IOOF slammed on use of super to pay compensation

Its CEO dismissed the regulator’s concerns about conflicts of interest at the wealth manager’s super trustee company.

IOOF’s Chris Kelaher: ‘The (pub) test has been passed.’ Picture: AAP

IOOF’s practice of using super­annuation members’ savings to fund compensation when it makes multi-million-dollar mistakes is among a laundry list of transgressions over which it has been scrutinised by the prudential regulator, evidence at the banking royal commission reveals

In extraordinary testimony to the commission yesterday that drove IOOF’s share price down 2.7 per cent, chief executive Chris Kelaher dismissed the Australian Prudential Regulation Authority’s concerns about conflicts of interest at the wealth manager’s super trustee company, revealed board minutes at the ASX 100 company are taken as handwritten notes and denied assets owned by a super fund belong to the fund’s members, as is the law.

Documents tabled at the royal commission show that in 2015 APRA told IOOF it was concerned about the difficulty it had in getting “accurate” information from IOOF, its “overall culture” and “the number and range of prudential matters” at the company, which manages $120bn in retirement savings.

$8.73, IOOF closed down 2.7%

The commission also heard that IOOF decided not to move customers trapped in a super fund paying now banned trailing commissions to a new lower fee product after working out it would cost about $8ma year to do so.

Much of the evidence drawn from Mr Kelaher by counsel assisting the commission, Michael Hodge, QC, focused on the conflict of interest inherent in the same company within IOOF, being both the trustee of a super fund and the manager of an investment into which the super fund tips members’ money. By law, trustees are obliged to act in the best interests of members.

Mr Kelaher said that at a board meeting last week, documented only in hand-scrawled notes that were barely legible, IOOF resolved to remove him from the board of the super trustee and “investigate” separating the two roles.

He denied Mr Hodge’s suggestion this meant there were “were governance issues with respect to IOOF that needed to be addressed”. Mr Kelaher said it was a “a matter of indifference” to him if the trustee and manager roles were split.

“You don’t share the view of APRA that there are legitimate concerns about these structures,” Mr Hodge said. “It’s just ultimately, as a matter of practicality, it’s easier to make the changes rather than having to keep dealing with the complaints?”

“Yes,” Mr Kelaher said.

APRA, which has copped flak over its policing of the super industry, is also expected to face questions over its “effectiveness” as a regulator at the royal commission as it rolls into its second week of hearings into misconduct in the superannuation sector.

Observing the royal commission proceedings from the public gallery at the Federal Court this week were APRA’s diversified institutions manager Adrian Rees and head of super Helen Rowell, who watched the testimony of Mr Kelaher.

Mr Kelaher was grilled over IOOF’s battles with APRA over a long-running failure to properly compensate victims of a $6.1m accounting error in a cash management trust run by the company’s super trustee, Questor.

Mr Kelaher said the error was made by the trust’s custodian, a subsidiary of NAB, in 2009.

Questor initially decided to make up the difference by cutting the amount of returns being doled out to members of the fund.

But in 2013 a whistleblower complained about the practice because it disadvantaged new investors in the fund, documents shown to the commission revealed.

While outside investors were compensated by IOOF, those who had put money in through the company’s super fund were paid back by dipping into an operating reserve that was required by law.

Mr Kelaher agreed that the operating reserve was an asset of the super fund but denied Mr Hodge’s assertion that it was money that belonged to members.

“It’s not an asset of the members, no,” Mr Kelaher said.

In 2016, APRA told IOOF it was not happy with the move and it expected Questor to “immediately replenish the super fund’s general reserves” using the company’s own assets, not the assets of members.

The commission heard IOOF used a similar approach in the case of two further fund errors, known as Pursuit and TPS Sweep.

And in April last year, Mr Kelaher wrote back to APRA defending the practice, saying not one member of the fund had complained. Mr Hodge suggested “it would be impossible for members to make a demand or a complaint” because they didn’t know what Questor was doing.

Mr Kelaher also told APRA the group had passed the “pub test” on the issue.

“In terms of the so-called pub test, which in these circumstances is a proxy for members’ best interests, it is the board’s view that the test has been passed,” he told the regulator.

Mr Kelaher was asked whether it met with APRA to discuss issues affecting the fund.

“We have a dialogue with APRA. It’s active, it’s robust. They raise concerns, we respond,” Mr Kelaher said.

The answer prompted commissioner Kenneth Hayne to interject: “Do I take the answer to be yes?”

Earlier, the royal commission was shown letters sent by APRA to IOOF in 2015 which said that given the size and complexity of IOOF, “the number and range of prudential matters raises concerns for APRA” as the regulator moved away from “individual issues” affecting the group to a probe focused on “the overall culture of IOOF”.

This contrasted with the witness statement, provided to the royal commission on behalf of IOOF general manager of distribution Mark Oliver, which was shown to the royal commission earlier, which said “no material concerns had been raised by APRA in respect of IIML since January 2013” and an industry-wide APRA review in 2016. Mr Hodge has told the royal commission that Mr Oliver, who could not answer many of the counsel assisting’s questions, had been rejected by the royal commission as a suitable witness.

The commission heard how IOOF also decided not to move customers trapped in a super fund paying now banned trailing commissions to a new lower fee product after working out it would cost about $8m a year to do so, documents tendered to the commission show.

The commission heard that the two IOOF independent ­directors who had to decide whether it was in the best interests of members to move them to lower fee products were not fully informed about the situation.

Documents tendered to the commission show that one reason IOOF management told the company’s board it could justify not cutting fees for existing members of the IOOF Employer Super scheme was that NAB’s wealth division, MLC, had done the same thing “and are about to do it again”.