Banking royal commission live: superannuation hearings

Interests of unions and super members’ interests ‘so aligned as to be indistinguishable’, commission hears.

• Using the risk reserve
• 2013 whistleblower
• IOOF’s Chris Kelaher appears as witness
• ‘Why were you put up?’
• IOOF’s evidence questioned
• IOOF’s Oliver returns

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is conducting its fifth round of hearings, focuseed on superannuation, in Melbourne. Following the proceedings with us live.

4.44pm: Merger scuppered

Energy Super chairman Scott Wilson appearing at the financial services royal commission in Melbourne. Picture: Supplied

We’re still on the Energy Super and Equip Super merger discussions.

The two funds then conducted an independent analysis to see what the benefits would be. It found that the merger would provide benefits of up to $20.5 million and a 15 basis-point saving for members.

In emails from September 2016, Mr Wilson says there were mixed messages around the possibility of a merger. Equip Super’s chair told Energy Super a potential deal-breaker was any union-appointed directors on a merged fund but the rest of Equip seemed keen to proceed with the merger, Mr Wilson says.

Mr Wilson says at the time he didn’t think the merger was going to proceed, because of the Equip Super chair’s position on union-appointed directors. So he was getting mixed messages.

A later email from Mr Wilson says he wants to kill the merger idea “once and for all”.

At the December board meeting, the directors resolved to accept the recommendation for the merger, subject to Equip Super amending the constitution to meet Energy Super’s needs.

“Had you formed the view that it was in the best interests of the members for the merger to proceed? Mr Dinelli asks. To be in the best interest it would have to go through successor funds transfer, Mr Wilson replies.

Was it ever put by Equip Super that Energy Super have no members on the board? “No, they were resistant to any union-nominated members on the board,” Mr Wilson replies.

“I beleive that we’d hit a point where there were non-negotiables for us and non-negotiables for them,” he says.

“Do you accept though that there might circumstances where something is in the best interest of members but not be in the best interests of the unions?” Mr Dinelli asks.

Mr Wilson begins a lengthy response. “Superannuation is a right, it’s a workplace right. It’s workers wages that are foregone for retirement,” he says.

“What the unions the around superannuation, we won it. We won it in the 1980s through awards. So superannuation is very, very important to unions.

“It just so happens, when we talk about superannuation funds, that the interests of unions and the interests of members of the funds are so aligned as to be indistinguishable. It’s what we do. We look after members’ money... through accumulation and into retirement.

“If we can’t be guaranteed that an anti-union employer based fund is going to allow union representation on their board going forward, what’s going to happen to our members in far north Queensland? What’s going to happen to our members in Cairns and Townsville? Who is going to service them?”

Mr Wilson says that his personal view was that the merger would not go ahead, but that the board had decided it was in members’ best interests.

“But because of the union representation and the compliance with the board skills policy couildn’t be secured, the merger didn’t proceed,” Mr Dinelli puts it.

“Yes because Equip Super decided they would not merge with us under those cirumstances,” Mr Wilson says.

The hearing then winds up for the day, with Mr Dinelli saying he has no further questions.

Commissioner Haybe adjourns until 9.30am Monday.

4.23pm: A merger proposal

Energy Super has $7 billion in funds under management [FUM] and 48,000 members, the court hears. Membership has remained stable in recent years, Mr Wilson says.

Mr Dinelli brings up a document showing that the membership numbers barely moved from June 2013 to June 2017, dropping very slightly if anything.

But operating expenses rose “quite considerably” from $18 million to $24 million, Mr Dinelli states.

The increase in expenses was due to higher administration fees, the court hears.

Is that a matter of concern, Mr Dinelli asks

No, because it is relative to the growth of the fund, Mr Wilson says. It’s an asset-based fee, he adds.

Mr Dinelli moves to mergers. The fund has considered the possibility of a merger, Mr Wilson says. It forms part of his most recent business plan.

The benefits of a merger would be to increase the membership, or to effect a change in the fund’s demographic, Mr Wilson says. It might look at a merger to reduce admin costs or to increase FUM to drive down investment fees.

And obviously to work in the best interests of your members, Mr Dinelli adds. Yes, Mr Wilson agrees.

Energy Super has discussed the possibility of a merger with other funds.

In 2016, it considered the possibility of merging with a group of other funds. Those discussions went nowhere. We hear that the fund has explored the possibility of a merger for a number of years, at least since 2012.

Mr Dinelli and Mr Wilson run through some of the discussions with the other funds, including those it had with Equip Super. Both funds authored a paper identifying the benefits of a potential merger, including scale benefits.

The paper was presented to the board and discussions were had around board membership etc. “Background work,” as Mr Wilson puts it.

Energy Super’s board was encouraged by the discussions and set out what the board makeup would look like.

Equip Super’s response to the merger proposal was that the fund was in favour of member/employer representation and it would want a skills matrix put in place for a merged board.

Mr Wilson points out that Energy Super had better performance “over those years”.

There was an MOU then signed between the parties, the court hears.

3.53pm: The ‘fit and proper’ test

Mr Dinelli brings up the “fit and proper” declaration for the newest director, Armand Mahne.

Mr Wilson says an outgoing board member put Mr Mahne forward, alongside other nominations.

The board considered that he had a similar skillset to the outgoing director. He also “believed in what we doMr ,” Wilson says. And he was willing and ready to undertake the role.

Mr Dinelli goes back to Mr Wilson’s evidence that the board can reject a nomination if it sees fit. He links it to the fit a proper policy, but finds a hole in the policy. “That doesn’t refer to the power for the person to be rejected, does it,” Mr Dinelli states.

In seven years, a nominated person has never been rejected, Mr Wilson says. The fund has always had a good relationship with its sponsoring bodies, he adds.

On to governance, and Mr Dinelli asks about equal representation on the board. He asks Mr Wilson about proposed legislation from APRA in 2015. APRA proposed that one third of a board be independent of any bodies. (That legislation never got through.)

Mr Wilson was on a trustee committee that reviewed the proposed legislation. He says the fund never formed a formal view on the matter. “There’s pros and cons with every change you make to a super fund,” he says. “In our fund we think we’re okay and it’s not something we’re prepared to do”

3.36pm: Directors’ skills

Mr Dinelli asks why interaction with, and attraction of, new members is in the best interests of existing members. Mr Wilson replies that it’s done to grow funds under management, which is “very important” to get scale.

Mr Dinelli brings up the fund’s constitution. He’s trying to get a handle on the circumstances under which directors may reject a board nominee.

He goes to the “fit and proper” policy. He asks if the trustee uses a “fit and proper” questionnaire to assess a nominee. “Yes,” Mr Wilson answers.

He brings up the one that was used for Mr Wilson. It sets out his qualifications and his professional associations.

Commissioner Hayne then pops up with two questions: how hard is it to administer a skills matrix plus fit and proper questionnaire, and how effective is it to administer.

“It’s a process that we undertake to meet a minumum requirement to become a director of a trustee,” Mr Wilson says.

Hayne goes back: it’s really about the skill set. How hard is it to administer and how effective is it to generate a result?

Wilson says the board takes a collective approach. The most recent director joined after the board looked at the skills it was lacking and the new director filled the gap.

“You need someone with passion for the fund. I don’t know how you capture that in a skills matrix. It’s a gut feeling,” he adds.

Mr Wilson finds the skills matrix an effective way of maintaining the fund’s skills and knowledge.

Does it yield good governance of the fund, Mr Hayne asks. It does, Mr Wilson responds.

Mr Wilson adds that there is currently a lack of investment knowledge, due to a director leaving. But the fund has already brought someone in to upskill the directors, he says.

3.15pm: Energy Super’s Scott Wilson takes to the witness box

IOOF’s time in the spotlight is over (much to Mr Kelaher’s relief, no doubt) and it’s now the turn of Scott Wilson, chairman of Energy Super.

Counsel assisting Albert Dinelli begins by asking Mr Wilson about his role at Energy Super. He’s been chairman since January but has been a member of the board for the past seven years.

The Energy Super fund has two wings, Wilson says: one is based on the electricity supply sector, the other comes out of the electrical contracting sector.

Trustees are appointed either through an employer or the relevant unions to represent the members of the fund. At any one time there are four trustees appointed by the unions.

Energy Super has agreements with various unions, including the electrical trades union in Queesnaldn and Northern Terrotory and the CEPU Tasmanian division.

Mr Dinelli brings up one such agreement, the ETU agreement from the last financial year. It states that Energy Super paid $63,800 to the union persuant to the agreement. Mr Dinelli asks what that money was for.

It was part of its marketing and interacting with members’ process, Mr Wilson says.

He describes it as an interactive approach to getting in front of members. An Energy Super person attends functions alongside a union person. “You can’t just rock up to a Gladstone project and start talking about super,” he says. So the money is used to give the super fund broader access to members.

2.52pm: ‘No understanding’ of obligations

IOOF managing director Christopher Kelaher denies the fund failed to understand its obligation to act in members’ interests. Picture: Supplied.

Mr Hodge brings up the board pack of a 2015 Questor meeting that detailed the remediation proposal related to another breach. The proposal was that Questor would pay compensation to the IDPS members but members of the super fund would be reimbursed using the ORFR reserve fund.

“The reserve is there for that purpose,” Mr Kelaher says.

Mr Hodge moves on to a 2016 memorandum prepared by IOOF and sent to APRA. It says Questor did not maintain a sufficient level of oversight or governance.

Mr Hodge asks if Mr Kelaher accepts that statement.

He replies by saying it’s not his expertise. “I can form a view (on it) but I’m not sure what use that would be to you,” he says.

Mr Hodge goes back to the board paper written in relation to the Questor CMT distribution error. It says Questor’s investigation found a number of failings by Questor and that it had improved those controls.

Did IOOF ever examine whether the question of whether to pay members from its own funds, Mr Hodge asks. Yes, Mr Kelaher replies. But that consideration was never documented in any meeting or minutes.

Mr Kelaher’s written evidence shows that he, on behalf of Questor as trustee, considered recouping the funds from Questor as responsible entity.

“And so that we undertand your evidence, your evidence is that at some stage, you and the other directors of Questor, on behalf of Questor as the trustee, considered suing yourselves.” Mr Hodge puts it. “No we didn’t” Mr Kelaher says.

Mr Kelaher argues again that “the fundamental root cause” was the custodian. The custodian, NES, thought that it was only partly at fault, Mr Hodge says.

Mr Hodge begins his final round of questioning.

“I want to put these things to you squarely, Mr Kelaher,” he says.

“At no time has Questor ever properly displayed any understanding of its best interests duty to its members in relation to the Questor CMT issue.”

Mr Kelaher disagrees.

“At no time has Questor ever displayed any proper understanding of its obligation to prioritise the interests of the members always and over the interests of Questor or any related entity”.

Mr Kelaher again disagrees.

“Even now, you do not see any problem with the events that have occured in relation to this,” Mr Hodge puts it to Mr Kelaher.

Mr Kelaher says the only problem was the over distribution, for which members were compensated “in full”.

Mr Hodge, slightly agitated now: “No, it wasn’t compensated in full. You used the members’ money to purportedly compensate them. You know that, don’t you.”

“No, they are your words.”

“Have you ever looked at the financial statements for Questor?”

“Um, yes.”

“Have you looked at the statements for the superannuation fund?”

“Not recently.”

Mr Hodge asks if Kelaher has ever looked to see if the reserve was an asset of the fund.

“Not specifically,” is the response.

“If the reserve is an asset of the fund, do you accept that it belongs to members?”

“No, I don’t.”

Mr Hodge says he has no futher questions and Mr Kelaher steps down.

2.40pm: ‘Would you be prepared to accept that it is misleading?’

IOOF’s communications with its members has been one of the key lines of inquiry pursued by Michael Hodge QC during today’s hearing. Here’s IOOF managing director Christopher Kelaher dealing with one of his questions earlier today.

2.31pm: Using the reserve funds

We’re back after lunch and senior counsel assisting Michael Hodge QC gets straight into it with IOOF managing director Chris Kelaher.

We’re still on the letter IOOF sent to members in April 2017 informing them of an error that led to them being compensated.

A board meeting from the same month shows the board knew about the letter and that IOOF “should continue to press its position”.

APRA wrote to the fund in August 2017, saying IOOF had to always preference the interest of the super fund members and that there was no “balancing act” as Mr Kelaher had previously said in his evidence.

APRA’s position was final, he says, but follows it with “our view was there was an interpretive piece about which prevails and it goes back to the concept of balancing”.

Mr Hodge puts it to Mr Kelaher that IOOF was in breach ot its duty to act in its members best interests by using the reserve to fund the compensation.

Mr Hodge reveals another distribution error involving IMIL.

He brings up an IMIL document that shows distributions had been invested in the cash account rather than reinvested in the managed accounts as they should have been.

The board was asked to approve that members from the super fund would be paid from the reserve, which was an asset of the trust and so an asset of the members, but IMIL would directly compensate IDPS members.

Mr Kelaher argues that the point of the ORFR, the reserve, was that it be used in such circumstances.

2.20pm: ‘Not a handwriting expert’

Ben Butler has taken a look at one of the more colourful incidents from the morning’ssession: the revelation that IOOF tendered notes handwritter on scraps of paper.

The revelation came after commission heard that IOOF just last week, ahead of its appearance at the inquiry, moved to dissolve a structure where its wholly-owned investment management arm, known as IIML, is also a superannuation trustee.

1.20pm: Commission breaks for lunch

The hearing has broken for lunch and is due to reconvene at 2.15pm.

1.18pm: Hodge and Kehaler clash over truth

Mr Hodge brings up a letter from APRA to Questor. It refers to correspondence from 2016. APRA was dissatisfied with Questor’s performance of its duties as trustee. APRA expected Questor to immediately compensate members using its own funds.

Mr Hodge asks Kelaher if by this time he was “fully immersed” in this issue. Mr Kelaher says he’s not sure he’d agree with that.

IOOF responded to APRA, saying that giving priority to super fund members does not mean it can ignore its duties to members of managed investment schemes.

Mr Hodge asks if Questor has to balance the interests of members of the fund against the interests of managed investment schemes.

Mr Kelaher says yes.

But the trustee has an obligation to prioritise the interests of the beneficiaries of the super fund, Mr Hodge argues, so there’s no balancing there.

The letter says that in 2011 Questor came to the rectification committee and offered two options as to how it would claw back the overdistribution. Mr Hodge questions the statement and says it’s untrue.

Mr Kelaher believes that it is true. They argue back and forth, but Mr Kelaher refuses to concede.

“Do you want to offer any other explanation as to why what you have written was true?” Mr Hodge asks.

Kelaher says he can’t offer anything more.

Mr Hodge goes to the end of the letter, where it says Questor has not received any demands or complaints about the issue, and that it passed the “best interest” test.

“Can I suggest that it would be impossible for members to make a demand or complaint because they didn’t know what Questor was doing,” Mr Hodge argues.

Yes, Mr Kelaher replies.

Mr Hodge asks about the best interest test. Mr Kelaher replies by saying the goal was to compensate the member. That was the aspiration, he says.

Mr Hodge asks if the community might expect Questor to use its own funds rather than member funds to compensate members.

“That’s a consideration but this is a relatively modest amount here,” Mr Kelaher replies.

1.15pm: Not an asset of the members

The commission hears that IOOF considered paying the compensation via insurance, before dismissing that as an option. This is because “there was no negligence so there was no possibility of making that claim,” Mr Kelaher says.

Mr Hodge reads from an IOOF document that states it explored all the options for paying out the compensation. But the option of the company paying wasn’t explored.

“There was a reserve there that covers events such as this, so it was deemed appropriate to use the general reserve,” Mr Kelaher says.

Mr Hayne interjects: “It’s an available point of view for me, Mr Kelaher, that the company was the first source to pay compensation. Would you say that’s not an available point of view?”

Mr Kelaher agrees that that is an available point of view.

Mr Hodge brings up the minutes of the Questor board meeting, where the directors were to decide how compensation would be paid. Each director said they did not have a conflict of interest.

Mr Hodge asks if it’s true that they didn’t have a conflict of interest.

“I guess there are conflicts of interest in relation to every matter,” Mr Kelaher offers.

Mr Hodge is not satisfied and asks again.

Mr Kelaher pauses and then says it’s open to interpretation that there could have been a conflict.

APRA has raised the issue of IOOF failing to record conflicts of interest, Mr Hodge says.

Mr Hodge moves on.

The document says there was an investigation to find ex-members and compensate them. This was funded using the general reserve, Mr Kelaher says. This is an asset of the trust, but Mr Kelaher is adamant the asset doesn’t belong to the members.

Mr Hodge pushes Mr Kelaher by pointing out that the trustee holds assets on behalf of members and the general reserve is one such asset. Mr Kelaher says he’s not qualified to answer.

Commissioner Hayne doesn’t accept that: “Qualified or not, I would be grateful if you would answer the question. I will make of the opinion what I do. But watch your answer,” he says, pointing his finger at the witness before crossing his arms in a huff.

“My answer is that the general reserve is not an asset of the members .... commissioner.”

1.03pm: IOOF share price

IOOF managing director Christopher Kelaher is being grilled at the financial services royal commission. Here’s what’s happeinging with IOOF’s share price today.

12.46pm: Whose money is it?

The court hears that there was no approval from management to reduce the distribution over three year period.

Mr Hodge asks if that concerns Mr Kelaher. He says it does concern him, “if that was the case”.

Mr Hodge suggests that the whistleblower report triggered Questor to take steps to figure out how to remediate members. Mr Kelaher disagrees with that assessment.

Mr Hodge reminds Mr Kelaher that he said the custodian was being difficult back in 2013 in regards paying compensation.

“I said ‘Are you sure you want to say that?’, and you said, ‘Yes’.”

Mr Hodge goes to a March 2014 Questor report. In the legal section it gives an update on the issue. It says it is working to reduce the time period for the over distribution to be recouped.

It references “once development is completed” and Mr Hodge asks what that means.

There was a requirement from APRA to have a certain level of risk reserve and once that was met there would be consideration to use that to compensate members, he’s told.

Mr Hodge asks if the ORFR (Operational Risk Financial Requirement, the risk reserve) is an asset of the trust. “Whose money is the ORFR?” he asks. “Who do you think it belongs to?”

If the money is the trust’s, as Mr Kelaher has argued, Questor is causing the members to compensate themselves, he states.

Yes, Mr Kelaher agrees. The ORFR didn’t end up being used.

Mr Hodge reads from the report and it suggests the first time Questor got in contact with the custodian was in February 2014.

This puts Mr Kelaher in an awkward spot, since it completely tears apart his earlier claim that the custodian “was being difficult” in not accepting responsibility in 2013.

“I might have made an error earlier,” he says.

“You might have said something that wasn’t true, is that what you mean?”

“No, I might have made a mistake in referring to it in 2013.”

So why did Questor wait until 2014 to get in touch with the custodian if it thought it was at fault, Mr Hodge asks.

Mr Kelaher says he wasn’t at fault.

Mr Hayne points out that a sentence in the report details a meeting with NAB “to commence discussions” on the issue and asks Mr Kelaher what’s he to make of that.

Mr Kelaher apologies and Mr Hayne tells him to listen to the questions asked.

12.23pm: Did the board know?

Mr Hodge goes back to the whistleblower.

Before anyone knew about the whistleblower, Questor had intended to wait until the three year period was over before doing any assessment on the impact of members and proposed compensation, Mr Hodge argues, based on wording in one of the documents.

“On the face of it you could interpret it like that,” Mr Kelaher replies.

Mr Hodge wants to know what he means and asks for more detail.

Kelaher is vague in his response.

He takes a minute to read the document. “Can you ask your question again?”

Mr Hodge obliges: “Was it being reported to the board that, because of the whistleblower notification, there would now need to be steps taken to bring forward, instead of waiting for three years, a further assessment on the impact on members and proposed compensation?”

Mr Kelaher finally concedes that “that’s a possible construction”.

Mr Hodge asks if it concerned Mr Kelaher that IOOF was only taking steps to assess the effect on members due to the whistleblower.

“I don’t accept that it was the whistleblower that triggered that action,” Kelaher replies.

12.20pm: 2013 whistleblower

Mr Hodge moves on to “an incident with a whistleblower in 2013”.

The whistleblower raised an issue about the reduction in distributions and that no one knew about it, Mr Hodge says.

Mr Hodge suggests it wasn’t the case that from 2012 Questor was attempting to identify and remediate customers. Mr Kelaher disagrees.

“Part of the challenge was the party responsible for the over distribution was denying responsibility,” he says.

Mr Hodge quickly jumps in: “Just take a moment and think whether you really want to say that the reason there was a problem in 2013 was that the party responsible for the over distribution, by which you mean the former custodian, was denying responsibility. Do you really want to say that that’s what was happening in 2013.”

Mr Kelaher: “Sorry.. in relation to what”

Mr Hodge: “Are you saying to the commissioner that in 2013, Questor had made a claim against the custodian and the custodian was denying responsibility.”

mr Kelaher: “Yes”.

Did you write that claim, Mr Hodge asks. Mr Kelaher says no

Did you meet with anyone on that, Mr Hodge asks. mr Kelaher says not that he can recall, but it would have been a legal claim.

12.15pm Reducing the distribution

Questor sought advice from Ernst and Young on the breach, the court hears. Mr Kelaher can’t recall exactly when EY was engaged to assist.

Mr Hodge brings up the risk report from the March 2013 meeting of the board of directors. He asks if Mr Kelaher would have known before this date about the breach notice. Mr Kelaher thinks so.

In response to ASIC queries on the issue, Questor details its plan to reduce the distribution over a three-year period. Mr Kelaher is unsure who would have made the decision but says he would have been consulted “about the remediation”.

Mr Hodge takes issue with Kelaher using the term “remediation”. “This is not remediation to the members ... this is about Questor as responsible entity of the CMT restoring itself.” Yes, Mr Kelaher replies.

Did he ever consider whether there was a legal entitlement to reduce the distribution? mr Kelaher can’t recall but says it would have been discussed with legal team. “It was 10 years ago”.

“Well we’re talking about 2013 - that was five years ago,” Mr Hodge replies.

Mr Hodge: “Did anyone ever say to you that we are entitled to reduce the distribution?”

Mr Kelaher: “I can’t recall.”

Mr Hodge: “Does that concern you?”

Mr Kelaher: “The over-distribution concerns me.”

Hodge asks when it was reported to Kelaher that the investors to be compensated had been identified and compensation had commenced. Kelaher says he doesn’t recall.

11.53am: ’Is it a matter of indifference to you?’

Mr Hodge brings up the breach notice. The breach occured in May 2009. Questor became aware of it in 2010 and the notice to ASIC was signed October 2012.

Mr Kelaher can’t recall how it was decided that it was a breach.

“Does IOOF have a breach review committee?”

I believe so, Kelaher replies. He doesn’t sit on it, has no involvement with it and says there’s no formal reporting on it.

Mr Hodge: “Is it a matter of indifference to you?”

Mr Kelaher: “No, it’s not.”

The breach would be reported to Mr Kelaher by IOOF’s general counsel, he says. No less frequently than monthly. “He just calls you up, or meets with you”, Mr Hodge states. Yes, Mr Kelaher confirms.

We hear that Mr Kelaher didn’t investigate why the mistake happened. Mr Hodge seems surprised. How do you expect to make sure the mistake won’t happen again if you don’t investigate it, he asks. Mr Kelaher’s response is that it was NAB’s fault (The custodian, NES, was a NAB-owned entity.)

Mr Hodge goes back to the document. It says the extent of compensation required needs to be determined.

So the problem with Questor reducing the distribution was that new members were being affected and existing members who had made additional contributions to the CMT were also being detrimentally affected.

So Questor allowed this to occur. You dont think there’s any issue with Questor sitting by and allowing it to take place, Mr Hodge puts to Mr Kelaher.

Kelaher disagrees and sees no issue.

“The resolution we were seeking was at restoring members.” It was a complex task, he points out, and says it was a challenge to work out a remediation plan.

11.40am: Questions over Questor

Mr Kelaher’s demeanour is rather more self-assured than that of Mr Oliver, and the hearing has taken on a much more combative atmosphere.

Mr Hodge moves on to Questor, which is no longer in operation.

Back in 2009, it was the RSE for a super fund and a responsible entity for IDPS, a managed investment scheme.

It was also the responsible entity for the cash management fund CMT. Questor, as RSE licensee of the super fund the Portfolio Service Retirement Fund, had invested money in the CMT.

In 2009, a term deposit was recorded as income rather than an asset. The custodian didn’t recognise it should have been registered as an asset. It resulted in an over-distribution.

Mr Hodge and Mr Kelaher disagree on whether Questor was at fault or whether the blame lies solely with the custodian. Mr Hodge pushes Mr Kelaher but he stands firm, saying the custodian was appointed to record information accurately and it hadn’t done that in this instance.

So back to 2009, and we hear there was an over distribution due to the error. It wasn’t detected until 2011. Questor then tried to figure out what happened and realised that the asset had been recorded as income. So Questor then reduced the distributions to be made over the coming three years. We hear that it didn’t tell the unitholders of the change in distributions.

It didn’t tell the members of the super fund and didn’t tell investors that it was diluting the distribution.

An issue was eventually raised about it and Questor in 2012 gave notice of a breach to ASIC. No notice was given to APRA. The CMT operates under ASIC’s jurisdiction, Mr Kelaher says.

Hodge is quick off the mark. “Yes, it has so many hats so we have to be clear about which hat it’s wearing at any one time, so thank you for that,” he adds.

11.22am: IOOF managing director Chris Kelaher appears as a witness

Mr Hodge announces he has nothing further to ask Mr Oliver.

IOOF managing director Christopher Kelaher now enters the witness box. This is sure to be interesting, as Mr Hodge is taking no prisoners today, and has already indicted to eagerness to question Mr Kelaher.

He begins by asking Mr Kelaher about APRA’s concerns about IOOF’s operations. “We have a robust dialogue with them,” is Mr Kelaher’s response.

APRA has requested IMIL’s dual role as responsible entity for the managed investment schemes and also the RSE [registrable superannuation entity] licensee be dissolved. That was considered at last week’s board meeting, Mr Kelaher confirms.

The commission requested notes and minutes of this board meeting last week but only got handwritten notes, Mr Hodge explains. We get to go through these notes and hear that they may be from the chairman. Mr Kelaher took no notes. “I scribble,” he quips lightly. Mr Hayne is not impressed. “A notice to produce was issued,” Mr Hayne says sternly.

Eventually someone does type up the minutes, Mr Kelaher says.

Does he think it’s common practice for a listed company to just have handwritten notes from a board meeting? Mr Kelaher says it’s IOOF’s practice, but he can’t comment on whether it’s common practice.

The results of the meeting were that IOOF would change the board structure of the RSE and appoint an independent chairman and independent director. It would be independent from its current structure. It would also investigate separating the two entities but would wait until after the ANZ acquisition was completed.

Mr Kelaher admits that APRA’s concerns were valid but doesn’t agree that there were legitimate governance concerns. So he thinks it’s just easier in the current environment to make the changes rather than keep dealing with APRA’s complaints.

11.07am: Would they move?

Mr Hodge puts it to Mr Oliver that IOOF could have applied the new pricing to existing members, but didn’t. That’s right, Mr Oliver confirms.

We hear that only two board directors voted on the repricing. The rest abstained due to conflicts.

Mr Hodge asks what Mr Oliver thought the likelihood was of IOOF Employer Super members moving their accounts due to the repricing. Mr Oliver gives a vague answer that there was an expectation that some members wouldn’t move.

Mr Hodge the pushes Mr Oliver on the likelihood that some members would move from old to new pricing. What was the assessment made on that likelihood?

It was based on probability, we hear.

The court hears that IOOF assessed that unengaged members and those with advisers receiving a grandfathered trail were unlikely to move to the new pricing or would be slower to move.

Hodge asks why IOOF didn’t just move members to the new pricing rather than waiting for the members to move.

“If the expectation was that all members would move, then the price point would have been higher,” Mr Oliver says.

The new pricing wouldn’t have been sustainable in that case, he adds.

10.52am: Moving the backbook

Mr Hodge brings up an email from March this year, in which one of IOOF’s directors raised concerns about repricing of the “backbook” (the old accounts that were paying commissions).

Another board member also flagged that it would be in members’ best interests to lower pricing for members.

Do you recognise the conflict of interest - between the members and the trustee itself, in wanting to make a profit, Mr Hodge asks. Yes, I do, Mr Oliver replies.

“Do you consider the conflict was adequately managed in this case?”

“Yes I do.”

The changes were ultimately approved by the board and all members were informed, Mr Oliver says.

In the March board meeting, we hear that under conflicts consideration it says 29,000 members were paying a higher fee structure and may benefit from the new pricing. It says 22,000 of those members had been advised of the changes. So 50 per cent of the Choice members would not be moved across, and to manage the conflict all members would be notified, Mr Hodge says.

10.43am: Setting price points

Mr Hodge moves on to changes made to pricing earlier this year.

A paper sent to the IOOF board shows there was going to be repricing and rebranding of certain super products.

It says all existing member pricing would be grandfathered, and that, since the new pricing was lower than the old, there was a risk that members might move to new pricing and therefore pay less.

Under the conflict of interest section, it doesn’t make mention of the grandfathering of some member payments, Mr Hodge points out.

At the time, the board asked that members be informed of the revised pricing. The day after the board meeting, Mr Oliver was asked by a board director via email why only some member accounts were being repriced and asked if the trustee was obliged to be reprice all clients, the commission hears.

In another chain of emails sent by Mr Oliver to his team in relation to the repricing, he repeated these questions. The response, we’re told, is that repricing would have an $8 million per annum revenue impact. It also says of 29,000 IES members who would be better off under the new pricing, 20,000 were paying commission.

10.32am: ‘Why were you put up?’

IOOF's Mark Oliver giving evidence at the financial services royal commission in Melbourne. Picture: Supplied

Mr Hodge is back on Mr Oliver’s statement. He’s happy to just keep picking holes in it.

One of the commission asks of the written statement was for IOOF to summarise any concerns raised by APRA over the group (IMIL). Mr Oliver’s written answer was that during the APRA review in late 2016, APRA raised certain matters in relation to IMIL governance. But up until then, APRA had raised no concerns.

“What was the basis on which you made that statement?”

“I had to rely on others because I only joined the company in 2016,” Mr Oliver says.

Mr Hodge brings up a document from 2015 that shows APRA interacted with IOOF on a number of prudential matters and that APRA was concerned with matters including the “overall culture of IOOF”.

Another 2015 letter from APRA to IOOF, which Mr Oliver was not shown before today, says there had been numerous instances where it had had difficulties in getting accurate information from IOOF.

“Do you still think the evidence in your statement is correct?” “Broadly,” Mr Oliver replies.

At the end of 2015, another letter from APRA says it is concerned with the governance structure at IOOF.

“Do you still maintain that paragraph in your statement is true?” Mr Hodge asks.

“Why were you put up as the witness?”

Most of the questions relate to my day to day activities, he says.

We now hear that the royal commission told IOOF that Mr Oliver wasn’t the best person to appear at the hearing and it instead wanted CEO Chris Kelaher to give evidence. Nonetheless, IOOF sent Mr Oliver in to face the music from Mr Hodge and Commissioner Hayne.

10.18am: The value of services provided

Mr Hodge is getting frustrated. “Do you have any knowledge beyond what is set out in five paragraphs of your statement on this issue?”

I have general knowledge, Mr Oliver replies.

“Can you see an issue from the perspective of the trustee, which is that another part of the group is receiving a percentage of the funds of the trust invested with an external manager?”

I can see that, Oliver answers.

“For a trustee acting in the best interests of members would say that money should not go to another part of the group unless a service is being provided. It should be returned to the members,” Mr Hodge says.

The funds that are paid as a percentage vastly exceed the value of services provided, Mr Hodge says.

“I can’t comment on that,” Mr Oliver replies.

Another document, in which one of the related entities is IMIL, shows the services provided are fund administration by IFL related entities.

So IMIL agrees to pay IFL Holdings for services that IMIL provides to itself, Mr Hodge asks. Yes that appears to be the case, Mr Oliver says.

How does that work in practice? Mr Oliver has no idea.

10.12am: Picking holes in written evidence

Mr Hodge asks if Mr Oliver has reviewed the financial statements for IMIL or IOOF.

Mr Oliver says he has not.

Mr Hodge brings up the statements for the 2017 financial year. We hear that it says under related-party transactions that IMIL is a related party to IFL and under other income it says external manager fees paid were just $154,500. The payments received by IFL paid by external managers vastly exceeds $154,000 in a single year, Mr Hodge puts to Oliver. He seems to agree, in a roundabout way.

Mr Hodge is picking holes in Oliver’s written evidence.

If the payments were received by IMIL you would expect them to be recorded in the financial statements. Since they weren’t, Mr Oliver’s statement must be untrue, Mr Hodge argues. Mr Oliver appears unsure.

Again Mr Hodge accuses Oliver of putting a statement in his evidence just because he was told something was true.

10.05am: ‘Who told you that this was the position?’

Now that we’ve established that money gets invested by IMIL - IOOF’s trustee - into an external fund manager, which then makes a payment back to IOOF, Mr Hodge moves to the amounts that are paid by these managers per quarter.

Some are “substantial”, he says.

He brings up a document outlining the various payments made in the latest quarter. Aberdeen paid some $136,000, that relates just to the super fund, back to IOOF holdings. This is per quarter.

Another fund manager paid just $1250 in the last quarter, the minimum amount payable. Mr Hodge suggests that some managers are paying on a basis of $10 per member and others are paying a percentage of FUM.

An amendment made to Aberdeen’s agreement in June 2013, just before the FOFA changes came into effect, shows the management fee to be paid back to the holding company was listed as a percentage of the funds.

“Do these percentages genuinely reflect the cost of IOOF Service Co of providing its services to Aberdeen?” Mr Hodge asks

“They’re the level that was agreed at the time. I can’t comment further than that,” Mr Oliver responds.

So these are grandfathered payments that have been prohibited since FOFA came into effect.

Mr Hodge gets to the point and goes back to Mr Oliver’s written evidence that IMIL’s position is that it should only receive payments in regards to the services it provides.

How did he determine what IMIL’s position was?

By working with my colleagues to determine what IMIL’s position was to understand the background to the contractural arrangements, Mr Oliver says.

Do you understand that ultimately the board determines what IMIL’s position is? Yes, Mr Oliver does.

Mr Hodge suggests that, at a board level, IMIL has never considered what its position is on payments made by external managers to the IOOF group, where those payments are derived based on investments in the super fund. Mr Oliver says he’s not privy to whether the board has discussed it.

So the relevant paragraph in his evidence is just something Mr Oliver and the legal team came up with, Mr Hodge says. “Who told you that this was the position of IMIL?” Mr Hodge asks. Mr Oliver says it was his legal counsel and other colleagues who came up with the position.

9.51am: IOOF’s Oliver returns

Here we go for round five, day five.

IOOF’s general manager for distribution, Mark Oliver, is back on the witness stand. He was called up late yesterday and only had time to answer a few questions before the session ended. Senior counsel assisting Michael Hodge QC gets straight into it this morning, bringing up Mr Oliver’s witness statement and asking him about IMIL, the super fund’s trustee.

Yesterday, we heard how IMIL invests some of its money in managed investment schemes that it operates and then it in turn invests that money in external managed investment schemes. These external schemes then agree to pay money back to IMIL.

Mr Hodge brings up one such agreement between IOOF Holdings, the holding company, and an external fund manager.

Stay with us here now, it gets a little complicated.

These agreements work by IOOF-related entities operating separate platforms. Members can invest their money through these platforms. There are then investments into external schemes, such as through Aberdeen, in which the external manager agrees to make payments back to IOOF in exchange for investments made through the subsidiary platform operators.

Agreements like this that were entered into before July 2013, required a percentage of the funds under management [FUM] to be paid back to the holding company.

After July 2013, those agreements were on a per-member basis, because of changes brought on by the Future of Financial Advice [FOFA] rules.

Mr Oliver doesn’t know if the earlier agreements still require percentages to be paid, even though they are still operating to this day.

Mr Hodge doesn’t seem impressed.

He asks if Mr Oliver made enquiries as to why fund managers were paying very different amounts per quarter.

Yes, he says, he did make enquiries but he doesn’t know why the amounts are different.

After July 2013, the amount paid by the external managers per member is $10. Mr Oliver doesn’t know how that number was arrived at but says it’s a recovery of the process costs incurred by IOOF. So the payments are made to the holding company and then paid back to the platform operator.

Mr Hodge tries to understand. Money gets invested by IMIL into an external fund manager. The external manager then makes a payment back to IOOF in respect of that investment.

9.00am: Preview

After a brief appearance on Thursday afternoon, IOOF’s Mark Oliver is expected back in the witness box this morning.

Yesterday, we learned that ASIC had accused NAB of four potentially criminal counts of misleading, deceptive or false conduct and another 110 potentially criminal counts of failing to report breaches of its licence on time.

Thursday capped a tough week for NAB, with counsel assisting Michael Hodge QC grilling both Paul Carter and Nicole Smith for several days each.

But as Michael Roddan reports, any hopes that industry super funds would also face a tough time at the commission were largely dashed yesterday after the CEO of the nation’s largest fund, AustralianSuper’s Ian Silk, emerged from two hours of questioning by Mr Hodge and Commissioner Hayne relatively unscathed.

The industry super fox and henhouse ad was aimed at members of federal parliament, as well as super fund members, to prevent the lobbying by retail wealth management companies to change the default system that would be a risk to members, we learned from Mr Silk.

On the commission’s list for today are:

• Mark Oliver, IOOF
• Christopher Kelaher. IOOF
• Scott Wilson, Energy Super

Join us live from 9.30am