22 February 2019
Transcript - #2019035, 2019

Interview with Tom Connell, News Day, Sky News

Subjects: Banking Royal Commission; mortgage brokers; Labor’s retirees tax; and Julie Bishop.

TOM CONNELL:

Josh Frydenberg, thanks for your time. A new plan from Labor today on compensation for victims of banking misconduct. Your thoughts?

JOSH FRYDENBERG:

Imitation is the best form of flattery. It has taken them eighteen days to mimic an announcement that we made in our full and comprehensive report to the Hayne Royal Commission. We set up the Australian Financial Complaints Authority, we set up its jurisdiction and its compensation limits based on independent advice from the Ramsay Review, which actually involved people from Choice and consumer groups, people with experience on the Productivity Commission, people with experience in the law. We think we have got the balance right and Labor have taken 18 days to come to the same conclusion.

TOM CONNELL:

So, in terms of those compensations, because that is one of the big changes from Labor. You’ll have consumers and small businesses now eligible for up to $2 million in compensation. Previously it was $500,000 for consumers. So, if a consumer lost more than that, more than the $500,000, they must prefer Labor’s plan.

JOSH FRYDENBERG:

Well, we’ve got to actually get the balance right. Lets remember that there are 35,000 members of the Australian Financial Complains Authority. It’s not just the big banks that Bill Shorten continues to talk about. Now, they meet the compensation payments through levys and as a compensation scheme of last resort. Now, it’s important for them to get indemnity insurance and for them to continue to be stable and prosperous businesses. So, it’s really important that the balance is right, we believe in a compensation scheme of last resort. That’s why we were the first to announce it. We believe that the Australian Financial Complaints Authority is the right avenue for this. That is why we established it and now the Labor Party is playing catch up.

TOM CONNELL:

The compensation for non-financial lost at the moment is just $5,000. Why is that so low?

JOSH FRYDENBERG:

Well, again, it’s about getting the balance right. We think that we have got the balance right. Compensation is going to be significant. But, importantly, we’ve also extended the remit of the Financial Complaints Authority to go back now a decade consistent with the period of the Hayne Royal Commission itself. So, people will now get their opportunity for their case to be heard. The other thing that we announced, Tom, was that we, as the Government, would pick up the tab for $30 million of compensation for payments that were never made but were adjudicated under the Financial Ombudsman Service. So, we’ve got a comprehensive response.

TOM CONNELL:

Yeah. I know that you announced that going back to 08’ earlier in the week. Just one more on that $5,000 cap. What sort of loss are we talking about because that is not much money?

JOSH FRYDENBERG:

Well, let’s look at the broader compensation scheme; I do think we have got the balance right. Labor has been interested in stunts all along here, they demanded that we put out the report straight away, so that they could respond within a week, said Clare O’Neil. They said if there was a recommendation from Hayne that “it shall be done,” was Chris Bowen’s words. We’ve heard today that they’re back-flipping on mortgage brokers…

TOM CONNELL:

I want to get to them in just a moment…

JOSH FRYDENBERG:

And that is a humiliation for Bowen and for O’Neil.

TOM CONNELL:

I do want to get to that in just a moment. But, this difference, this is a huge difference between you and Labor; non-financial loss, $5,000 under your plan, $2 million from Labor.

JOSH FRYDENBERG:

Well, obviously the focus has been on financial loss. But, again, we think we have got the balance right.

TOM CONNELL:

Is there an example of non-financial loss that you can give, you know, why is it such a small amount?

JOSH FRYDENBERG:

Well, look, it’s about getting the balance right. Its financial loss and non-financial loss. They’re both provide-able for by AFCA. Labor is playing follow the leader here. We made these decisions around compensation limits and jurisdiction based on independent advice, and Tom, we’ve gone back a decade too.

TOM CONNELL:

Mortgage brokers, which you mentioned, is it fair to say that you won’t be making customers pay up-front commission?

JOSH FRYDENBERG:

Well, what we have said is that you’ve got to be really cautious about this particular recommendation of Hayne. Particularly, because the Productivity Commission itself had actually said if you changed that fee model, then the impact on competition could be detrimental, that the big banks could benefit at the expense of the smaller lenders. Now, mortgage brokers employ around 26,000 people in the community. 75 per cent of them are sole traders, so they’re small businesses and they write over 50 per cent of the mortgages in the residential housing market. Now, Clare O’Neil said on ABC Radio that when it comes to the commissions for mortgage brokers, they should all go. We have never said such a thing. Chris Bowen said they would implement the recommendations. Again, we were very cautious with respect to that. And the Reserve Bank came in behind us and said that our caution was right, we will do a review in three years’ time. We stand on the side of mortgage brokers, the Labor Party can’t be trusted.

TOM CONNELL:

So, in terms of what that actually means “we stand on the side of mortgage brokers”. For now, there is going to be a review on those up-front commissions and how they will work. There is going to be no change at all to that structure?...

JOSH FRYDENBERG:

Well, what we’ve said on best interest duty, let’s put that in in accordance with Hayne, let’s get rid of the volume based bonuses and we’ve also got a phase out period for the trailing commissions, for new ones. But, when it comes to the customer paying a fee instead of the bank paying the mortgage broker, we’ve exhibited a great deal of caution and we’ve been backed in by the Reserve Bank of Australia.

TOM CONNELL:

Cause, you have said several times, this has been increasingly, I think, a feature of the past two weeks in Question Time, I’ve heard you say quite loudly that we’re on the side of mortgage brokers…

JOSH FRYDENBERG:

And we are…

TOM CONNELL:

In terms of what that actually means, even with the review, you seem to be indicating the up-front commission, the customer that would never be a good idea for them to pay that.

JOSH FRYDENBERG:

Well, we’ve got a review in three years time. But, we’ve said let’s not jump to implement that particular recommendation because of what the Productivity Commission and others have said about that particular policy. But, that is in stark contrast to what the Labor Party has said. The Labor Party has said “if Hayne recommends it, it shall be done”, says Chris Bowen. “We will implement every single recommendation”, said Clare O’Neil. Today, there is egg on their face.

TOM CONNELL:

As for the trailing commissions, they will be phased out as you just mentioned…

JOSH FRYDENBERG:

In relation to new trailing commissions…

TOM CONNELL:

Right, but in terms of incentive here. If mortgage brokers get nothing from a trailing commission, they get 100 per cent of their income from commissions, each time they write a loan. You’re going to incentivise churning, aren’t you?

JOSH FRYDENBERG:

Well, no…

TOM CONNELL:

It’s in the mortgage brokers interest to keep getting someone on a new loan. They get money every single time and nothing in the interim.

JOSH FRYDENBERG:

Well, actually, I think that the mortgage brokers do a very good job of ensuring the best interest of the customer and that’s where the best interest duty that Hayne actually recommended, will also play a role.

TOM CONNELL:

So, they will be prevented from doing that sort of churn even if they might be able to get someone on this fractionally…

JOSH FRYDENBERG:

Well, they’ll have an obligation, they will have an obligation to continue to act in the best interest…

TOM CONNELL:

But they could get someone on a fractionally better deal and keep churning them around…

JOSH FRYDENBERG:

Again, the best interest duty I think will play its role there.

TOM CONNELL:

A fractionally better deal is best interest though, right?

JOSH FRYDENBERG:

Well, no. A best interest duty is ensuring that the consumers interests come first.

TOM CONNELL:

But is there an issue with churning on incentive there?

JOSH FRYDENBERG:

Well, look, I think this will be dealt with within the industry. But, I think the focus is on ensuring that we don’t change the fee model in haste, which is what the Labor Party was proposing when they first looked at the Hayne Royal Commission.

TOM CONNELL:

And finally on this, there is incentive at the moment to write a bigger loan, obviously. You commission is commensurate to how big the loan is. Is that a problem?

JOSH FRYDENBERG:

Well look, I think that obviously the best interest duty will also play a role here. What you want, is the mortgage broker, Tom, to get a deal that is the interests of the consumers and speaking to consumers and speaking to mortgage brokers, I think that relationship is one of respect, has worked well.

TOM CONNELL:

So, the best interest there would ensure they’re not getting a loan too big?

JOSH FRYDENBERG:

Well, I think that what is going to happen here is that the consumers will be well served by the mortgage brokers, but the big banks won't get actually the additional work that they would have if the Hayne Royal Commission was implemented as was.

TOM CONNELL:

But on that size of the loan, because one of the issues at the moment with mortgage brokers is they tend to write bigger loans…

JOSH FRYDENBERG:

I don’t know if that’s actually, that you’re being accurate there. There are maybe some instances where some of the bigger loans may be done, and the mortgage brokers do get the financial benefit of those bigger loans. But that also provides the flexibility to the consumer because they can draw down on higher amounts as well. So I think you’ve got to understand there’s a two way relationship here between the mortgage broker and actually the customer. The market has worked effectively well; these people are well respected in our community. We’ve exhibited a great deal of caution, we’ve followed what the productivity commission has also recommended here, we’ve been backed in by the reserve Bank of Australia, but the real story today is that the Labor Party and Chris Bowen and Claire O’Neil have been forced into a humiliating back down and they’ve been rolled by their caucus, rolled by their Cabinet, and rolled by their leader.

TOM CONNELL:

We’ll see what they do on that, they’ve always got an invitation to come on the program.

JOSH FRYDENBERG:

Well, I notice that Claire O’Neil hasn’t rushed to fulfil that invitation.

TOM CONNELL:

We’ll see, we’ll see. They door is always open.

JOSH FRYDENBERG:

Nowhere to hide today.

TOM CONNELL:

I wanted to speak with you about frank dividends. This has been obviously a big topic as well. What’s your best example of someone’s financial situation here that’s going to be hit by Labor’s plan that should not be.

JOSH FRYDENBERG:

Well there are a thousand plus submissions to the parliamentary inquiry, many of which that I read out this week, where people on low incomes are actually going to be hit, Tom, by Labor’s new policy, their retirees tax. And it’s a $55 billion tax grab, so that’s money straight out of the pockets of retirees and people who are preparing for retirement, into the coffers of Government. Now, the Labor Party supported this policy for two decades. Simon Crean was very up front, and said that actually low income earners and retirees would be the beneficiary. Now over 80 per cent of people who will be hit by Labor’s policy have a taxable income under $37,000. Now over half the people that will be affected are women, and of those, half of them are single or widowed, and two thirds of whom are over the age of sixty. Now the other thing to point out here is Labor said there’s a pensioners guarantee. Well that’s actually not worth the paper that’s written on, and Labor even admits that now, because anybody who was a pensioner before the 28 March 2018 but sets up a self-managed super fund after that date will be hit by Labor’s policy. Anybody who had a self-managed super fund before 28 March 2018 and becomes a pensioner after that date, will be hit by Labor’s policy. That’s around 50,000 people. So, there are facts and there is fiction and the Labor Party’s pensioners guarantee is not worth the paper it’s written on.

TOM CONNELL:

Well going through a few of those elements, obviously, self-managed super funds tend to have much bigger balances, but I just want to…

JOSH FRYDENBERG:

Not in every case…

TOM CONNELL:

Not in every case, but...

JOSH FRYDENBERG:

…and as you know, there is not a legislated minimum. This is really important. Again, this is Labor’s policy …

TOM CONNELL:

Just on that aspect, in terms of the incentive, I mean if someone is a pensioner, they’re not really going to set up a self-managed super fund, are they, after that date, because any pensioner … [interrupted]

JOSH FRYDENBERG:

What happens if they are a widow?

TOM CONNELL:

Well you don’t need to set up a self-managed super fund…

JOSH FRYDENERG:

But what if they are a widow, and they’ve actually been left a self-managed super fund as can often be the case if you are thinking of a widowed women who has been left a self-managed super fund by her husband. I mean you’ve got to go through these stories; you’ve got to listen in to the parliament, Tom. These are people who do not necessarily vote Liberal or Labor. These are people who are affected.

TOM CONNELL:

I know you’ve talked about the people who can be effected, but what about the specific financial circumstances of where you think…

JOSH FRYDENBERG:

Well they each differ in different cases, different assets, different asset allocation.

TOM CONNELL:

What’s an example of something, because there’s been a lot of talk about fairness, and your side’s talking about it as well, you mention for example, taxable income, for someone obviously in retirement phase, you could have $1.6 million in super…

JOSH FRYDENBERG:

Could be up to a [inaudible] transfer balance, correct.

TOM CONNELL:

…which is all tax free, so I’m just trying to step through the sort of example of where you go here’s the person, here’s the assets, here’s why it’s unfair.

JOSH FRYDENBERG:

Well, we can give you a thousand of them because they’ve all made submissions to the inquiry. I can give you the Hansard from the week in Parliament. There are many cases where people who have planned for their retirement, done nothing wrong, and actually now find they’re going to lose $8,000, $10,000, $12,000. Now the average loss for one of those 900,000 individuals who are impacted by Labor’s policy – don’t forget, they costed it, they costed it at $55 billion tax grab, that’s their number, their average loss is $2200. If you are in a self-managed super fund, your average loss is $12,000. Now if you go back to the Labor Party’s tax policy in 1998, before this policy actually came in, they made the very point, they made the very point that this would complete the imputation system, that this was a good thing, that this would help retirees and those low income earners. So the Labor Party’s own words have said that this is good policy. We now know that they are feeling the heat from people in their own constituencies about this very badly designed policy that will hurt pensioners, that will hurt women that will hurt low income earners.

TOM CONNELL:

In terms of who it affects, obviously atm if you’ve got a couple on the pension, the qualification ends at assets at $848,000, so we are not talking about people with nothing here are we?

JOSH FRYDENBERG:

In the case of some people, they have low incomes, and also not a lot of assets. The issue here is…

TOM CONNELL:

But just on that point, when you say not a lot of assets, in that situation, a couple, with their own home, can still have $848,000 of assets and qualify for the part pension, so those people, and everyone below that, would all still get the refund under Labor.

JOSH FRYDENBERG:

Well look, there a range of circumstances, Tom, but the fact is, these people do not consider themselves wealthy and are not wealthy. These are teachers, these are nurses. These are people who have done nothing wrong except diligently plan for their retirement. Now, if you think that it’s welfare for the wealthy, as the Labor Party said, well then go and speak to these people, and actually understand their own individual circumstances. We’ve had Chris Bowen, boasting on the 7.30 report that he wouldn’t change his policy. Now we know that they won’t. And we’ve also - Chris Bowen arrogantly dismiss the concerns of over one million Australians, who will be effected by this policy. It’s not the right policy.

TOM CONNELL:

Finally and briefly, Julie Bishop, big loss to the Party?

JOSH FRYDENBERG:

Yes, absolutely. Julie has been an outstanding member for Curtain, an outstanding Foreign Minister. One of her great legacies will be the New Colombo Plan, which was based on the Menzies era initiative where thousands of people came from Asia to Australia and got experience here, learning and studying, now thousands of young Australians are going into the region, working and studying. I think that is a great legacy, the great empathy that she showed, Tom, after the downing of MH17, with the families of those victims, was great leadership; she’s been the Deputy Leader of the Party for eleven years, and I think she’s served with great dignity and distinction and she leaves on a high.

TOM CONNELL:

Treasurer, Josh Frydenberg, thanks very much for your time.