Key News Summary:  APRA has taken action against IOOF and its associated entities centering around their conflict of interest and failure to act in the best interests of members, by enforcing the RSE Licence, imposing more conditions, seeking to disqualify 5 individuals as directors of superannuation entities and seek declarations of contraventions of the SIS Act and the covenants it creates.


 

APRA has commenced disqualification proceedings and is seeking to impose additional licence conditions and issue directions to APRA-regulated entities in the IOOF group.

Compliance with IOOF RSE Licence & additional conditions

APRA has issued a SHOW CAUSE NOTICE (see link below) setting out APRA’s intention to direct IOOF Investment Management Limited (Management) to comply with its Registrable Superannuation Entity (RSE) Licence and impose additional conditions on the licenses of Management, Australian Executor Trustees Limited (Trustees) and IOOF Ltd (IOOF). These entities have 14 days to respond to this notice.
  • The proposed conditions and directions to comply with conditions seek to achieve significant changes to the identification and management of conflicts of interest by Management, Trustees and IOOF and facilitate APRA’s ability to take further enforcement action should this not occur.
  • The proposed additional conditions on the licences of Management, Trustees and IOOF are based on issues and concerns raised by APRA since 2015 relating to the entities’ organisational structure, governance and conflicts management frameworks, and require the entities to address these within specified timeframes.
  • The proposed directions for Management relate to an independent report issued by Ernst & Young, the findings of which provide a reasonable basis to conclude that Management has breached:
    • section 52 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) – which deems a number of covenants into the governing rules of RSE’s including the duty to act in the best interests of members, how to deal with conflicts of interest, to act with due diligence and to act fairly between beneficiaries and classes of beneficiaries,
    • Prudential Standard SPS 520: Fit and Proper and
    • Prudential Standard SPS 521: Conflicts of Interest.

Action to disqualify individual 5 directors and seek contravention declarations

APRA has also commenced proceedings in the Federal Court of Australia to:

  • seek the disqualification of five individuals that, at relevant times, were responsible persons of Management and Questor Financial Services Limited (Questor).
  • seek a court declaration that Management and Questor (which at the material times were RSE Licensees, owned by IOOF Holdings Limited) breached the SIS Act.

The individuals included in the disqualification proceedings are Managing Director Chris Kelaher, Chairperson George Venardos, Chief Financial Officer David Coulter, General Manager – Legal, Risk and Compliance and Company Secretary Paul Vine, and General Counsel Gary Riordan.

As part of these proceedings, APRA filed a ‘Concise Statement’ (see link below) seeking seeks disqualification orders and declarations in relation to breaches of sections 52 and 55 of the SIS Act and Prudential Standards, and associated conduct. Section 55 deals with the consequences of contravening the SIS covenants, which includes a person (say a beneficiary) seeking compensation for loss, from a person engaged in the contravention (say a trustee or manager).
  • As outlined in the Concise Statement, APRA considers that Management, Questor and the relevant individuals did not appropriately acknowledge and address issues concerning conflicts of interest raised by APRA from 2015 to date.
  • In particular, APRA identified that on three separate occasions in 2015, Questor and Management contravened the SIS Act by deciding to differentially compensate superannuation beneficiaries and other non-superannuation investors, for losses caused by Questor, Management or their service providers, with superannuation beneficiaries being compensated from their own reserve funds rather than the trustees’ own funds or third-party compensation.
  • If successful, the disqualification proceedings would prohibit the above individuals from being or acting as a responsible person of a trustee of a superannuation entity.

In comments that pick up on criticisms in the Financial Services Royal Commission, APRA said:

  • “APRA 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.
  • “APRA’s efforts to resolve its concerns with IOOF have been frustrated by a disappointing level of acceptance and responsiveness to the issues raised by APRA, which is not the behaviour we expect from an APRA-regulated entity,”
  • “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.

By way of post-script, the directors are contesting APRA’s disqualification action.

[APRA website: Media Release, Show Cause Notice, Federal Court Concise Statement; LTN 237, 7/12/18; Tax Month – December 2018]

FJM 12.1.19

CPD (comprehension) questions

  1. Has APRA been criticised, in hearings of the Financial Services Royal Commission, for failing to take legal action early enough or often enough?
  2. Have participants in the Financial Services sector, been criticised in the Financial Services Royal Commission, for taking an overly legalistic, stalling approach, to actions by the regulators?
  3. Does APRA say that it has been trying to get the conflict of interest issues resolve, with IOOF, since 2015?
  4. Is APRA giving IOOF notice to ‘show cause’ why it ought not be treated as having contravened relevant RSE licences?
  5. What else does the ‘show cause notice’ give notice of?
  6. What is the managing director’s name, and how many other directors, does APRA want disqualified?
  7. What else does APRA seek by its Federal Court action?
  8. What SIS requirements does APRA say have been contravened?

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