Prudential regulator APRA lacked the power to force IOOF to act in the best interests of its superannuation fund members, the financial services royal commission has heard.
It could also not force the group to change its structure in a way that overcame what the regulator saw as internal conflicts of interest.
APRA executive Stephen Glenfield told the commission that the regulator had identified potential breaches by IOOF as early as 2012. That was before the company itself had identified the problems to APRA.
IOOF chose to put the misdeeds to right in a way that disadvantaged some super fund members who it chose to recompense using the funds’ general reserves.
Mr Glenfield told counsel assisting Michael Hodge QC that IOOF could “possibly use the reserve to put members back to the position they should be in immediately [but] you would follow up the RE [responsible entity or owner] for compensation”.
Mr Glenfield said IOOF’s trustee was also the RE in this situation and that this was “the challenge” regulators had to deal with.
“It seems actually like that’s not much of a challenge at all … it just had to put its hand into its pocket and compensate the members for the mistake,” Mr Hodge replied.
APRA told IOOF of its concerns about both the payments and its structure but the company resisted acting as the regulator wanted.
In reviewing what had happened, an APRA internal document identified IOOF as an industry outlier which did not operate like its peers.
“IOOF operate their superannuation business within a silo and appear to be insulated from the rest of the superannuation industry with view that are not considered … best practice.”
“And the board and management have been seen to make decisions which appear to favour shareholders above superannuation members.”
It’s “legalistic approach” often served to shield IOOF from obligations “which may be in members’ best interests”.
IOOF CEO Chris Kelaher told the commission earlier that the company took the view that a “pub test” – or how an average person might view the circumstances – was a proxy for the “best interest” duties the law demanded.
“I don’t support that view,” Mr Glenfield said.
The commission heard that IOOF had changed its policy of dealing with reserves by May 2017 to allow general reserves to be paid in compensation to members after this had already been done. APRA did not know about the change, Mr Glenfield said.
After IOOF had refused to replenish the funds APRA took legal advice but found it did not have a clear cut case to force payment so it took no legal action.
The commission also heard that APRA had allowed AMP to contact clients encouraging them to make investment choices on default superannuation accounts that would result in them continuing to be charged commissions following the banning of the practice in 2014.
AMP had illegally charged more than 15,000 clients commissions on default funds after they were banned and APRA gave it approval to continue the practice while it transferred members to new accounts.
It used letters and phone calls to try to get clients to make investment choices that would allow the payments to continue without telling clients they had the option of doing nothing and going to commission-free accounts.
APRA deputy chair Helen Rowell told Mr Hodge that the regulator had checked the text of these communications and not objected despite understanding that their aim was to make members pay higher fees.
In recent days IOOF contacted APRA saying it would implement most, but not all, of the changes it had asked for.