IOOF skimmed super members: APRA

Australian Financial Review May 1, 2019 12.00am

James Frost

 

Former IOOF managing director managing director Chris Kelaher ran the financial services company like a personal fiefdom and once unilaterally refused a request from Optus to move its staff super fund elsewhere without a reason, according to court documents.

The allegations are contained in a 190 page statement of claim bound for the Federal Court where Australian Prudential Regulation Authority is seeking to have five of IOOF’s former and current directors and executives banned from acting as superannuation trustees.

APRA also alleges that IOOF broke the law when it sought to fix its mistakes by compensating customers with more than $5 million in funds taken from the members own reserves instead of penalising itself for making the mistake. It says raiding the members reserves demonstrated a failure or unwillingness to understand its obligations.

APRA compared the controversial approach to compensating customers with skimming the returns of all other superannuation members.

The regulator's statement of claim alleges a pattern of law-breaking by Mr Kelaher and former chair George Vernados saying they “were not cooperating with APRA and were not open and transparent in their dealings with APRA”.

APRA is seeking to ban the two alongside current IOOF directors and executives including chief financial officer David Coulter, chief legal officer Gary Riordan and company secretary Paul Vine because they are “not fit and proper” to act as superannuation guardians and to act as a deterrent.

The statement of claim alleges the five men broke laws including aspects of the Superannuation Industry Supervision Act that require trustees act in the best interests of the members, act as a prudent superannuation trustee and give priority to fund members above all others.

APRA claims the firm’s dual structure, which allowed it to operate as both owner of the investment arm and trustee for the members, led to a conflict whereby it would on occasion prioritise the profits from the investment arm over the interests of members.

A spokesperson for IOOF declined to respond to the allegations saying it was a matter for the courts and was being defended accordingly. IOOF has yet to file its defence on the matter.

APRA first expressed concern over IOOF's approach of compensating customers from the members own reserves on March 2, 2015 and would later say the plan put the profits of IOOF and shareholders including Kelaher above the members.

One year later on March 24, 2016 it would ramp up the rhetoric saying it was skim[ming] returns of all superannuation members”.

After more than two years of warnings and requests APRA’s frustration with IOOF would boil over during a meeting on May 29, 2017 when Chairman George Vernados and MD Chris Kelaher dismissed the regulator’s concerns over the dual structure.

Former chairman George Vernados told APRA that the dual regulated structure that allowed the same arms of IOOF to act as both managed investment business and responsible entities was a “bit of a non-event” and did not “create issues for members”.

The former chairman also said that he did not think IOOF has any problems with conflicts of interest, that he “struggled” to think when there has been a problem with conflict of interest, and the issue was getting too much “airplay” or was “overdone”.

Mr Kelaher was also of the opinion the regulator’s concerns were a beat up making representations to the effect that “there was no conflict of interest” and “IOOF had not had any incidents over the 20 years”. Mr Kelaher would later tell the Hayne royal commission it was “a matter of indifference”.

APRA began its engagement with IOOF after four separate incidents came to light in 2015 where the company compensated fund members who were short changed by the firm’s mistakes by repaying them with their own reserves.

These were known as the Pursuit breach which dated back to 2007, the Sweep breach which dated back to 2011 and the CMT breach which dated back to 2009.

The fourth breach involved Bendigo Bank’s staff super fund and saw the fund’s members out of pocket when an administrative error triggered the sale and repurchase of assets at a loss. The amount lost in the breaches was little more than $5 million.

It was a busy year for IOOF because 2015 was the same year Optus asked IOOF to move its staff super fund across to AMP because it felt IOOF’s approach was too risky. Mr Kelaher rejected the request and said Optus employees should be allowed to make their own decision according to APRA.

A spokesperson for Optus said the fund was successful in rolling the fund over only after putting the decision to an employee vote.

APRA would be forced to step up its engagement with IOOF in 2017 after IOOF emerged as the bidder for ANZ’s OnePath pensions and investments arm for $975 million in a deal that has yet to be formally approved by OnePath’s custodians.

The document says the regulators “concerns were heightened” after the announcement “as this would significantly increase the size and risk profile of the IOOF Group’s superannuation business”.

APRA’s relationship with IOOF had already deteriorated significantly by this stage with the nascent financial services giant slow to respond to the regulator’s requests.

For example, a list of recommendations contained in prudential review from APRA dated December 12, 2015 required IOOF to respond by January 22, 2016 was not responded to until June 30, 2016 and then only superficially address the regulator’s concerns.

In another example, APRA requested an independent review of IOOF’s governance framework, approach to conflicts management in August 2017. EY would not commence the review as requested by APRA until nine months later in May.