APRA can only seek disqualification as super trustees under its powers, so exactly how this action affects the ability of Kelaher and Vernados to remain in control of the wider IOOF business is unclear.
But surely the company has no choice but to stand the pair down – even if temporarily – given the seriousness of the matters raised by APRA.
Indeed, just hours after APRA dropped its bombshell, ANZ Banking Group, which last year sold its wealth business to IOOF in a $2 billion deal, said it was assessing its options while seeking “urgent information from both IOOF and APRA”.
IOOF shares plunged 29.5 per cent in early trade to $5.05.
‘A matter of indifference’
Kelaher’s attitude towards regulation in general, and APRA in particular, was highlighted perfectly during his appearance at the royal commission in August.
Early in his evidence Kelaher was asked by Hodge whether IOOF’s decision to change the structure around its superannuation trustee was driven by an APRA request to improve its governance. Or did the board determine to fix things itself?
Kelaher said the board didn’t see any problems with the existing structure, but it was happy to change if APRA wanted it to.
“It’s a matter of indifference,” he said.
It’s unlikely he will be treating APRA’s latest action with the same cavalier approach.
The APRA action centres around a mistake inside an IOOF subsidiary called Questor that saw this business make an over-distribution to its beneficiaries way back in 2009
Questor, which does not operate now, was what is known as a dual-regulated entity, because it was responsible for a super fund and a cash management trust. The super fund was also a beneficiary of the CMT, just to make things nice and complicated.
The over-distribution was not picked up until 2011. But instead of clawing the money back from beneficiaries, IOOF – led by Kelaher – decided to simply reduce distributions from the cash management trust for three years.
This was problem one. The SIS Act requires trustees to put the interests of a super fund’s members before all else. But this distribution reduction strategy meant the benefits to super fund trustees had been artificially reduced, so that all the beneficiaries of the CMT would not face clawbacks.
Problem number two emerged with IOOF’s plan to make good all beneficiaries for the lost time value of money.
IOOF had successfully taken legal action against service provider Questor which it blamed for making the over-distribution.
It used the proceeds from the settlement with the service provider to compensate the CMT beneficiaries.
But to compensate Questor’s super fund beneficiaries, it used the leftover bit of the settlement and then dipped into the super fund’s general reserves.
When he appeared before the royal commission in August, Kelaher said IOOF had tried to “balance” the interests of the super fund members with the interests of the CMT.
But again, the SIS Act is explicit – super fund members must be placed before all else.
When APRA wrote to IOOF on the matter back in 2015, Kelaher and his team claimed that its handling of the matter had passed “the so-called pub test”.
Kelaher stood by that view in August. He seemed unable to understand why the commission was worried about the details of the compensation. Everyone was made whole, where was the problem?
It seemed an extraordinary misreading of the commission and APRA’s concerns, but more importantly, of the central principle of protecting members that sits at the heart of super regulation.
APRA has let IOOF’s approach stand for far too long. But now, finally, Team Kelaher will have to answer for it.