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Monday, 4 June 2001
Page: 27203

Mr KELVIN THOMSON (9:14 PM) —The centrepiece of this budget was a half-baked attempt by the government to say sorry to those older Australians, the pensioners and self-funded retirees, who have been so cruelly affected by the government's GST, that tax under which nobody—repeat, nobody—was going to be worse off. The government now acknowledges that tens of thousands of retired Australians have been made worse off as a result of the GST, and it has endeavoured in this budget to say sorry to them. Regrettably, the compensation lasts for one year but the GST goes on forever.

Compensation would have been a little more substantial if the government had not had to engage in a $500 million bailout over the course of the next 10 years to cover policyholders who have been left stranded as a result of the collapse of the insurer HIH—the largest corporate collapse in Australian history. Since I spoke on this matter on the matter of public importance debate when parliament was last sitting, last Thursday week, there have been a couple of significant new developments. The first of those is that we have had the provisional liquidator's report, which is truly alarming. It estimates the losses at between $2.7 billion and $4 billion. It further states that reliable estimates of creditor payment outcomes will not be possible for at least a year and there will be a delay of two years before the first general dividend payment and a delay of up to 13 years before the final payment to creditors. That $2.7 billion to $4 billion makes this the largest financial collapse in Australian history. And it is clear that neither the federal nor the state bailout packages will adequately cover the losses now being faced by innocent HIH policyholders. The other thing that was very significant about the provisional liquidator's report was the statement that:

The very substantial losses are not restricted to the last nine months of the operation.

HIH did not sink suddenly. It was sinking for a long time. And those whose job it is to notice these things—the auditors, Arthur Andersen; the regulator, APRA; the Minister for Financial Services and Regulation—have a great deal of public explaining to do.

The second thing that has occurred since I last addressed the House on this topic is the collapse of One.Tel and some further focus on corporate governance issues. Indeed, today the Prime Minister said that the One.Tel directors Jodee Rich and Brad Keeling had a moral obligation to pay their million-dollar bonuses back to the company. But he could have, and indeed should have, made the same observation about the HIH directors who drove that company into the ground. According to the HIH 1999-2000 annual report, chief executive Ray Williams was paid a cool $1.147 million in 1999-2000 for his great work in building up the company. Mr George Sturesteps was paid over $770,000 in 1999-2000, Mr Dominic Fodera was paid over $677,000, Mr Terence Cassidy was paid over $671,000 and Mr Randolph Wein was paid a more miserly $648,000. Mr Fodera, Mr Wein and Mr Cassidy are now reported to be claiming severance packages of up to $1 million each. These failed HIH directors should withdraw their severance claims immediately. In all good conscience, they should not have accepted salaries of in excess of $500,000 when their mismanagement of HIH will cost Australian taxpayers $500 million and policyholders untold misery. Indeed, they should hand back this undeserved money.

The severance claims have the same status as other claims from unsecured creditors, including policyholders. As a result, if these severance claims were honoured, it could only be at the expense of HIH policyholders who have been innocent victims of the HIH collapse. Even before the royal commission, it is abundantly clear that the directors and senior managers of HIH and associated companies have managed to turn it into a billion dollar disaster, leaving taxpayers holding a $500 million baby. So, in all good conscience, directors and senior managers should now withdraw these claims. Whatever legal entitlement they may have, surely they have no moral or ethical entitlement to further HIH money.

When APRA was first established, Treasurer Costello said it would give Australia a stronger regulatory regime designed to better respond to developments in the finance sector. Indeed, this boasting continued for quite some time after the establishment of APRA and ASIC. But we can now see, with the release of the provisional liquidator's report, how the great financial managers of the Howard government will leave a legacy of a 10-year, taxpayer funded bailout to meet the worst insurance company collapse in Australia since Federation.

Labor also wishes to place on record some concerns about the bailout arrangements, however reluctantly entered into by this government. As things stand, we have a private company effectively being given a blank cheque from Commonwealth taxpayers to pay various unquantified amounts to an unspecified group of people under unknown criteria. There are questions about the accountability of this body to the parliament, the Senate estimates process, the Commonwealth Auditor-General and the departments of Finance and Administration and Treasury. Nor has the minister made clear to the public just how this private company will be accountable to the financial system regulators, such as APRA and ASIC. Clearly, we need to have appropriate accountability in relation to this body. Not only should the bailout processes of this private sector rescue vehicle be completely transparent but also the administrative and personnel costs must be scrutinised by parliament and the Auditor-General. In any HIH rescue, the taxpayer cannot afford a double whammy by having to pay exorbitant private sector level fees to managers or consultants. It is still the case that the bailout is being worked on without the involvement of the states, without the involvement of the opposition and without the involvement of representatives of the policyholders who are the victims of the collapse. As a result, victims still have no idea who will be covered and still no prospect of a decent night's sleep. Indeed, I have talked with people who have filed for bankruptcy based on legal advice because they simply could not wait any longer for the government.

I regret that the government has not been interested in any bipartisan way of handling this matter. Back on 12 April, the day before Easter, I wrote to Mr Hockey, the Minister for Financial Services and Regulation, urging him to convene a roundtable of all the relevant parties to try to come up with a national solution to what was clearly an emerging national crisis. I said to him in my letter:

The Opposition would also wish to be invited to such a round table, and would be interested in working constructively in a bi-partisan way toward addressing the outstanding problems faced by victims of the HIH collapse.

I regret that the minister has never seen fit to respond to that letter and has not seen fit to involve either the opposition or the states, which clearly have an interest in this matter, in endeavouring to work out a comprehensive national solution. As a result, there are many cases—and many members of this House would be aware of cases in their own electorates—such as the family company Fresha Foods being served with a bill for $600,000 from the Hilton Hotel in Cairns in relation to a claim against them which their insurers, HIH, saw fit to settle just prior to going into liquidation, and there are many other examples of hardship as a result of the way in which the government has handled this matter.

The other thing that we remain concerned about is the terms of reference of the royal commission. We have had an announcement by the government, under duress, of a royal commission. They said, `We could not have a royal commission because that would politicise matters; that would get in the way of ASIC.' Then Labor said, `A Beazley Labor government would hold a royal commission.' And, hey presto, we get a royal commission. But we still do not have the terms of reference, and we insist that these terms of reference go to things such as the action of Howard government ministers and the advice given to them by APRA and ASIC, the government's handling of insurance industry regulation issues, including a review of the Insurance Act since 1998, and any role played by political donations in the HIH debacle.

The sort of thing that the royal commission ought to be looking at is the fact that the New South Wales Motor Accident Authority expressly raised with APRA the idea of appointing an inspector as early as October last year. The New South Wales Motor Accident Authority became very concerned about the state of HIH insurances. Its chairman contacted a senior APRA officer to raise with him the option of appointing an inspector, and APRA advised the New South Wales Motor Accident Authority that it would prefer that the Motor Accident Authority not send an investigator into HIH because APRA was working with the company and did not wish to have any `pre-emptive activity' that might cause a loss of market confidence. Instead of the minister backing up APRA in relation to these things, he ought to be making sure that APRA is publicly accountable for what it did, rather than complacently accepting APRA's explanation that it did not wish to damage market confidence in HIH. APRA's responsibility is to protect consumers and policyholders rather than the share market.

I also indicate that we want close scrutiny of the issue of political donations. HIH's $696,000 of donations to the Liberal Party, including a $100,000 donation to the Free Enterprise Foundation, have become a matter of notoriety in recent days and weeks. The opposition also notes that support for the Free Enterprise Foundation was recorded in the award citation when Mr Ray Williams received an Order of Australia. Given that the Free Enterprise Foundation is an associated entity of the Liberal Party, we need an assurance that Mr Williams's support for the Free Enterprise Foundation was not a factor in the award of this Australian honour, and such an assurance is indeed vital to the integrity of the Australian honours system.

Another thing that the royal commission needs to be examining is the conduct of the auditors. In a matter of public importance debate a week or so ago I had a few things to say about the conduct of Arthur Andersen, the auditors; about how they were able to charge and receive $1.7 million for signing off on books that said that HIH was $930 million in the black—that is to say $1 billion in the black—when it turns out that HIH was a cool $1 billion in the red.

I also raise the issue about the conduct of others who get paid good money and who provide nothing of value in exchange for it. There is the question of the insurance brokers. They have been criticised for placing clients' business with HIH in recent years, despite what appears to be widespread concern about the company's financial position. The brokers say that they rely heavily on the opinion of independent agencies like Standard and Poor's. Mr John Richardson, the chairman of insurance broker Marsh said, `We are reliant on external agencies to a substantial degree because the external agencies are in a privileged position in that they have access to confidential financial information.' So you wonder just what it is that the insurance broker Marsh are doing, what kind of value they are adding and what it is that they are getting paid for, because they say, `Well, actually, we have to rely on the ratings agencies.'

The ratings agency Standard and Poor's representative, Mr Ian Thomson, said that the ratings agencies do not represent themselves to the auditors and go through all the contracts. He said that his organisation ultimately relied on information provided by management, along with actuarial reports and audited accounts, and that the challenge they have is that they rely on information from the company. Once again, you really have to ask yourself what it is that these people are getting paid for. Similarly, APRA have said that the ratings agencies' views and reports are part of a general mishmash of information that is out in the market `that we certainly keep ourselves aware of'. So it turns out that all these organisations which are supposed to be offering some independent commentary on the status and standing of HIH in fact are not offering much of value at all.

Another area that the royal commission needs to examine is the transactions involving HIH and Home Security International, the Sydney burglar alarm company that Mr Rodney Adler and Mr Brad Cooper built up from a small operation. What we saw happening during last year was that, on the one hand, HIH decided to write down its holding in HSI from $50 million to zero as at 30 June 2000 and, on the other hand, it released that information on 14 September 2000. Notwithstanding that very pessimistic assessment of HSI's prospects, what HIH managed to do over a six-month period from April was to pump something like $40 million into this company, which is now delisted. On 11 April 2000, the day that Mr Adler joined Home Security International as chairman, Home Security International announced that they had received an infusion of cash from HIH, which was buying a half-share in FAI Finance Corporation from Home Security International. On the one hand the HSI accounts say that HIH paid $13.4 million for the stake and lent another $5 million but on the other hand, according to the Financial Review, if you look at the HIH June 2000 accounts, you will see that they say HIH paid $25½ million. So HSI accounts say one thing and HIH accounts say another. Further to that, we found HIH agreeing on 29 September to buy half of the subsidiary company, Ness Security Products, from HSI for $17.5 million and also agreeing to lend a further $2.5 million later that financial year. It is a pretty extraordinary transaction to be putting that kind of money into a company which HIH had already written down as being of no value. That is precisely the sort of thing the royal commission ought to be investigating.

The other issue that Labor wish to return to is the question of an insurance industry contribution. I set out in the House last Thursday week five reasons why we believe that an insurance industry contribution is appropriate. One of the things that the insurance industry says is that it is not appropriate to make the good companies pay for the bad ones and that that is not the way things work. But indeed in a number of areas where people are required to put out money well in advance of a service being provided, you see precisely these sorts of operations and arrangements in place. For example, you see them in the area of superannuation, where there is a capacity to levy the funds where theft and fraud have occurred in order that fund members not be disadvantaged. You see them in the area of travel agents—funds to protect all consumers if some travel agencies go broke. You also see them in the area of bookmakers. For example, in New South Wales country bookmakers are required to acquire outstanding betting debts on behalf of others if one of their own goes belly up. The New South Wales Bookmakers Cooperative Ltd schedule illustrates precisely this point—that bookies all across the state are required to cover each other, so that concept of industry contributions is not unprecedented.

We do not suggest for a moment that this should be a means by which directors or auditors are allowed off the hook. We are adamant that any government or insurance industry payments to HIH policyholders are accompanied by an assignment of the legal rights against directors and auditors and that those rights are pursued to the letter. These are things which the government ought to be acting on and, once again tonight, I urge the government to act on those outstanding issues in relation to the HIH collapse and to belatedly display some of the national leadership which has been so conspicuously absent from their handling of this matter to date.