The Australian Prudential Regulation Authority (APRA) has announced that it has commenced actions against IOOF entities and certain directors and executives for alleged failure to act in the best interests of superannuation members.
APRA has issued a show cause notice setting out its intention to direct IOOF Investment Management Limited (IIML) to comply with its Registrable Superannuation Entity (RSE) Licence and impose additional conditions on the licenses of IIML, Australian Executor Trustees Limited (AET) and IOOF Ltd (IL). APRA's concerns relate to alleged issues in relation to 'the adequacy of the organisational structure, governance and conflicts management frameworks' within the IOOF group. More particularly, APRA alleges (among other things) that the group structure 'presented an inherent conflict of interest, as the same individuals were responsible for making decisions in respect of issues where the interests of the investors or members of the different entities within the IOOF group were likely to give rise to conflicts of interests or duty' and that these conflicts were not adequately managed. APRA also alleges that there has been insufficient progress towards addressing its concerns to date. The additional licence conditions proposed by APRA include (among other things): the restructure of certain entities to meet its Superannuation Industry (Supervision) Act (1993) (SIS Act) obligations, the implementation of an action plan to address APRA's concerns within set timeframes, the provision of fortnightly progress reports and the appointment of an independent reviewer or reviewers to report every three months to APRA until all items in the action plan are completed. The entities have 14 days to respond.
APRA has also commenced proceedings in the Federal Court to seek disqualification orders and declarations in relation to five individuals (IOOF Managing Director, Chair, CFO, General Manager and Company Secretary and Group General Counsel) for alleged breaches of sections 52 and 55 of the SIS Act, Prudential Standards, and associated conduct.
APRA alleges that IIML, Questor and the relevant individuals did not appropriately acknowledge and address issues concerning conflicts of interest raised by APRA from 2015 to date. More particularly, APRA alleges that on three occasions in 2015, Questor and IIML contravened the SIS Act by compensating superannuation beneficiaries and other non-superannuation investors for losses caused by Questor, IIML or their service providers, from their [ie the superannuation members'] own reserve funds rather than the trustees’ own funds or third-party compensation.
If successful, the disqualification proceedings would prohibit the individuals from being or acting as a responsible person of a trustee of a superannuation entity. The court filing states that due to their involvement in the alleged 'contraventions of the SIS Act and failure to appropriately engage with and respond to APRA's prudential supervision…they should no longer remain responsible officers of a superannuation trustee'.
[Note: Round 5 of the Financial Services Royal Commission Hearings included a case study concerning IOOF. Counsel Assisting suggested in closing submissions, that it may (or may not) be open to the Commission to find that Questor and IIML breached s52 of the SIS Act.
In a statement, APRA Deputy Chair, Helen Rowell said that the regulator had sought to resolve its concerns with IOOF over several years but considered it was ‘necessary to take stronger action after concluding the company was not making adequate progress, or likely to do so in an acceptable period of time’. She added that ‘The actions we are now taking are aimed at achieving enduring change to ensure that the trustees of the superannuation funds operated by IOOF fully meet their obligation to put the interests of members ahead of all other interests. Furthermore, the individuals included in the proceedings have shown a lack of understanding of their personal and trustee obligations under the SIS Act and at law, and a lack of contrition in relation to the breaches of the SIS Act identified by APRA.’
IOOF Response
In a statement to the ASX, IOOF writes that the 'allegations are misconceived and it and its executives intend to vigorously defend the proceedings'.
The statement adds that IOOF has been 'working cooperatively with APRA to actively implement various agreed initiatives, which were most recently outlined at the 2018 Annual General Meeting. The historical matters the subject of the proceedings were disclosed to APRA a number of years ago. IOOF has already addressed or is addressing them, and it has been constructively working with APRA to this end. IOOF will continue to actively progress the agreed initiatives and will further consider the allegations raised by APRA'.
Media response
Media reports have speculated that APRA's actions could signal a more general shift in the approach to enforcement now to be expected not only of APRA but also the Australian Securities and Investments Commission (ASIC) in the wake of the Financial Services Royal Commission and the criticism levelled at both regulators over the course of the hearings. The AFR suggests that this may be the beginning of a 'likely flood' of court cases in the coming year.
The AFR also reports that some investors, including IOOF's major investor Legg Mason, are calling for board change are applying pressure for the current Chair and Managing Director to step aside. Media reports also speculate that APRA's actions could have implications for the planned sale of ANZ's OnePath superannuation fund to IOOF. The ABC quotes ANZ deputy CEO Alexis George as stating ‘Given the significance of APRA's action, we will assess the various options available to us while we seek urgent information from both IOOF and APRA’.
