APRA says IOOF rots from the head

APRA will argue the IOOF executives, and several IOOF entities, have failed to act in the best interest of super members, and in doing so have breached the Superannuation Industry Supervision Act. APRA also wants to force IOOF to restructure several entities to meet its SIS Act obligations.

Not minor errors

What should worry IOOF investors most is not the individual conduct breaches that APRA has highlighted in its legal action.

Rather, it is the accusations that Kelaher and his team have repeatedly misunderstood their key responsibility to put the interests of their members before all else; have fought APRA’s moves to reform IOOF structures; have failed to meet timetables to make changes; and showed what APRA’s super tsar Helen Rowell described as “a lack of contrition in relation to the breaches.”

This is not about a few mistakes by a few bad apples in middle management. APRA has accused the trio at the very top of IOOF of a systemic failure to safeguard the interests of members, comply with the law and deal appropriately with the regulator.

Central to the APRA case is a minor error inside an IOOF subsidiary called Questor, which saw this entity make an over-distribution to its beneficiaries back in 2009.

Questor was a dual-regulated entity, in that it was responsible for a super fund and a cash management trust (CMT). The super fund was also a beneficiary of the CMT.

The over-distribution wasn’t identified by IOOF until 2011. But instead of clawing the money back from beneficiaries, IOOF decided to reduce distributions from the CMT for three years.

But the SIS Act requires trustees to put the interests of a super fund’s members before all else. IOOF’s distribution reduction strategy protected CMT beneficiaries from clawbacks, but meant benefits to super fund trustees had to be artificially reduced.

Kelaher told the royal commission in August that he saw no issue with this, or how IOOF eventually compensated all Questor beneficiaries for the lost time value of money.

To do this, IOOF obtained a payout from Questor’s provider of custodian services, which it blamed for making the over-distribution.

It then used this payout to compensate all CMT beneficiaries. But to compensate Questor’s super fund beneficiaries, it used the remainder of the settlement and then dipped into the super fund’s general reserves.

When he appeared before the royal commission, Kelaher said IOOF had tried to balance the interests of the super fund members with the interests of the CMT – despite the SIS Act stating he had to prioritise super fund members at all times.

And Kelaher saw no issue compensating the super fund members using what the commission argued was their own money. Indeed, when APRA wrote to IOOF on the matter in late 2015, Kelaher and his team replied that its handling of the matter had passed “the so-called pub test”.

Kelaher stood by that view in August. He seemed unable to understand why the commission was worried about the details of the compensation. Everyone was made whole, where was the problem?

Repeated requests

In its statement of claim in the Federal Court action, APRA takes a different view, arguing that “the board of Questor (including Kelaher and Venardos) approved the plan on October 28, 2015 without identifying that it involved any conflict between the interests of superannuation investors and the interest of non-superannuation investors”.

Two other breaches APRA identifies in its statement of claim involve occasions where IOOF made good super fund beneficiaries using the reserves of their funds. The regulator says that only in the Questor case have the reserves been replenished – and only then “following repeated requests from APRA”.

IOOF said on Friday that it “believes that these allegations are misconceived, and it and its executives intend to vigorously defend the proceedings”.

Another way IOOF could have compensated beneficiaries for these mistakes, or replenished those reserves, would have been to use funds belonging to IOOF shareholders, a group that includes Kelaher himself, with a stake just over 1 per cent.

Saving shareholder funds back then has turned out to be very painful and expensive now.

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