IOOF faces funds, staff freefall as APRA legal action sends shockwaves

Which ever way you look at it, tarnished wealth group IOOF confronts a tumultuous period.

Chris Kelaher: APRA’s allegations are ‘misconceived’. Picture: Hollie Adams

Which ever way you look at it, tarnished wealth group IOOF confronts a tumultuous period, marred by a potential management shake-out, the risk of fund outflows and financial advisers heading for the exits.

That is exacerbated by the reputational fallout and the fact ANZ Bank will almost certainly pull the plug on the sale to IOOF of its investments and pension business.

IOOF, founded 172 years ago, has a lot to lose after APRA moved to disqualify its top brass and impose new licence conditions following allegations of wrongdoing. APRA said IOOF failed to act in the best interests of superannuation members.

It is to take legal action to ban chief Chris Kelaher, chairman ­George Venardos and three other executives from the superannuation industry.

That is the biggest of IOOF’s headaches but the company is also seeking to remediate customers as much as $10 million for charging fees where no services were provided or to dead people’s accounts.

In an ASX statement yesterday, Melbourne-based IOOF said the latest allegations were “misconceived” and that its executives would “vigorously defend” them.

One senior industry executive said on condition of anonymity: “It’s certainly the most drastic ­intervention I have seen since HIH (collapse of HIH Insurance).

“This will send shivers though the financial services industry.

“It is certainly not going to help IOOF’s (fund) flows.”

Many in the industry were miffed about IOOF’s failure to appoint an independent board committee to deal with APRA’s action.

IOOF had $164.9 billion in funds under management, advice and supervision at September 30.

It is now at risk of financial planning dealer groups asking to redeem their funds so they can park them elsewhere. Advisers who sit under the ownership of IOOF’s seven dealer groups may also start looking for new homes.

Following the ANZ dealer group acquisition, IOOF has 1776 financial advisers on its books, the second largest network behind AMP.

Sources told The Weekend Australian IOOF had quietly sealed a retention agreement with ANZ advisers that came across with the dealer group acquisition, if they stayed for three years.

But the deal is said to centre on those advisers earning higher levels of annual revenue and receiving 10 per cent of that income in IOOF stock as an extra retention payment if they reach the three-year mark and achieve good annual audits.

That arrangement doesn’t look as attractive after IOOF’s shares tanked 35.8 per cent to $4.60 yesterday.

Analysts sounded warning bells after the IOOF legal action became public.

UBS analyst Kieren Chidgey warned of outflows of funds from IOOF, planner departures and higher operating and compliance costs.

“We see significant potential earnings implications regardless as a result of heightened ANZ wealth completion risks and ongoing brand and reputational damage,” Mr Chidgey said.

“Potential management overhaul presents further risk.”

Macquarie analyst Brendan Carrig cited risks around management changes.

“If successful, the disqualification proceedings would prohibit the individuals from being or acting as a responsible person of a trustee of a superannuation entity,” he said.

“While this would not have a direct impact on their ability to continue in their current roles, we cannot discount the risk that management may be pressured into stepping down.”

Mr Carrig said that if the deal with ANZ fell over, the bank would be likely to refund the $800m ­already paid by IOOF, which could then opt to pay down $455m in debt raised and return funds to shareholders.

Macquarie’s note to clients was titled “The last straw?”.

IOOF management will be glad the company completed the $51.6m sale of its corporate trust business to Sargon Capital last month.

A fund manager who declined to be named said of APRA’s court action: “Even if IOOF fights it and win, the mud will stick.

“It’s a shot across the bow to everyone in Australia to be cognisant of their (corporate) responsibilities.

“What AMP and Blue Sky have found is an elevated risk of (client fund) redemption. Now it’s IOOF’s turn.”

The Hayne royal commission lifted the lid on misconduct in the banking and financial services sector this year. Commissioner Kenneth Hayne also took aim at APRA and the Australian Securities and Investments Commission for taking a soft approach to ­enforcement.

APRA ran a scathing assessment of the Commonwealth Bank’s controls and culture and hit it with a $1bn additional operational risk capital requirement after a number of scandals, including CBA’s facilitation of money laundering and terrorist financing.