An IOOF subsidiary, Questor, did not tell investors or its board about plans to remedy an error that first saw it pay too much money out to members then cover the mistake.
The fund attempted to hide the error by reducing distributions in a way that damaged the interests of those who were not invested in the fund when the mistake was made.
Chris Kelaher, CEO of IOOF, now the second largest private fund manager in Australia, told the financial services royal commission that the board wasn’t told of the $6.1 million error until late 2012 or early 2013 despite the initial mistake being made in May 2009 and Questor becoming aware of it in 2010.
Nonetheless, the incident was reported to ASIC as a “significant breach of the Corporations Act” in October 2012.
The $6.1 million overpayment occurred when the fund paid out the total value of a debt instrument that should have just being paying interest to investors.
The commission heard that the management of the trust, which included superannuation and other investors, chose to make up the over payment by cutting distributions over three years.
That decision meant that distributions were reduced to investors joining the fund after the mistaken payout or existing investors who boosted their holdings, the commission heard.
When Questor eventually came up with the repayment arrangement according to an IOOF document the company thought it “passed the pub test” because no-one had complained about it.
However senior counsel assisting the commissioner Michael Hodge QC replied, “can I suggest it would have been impossible for members to make a demand or a complaint because they didn’t know what Questor was doing?”
When investors were eventually told of the issue IOOF used language that Mr Kelaher agreed could be seen as ‘misleading’.
Eventually the overpayment was remedied and the repayment period cut from three years to around 18 months. The compensation included both making up of the distribution losses for those who shouldn’t have faced them and a component for interest foregone by the cuts.
This reimbursement came from two sources: compensation received from the entity which wrongly paid out the funds and the capital reserve of IOOF’s superannuation group.
Mr Hodge put it Mr Kelaher that the reserve was effectively the money of investors and Questor should have used its own money. Mr Kelaher said that in his view the reserve was not investors’ money.
Mr Kelaher also admitted that in APRA’s view IOOF was not dealing properly with conflicts of interest and had pressured the company to separate its superannuation operations from the trustee group that managed them.
Mr Kelaher said he saw no problems personally with that but the company had agreed to investigate separating the two earlier this year.
Earlier in the day another IOOF executive, Mark Oliver, told the commission that the company had decided not to offer a reduction in fees on investments following the banning of trailing commissions in 2013 because it would have cost the company $8 million in lost fees.
Independent directors of the investment group were not told about the reductions because some had expressed the view that all investors should get the benefit of fee reductions.
“You couldn’t say to the directors, and in particular the independent directors, ‘it would be in the best interest of approximately 29,000 members to simply move them to the new pricing’ … and that would reduce the profitability of IOOF,” Mr Hodge said.
Had all investors moved to the new lower fees “it [IOOF] would never have wanted to introduce the new pricing in the first place,” Mr Hodge said.