraser Government and it was always an entity that was owned by the Commonwealth on behalf of taxpayers. What you're suggesting is that we should undermine the rights of taxpayers in…interrupted
ALAN JONES: No, that is not, Mathias that is not correct. You are not correct. It was not owned by taxpayers, Malcolm Fraser, I was there. Malcolm Fraser tipped $10 million to get it going and the $10 million was repaid, it was not owned by the taxpayers.
MATHIAS CORMANN: And it was structured as a business…interrupted
ALAN JONES: I don't care. The capital Mathias came from the business came from the policyholders and continued to come from the policyholders.
MATHIAS CORMANN: Well the policyholders as I say, purchase private health insurance. They don't purchase a share in the business. They purchase private health cover. Medibank Private is not a mutual. The legal advice is unambiguous about this, it is not even grey.
ALAN JONES: The Chairman Fred Miller of Medibank said in his report in 1988 quote: "Medibank Private is a non-profit organisation based solely on its contributors' funds. The Government has no financial interest in Medibank Private's assets and reserves; they are the property of its contributors." So is Miller wrong?
MATHIAS CORMANN: He might have. I haven't seen the letter. I'm happy for you to send that through to me. Let me just say again that the advice to the Government is clear and unambiguous.
ALAN JONES: Yes I know, but your advice is being contested.
MATHIAS CORMANN: Well it hasn't been. Yes, I know that people raise it with us… interrupted
ALAN JONES: People tell Government what they want to hear. You need to hear the $4 billion; they will tell you what you want to here. But are going to be subjected to legal challenge?
MATHIAS CORMANN: I don't control what people might choose to do, but from where we sit here, we don't believe that any legal challenge would be successful and I'm not aware of any legal challenge.
ALAN JONES: The 2004 Annual Report of Medibank said: "as a not for profit organisation, every dollar of profit is retained within the fund for the benefit of members."
MATHIAS CORMANN: Well and that was true.
ALAN JONES: Right, so just as Fred Miller said?
MATHIAS CORMANN: Well that is actually not the same…interrupted
ALAN JONES: They are the property of its contributors.
MATHIAS CORMANN: No, no. The reserves were retained by Medibank for the benefit of its members. That is of course true because obviously the whole purpose of Medibank Private is to finance access to high quality healthcare on behalf of contributors. That is the whole purpose. And obviously it is in the interest of Medibank Private policyholders that Medibank remains strong so that it is able to deal with all future claims that arrive.
ALAN JONES: Final question because I just think this hasn't been adequately debated and I don't mean any offence to Members of Parliament. They have got other things on their hands; many of them wouldn't have a clue what this was about. Actually there is a few down there who do some homework. Have you got a dividend, has the Government got a dividend? Just say roughly $400 million for 20 years from Medibank Private, that's about $8 billion. You're going to sell it for $3 or $4 billion to do a bit of infrastructure. How is that a sensible commercial operation that it is okay to take the $4 billion now and run, rather than have $400 million for each of the next 20 years? How is that sensible?
MATHIAS CORMANN: I don't know how you're going to draw $400 million in dividends…interrupted
ALAN JONES: Well, $315 million…interrupted
MATHIAS CORMANN: Yes but this is the point right. You're sounding like Tony Burke from the Labor Party now who has been making exactly that point. The truth is that Labor took $600 million in special dividends out of Medibank Private at a time when they were making $100 million or so in profit, so you can't continuously go into the reserves and draw down reserves in order to pay out special dividends.
ALAN JONES: Well I'm only going on your own figures. You took $315 million last year.
MATHIAS CORMANN: Well that was not me that was the previous Government.
ALAN JONES: Well the Government of Australia took $315 million.
MATHIAS CORMANN: So the Labor Party took out of Medibank Private special dividends of about $600 million over two years on top of the ordinary dividends. The point is that is not sustainable and part of my argument is that it is better for Medibank Private policyholders for the Government to get away from ownership of Medibank Private so that a future Labor Government can't do what the last Labor Government did because as you say, these capital reserves are built up on the back of contributions from policyholders and so we don't want Medibank Private policyholders to be exposed to the risk that a future Labor Government would seek special dividends at the same rate as the previous Labor Government did because it's just not sustainable into the future.
ALAN JONES: I agree with that. I agree that governments shouldn't be owning Medibank, so I don't have a disagreement there. I'm just concerned about who actually currently owns it and who should get the benefit of its sale. But if that were also the case and I'll let you go Mathias, but if that were the case, and we are terribly concerned about wasting money and Government not being involved, why is the Government pouring the likelihood of about $25 billion into Renewable Energy Targets. You're the Finance Minister. By 2020, $25 billion to be paid to Chinese and Qatar wind turbine owners. Someone's kidding me. You can't on the one hand say it's financially responsible to do what we're doing about Medibank and it is financially responsible not to chase Holden up the road with an open cheque, and financially responsible to not support SPC Ardmona which it is, and then say ah, but here we are out there, we're going to tip in Angus Taylor's electorate $10 billion in taxpayers' money over 10 years. It doesn't add up Mathias.
MATHIAS CORMANN: I've got a lot of sympathy for what you are saying. But again we don't start with a blank sheet of paper. There is obviously an industry there now that has made investments. We are concerned about the way the Renewable Energy Target has been operating. It has been growing well beyond the actual 20 per cent target that it is supposed to be...interrupted
ALAN JONES: I'm worried about the money.
MATHIAS CORMANN: I understand your point...interrupted
ALAN JONES: Well on that blank sheet of paper, Mathias, I'd like you to write your story. Not the Labor Party's story. You're arguing the Labor Party line. With Medibank you say this is the Labor Party, they did this to us, well this is the Labor Party renewable energy story, you tell your story.
MATHIAS CORMANN: Our story is that we want to ensure that we bring down the cost of electricity by either making reforms to the way it operates and you can't just from one day to the next scrap something like this altogether, that would be irresponsible because of the implications that it would have, but we can make it work better and that is what we're focused on.
ALAN JONES: Do you know the good part about this morning? You've spoken to us. We need more debate and discussion so that the public can understand those issues. I'm immensely grateful for your time.
MATHIAS CORMANN: Good to talk to you Alan.
ALAN JONES: You too, thank you so much. There he is, the Finance Minister Senator Mathias Cormann.