Revelations at Australia's Banking Royal Commission have led the Australian Prudential Regulation Authority to take court action against the wealth management giant IOOF and some of its directors and executives for failing to act in the best interests of superannuation members. The managing director and chairman are on leave for the time being.

APRA has commenced disqualification proceedings and is seeking to impose additional licence conditions and issue directions to APRA-regulated entities in the IOOF group. IOOF is fighting the claim with all its might, averring that APRA's accusations are misconceived.

The people included in the disqualification proceedings are managing director Chris Kelaher, chairman George Venardos, chief financial officer David Coulter, the general manager of a department called "legal, risk and compliance," Paul Vine, and general counsel Gary Riordan. Vine is also the company secretary.

Kelaher has been replaced, albeit temporarily, by Renato Mota, the group general manager for wealth management. Venardos is also taking a leave of absence and being replaced by Alan Griffiths, hitherto a non-executive director. The two new men have vowed to co-operate with APRA to the fullest extent, although the terms on which they will do so have not all been settled.

At all times during the period mentioned in the court documents, the IOOF group carried out the business of a superannuation (pensions) trustee through IOOF Investment Management Ltd and Questor Financial Services Ltd. The five men were 'responsible officers' of those superannuation trustees for the purposes of the Superannuation Industry (Supervision) Act 2013.

Losses not made good

In 2015, APRA spotted some problems regarding the IOOF group of companies that showed, in its opinion, showed that the group had failed to maintain the structures, policies and procedures required to manage conflicts of interest in their superannuation business. On three occasions in 2015, so it says, Questor and IOOF Investment Management contravened the Act of 2013 by deciding to "differentially compensate" superannuation beneficiaries and other non-superannuation investors for losses caused by Questor, IOOF Investment Management or their service providers, with those beneficiaries being compensated from their own reserve funds rather than the trustees' own funds or third-party compensation. This came up at the Royal Commission in August, when Kelaher admitted that IOOF was guilty of an accounting error to the disadvantage of the beneficiaries, but tried to pay for their losses by tapping into their own reserve funds instead of its corporate funds.

Kelaher's grilling

When asked whether he thought that none of the directors had had a conflict of interest in relation to the question of compensating the members of the fund, he replied, stroking his mouth prodigiously: "I guess there are conflicts of interest in relation to every transaction matter, so...I think it's making a general expression."

The panel asked him the same question again, he paused and his eventual reply was "er...it's open to interpretation that there could have been a conflict."

He then took to stroking his tie while answering questions. The questioner mentioned that APRA had spent years telling IOOF (since 2015, according to the recently-released court documents) that it had not been explicit enough in reporting its conflicts of interest to the regulator, as was its duty. Kelaher replied: "that's their words."

The questioner then said: "If you say there is no conflict of interest when there is a conflict of interest, do you regard that as being not sufficiently explicit about conflicts of interest, or is that an entirely different category of problem?" His reply was: "With the benefit of hindsight, I would agree with you."

APRA also found that Kelaher had rejected a proposed fund transfer without considering the interests of the relevant superannuation beneficiaries.

As in so many of these cases, a tipster or 'whistleblower' had to suffer the loss of his job before the problem saw the light of day. He told the press: "Finally, they might get to the bottom of it."

Corporate consequences

The news has sent IOOF's share price tumbling precipitously. It was reported in October that IOOF had finished the process of acquiring the Australian and New Zealand Banking Group’s aligned dealer groups while moving ever-closer towards its complete acquisition of the ANZ One Path Pensions and Investments business. The latter now seems in jeopardy and there are even press reports of the former possibly being 'rescinded.'

Andrew Haslip of GlobalData, a data and analysis company, told Compliance Matters: "Following IOOF’s superannuation scandal, the latest wealth manager scandal in Australia, the damage to the banks' reputation and to public trust in the financial services industry will have significant long-term implications for how Australians invest. Allegations of misuse of client money in this area are particularly damaging, giving the impression that the entire industry is suffering from a conflict of interest and corruption.

"The clutch of neo-banks waiting in the wings in Australia will have no better time to launch recruitment drives, while a range of robo-advisors, none of which have yet broken out into the mainstream, will have the best conditions yet to draw in new money.

"Incumbents need to act fast to shore up tarnished brand images. As of yet there is no indication that consumers are keen to switch, but all it will take is a sudden change in interest rates, putting attractive APRs for savings out into the market (unlikely in the short term to be sure), or a big downturn in the share market causing portfolio values to tumble (already underway by some measures), to galvanize the market.

"With these trends already in play, disillusioned consumers will bite the bullet and switch to the new and untested but unsullied providers."