4.2 The APRA proceedings

On 6 December 2018, APRA commenced proceedings against IIML, Questor, Mr Kelaher, and four other individuals holding senior positions at IOOF: the Chair, George Venardos; the Chief Financial Officer, David Coulter; the General Manager – Legal Risk and Compliance and Company Secretary, Paul Vine; and the General Counsel, Gary Riordan.[1] The documents filed by APRA alleged that:[2]

Until January 2014, Questor was the RE of two managed investment schemes, known as the Cash Management Trust (CMT) and The Portfolio Service Plan (TPS MIS). Questor invested the funds of the TPS Fund and the TPS MIS in the CMT. In May 2009, Questor as RE for the CMT made an overpayment to unitholders that was distributed to individual investors in the TPS Fund and TPS MIS. Questor did not identify the error until 2011. To address the overpayment, it caused a reduction in distributions from the CMT. This prejudiced new members in TPS Super who had not received any of the overpayment. The board of Questor then approved a plan to (a), use the amount received from a settlement with Questor’s custodial services provider to wholly compensate investors in a managed investment scheme of which it was RE, and (b), to compensate superannuation members from the remainder of the settlement amount while using the TPS Fund’s general reserve to make up the shortfall. The compensation plan continued to be implemented by IIML following an SFT from TPS Super to IPS Super. IIML did not replenish the general reserve of TPS Super or IPS Super until October 2018, following repeated requests from APRA.
From around 2007, IIML failed to reinvest certain income distributions in accordance with instructions from clients of its Pursuit investor directed portfolio service product. The failure was not detected until 2014, and affected both superannuation beneficiaries and non-superannuation investors. In 2015, IIML approved a plan to pay compensation to non-superannuation investors from its own funds, and to pay superannuation beneficiaries from the superannuation fund’s Operational Risk Financial Reserve (ORFR).
In around 2011, Questor failed to reinstate automatic investment plan instructions given to it by approximately 1,300 clients. The failure was not detected until January 2015, and affected both superannuation beneficiaries and investors in managed investment scheme products. In 2015, Questor approved a plan to compensate non-superannuation investors from Questor’s own funds, and superannuation beneficiaries from the superannuation fund’s ORFR.
In 2015, Singtel Optus Pty Ltd requested that IIML transfer the Optus employee default superannuation arrangements from the IPS Fund to an AMP fund. IIML and Mr Kelaher rejected the proposed SFT without taking any or adequate steps to consider whether the transfer was in the best interests of beneficiaries.
Until 2018, the boards of IIML and Questor did not distinguish between when they were acting as the board of a superannuation trustee or as the board of an RE of a managed investment scheme, and did not identify potential or actual conflicts of interest arising from these dual roles.
In responding to APRA’s concerns about these and other matters, Questor, IIML, and the five individuals demonstrated a lack of understanding of their obligations under the SIS Act and the general law; failed to properly implement a robust conflicts management framework as required by SPS 521; failed to ensure that Questor and IIML complied with APRA’s requirements and recommendations in a timely manner or at all; and failed to comply with SPS 520, which requires responsible officers of a superannuation trustee to be aware of their legal obligations.
The conduct gave rise to breaches of sections 52(2)(b), 52(2)(c), 52(2)(d) of the SIS Act by Questor and IIML, and breaches of sections 52A(2)(c), 52A(2)(d), 52A(2)(f) and 55(1) of the Act by Mr Kelaher and the Chair of IOOF Holdings, George Vernardos.

In the same proceeding, APRA sought disqualification orders under section 126H of the SIS Act against Mr Kelaher, Mr Venardos, Mr Coulter, Mr Vine and Mr Riordan.

On 6 December 2018, APRA also sent a ‘show cause’ letter to IOOF’s legal representatives, setting out its intention to direct IIML to comply with its RSE licence and to impose additional conditions on the licences of IIML and two other IOOF subsidiaries. The proposed directions to IIML related to ‘breaches, or potential breaches, of the SIS Act and relevant prudential standards identified by Ernst & Young in their report dated 4 September 2018’.[3] The proposed additional conditions related to what APRA said were ‘failures to adequately identify and manage conflicts of interest throughout the IOOF Group, and failures to comply with legislative requirements and prudential standards’.[4]

The Commission’s Terms of Reference provide that I am not required to inquire, or continue to inquire, into a particular matter to the extent that I am satisfied that the matter is being, or will be, sufficiently and appropriately dealt with by a civil proceeding. I am, of course, satisfied that the matters described above will be sufficiently and appropriately dealt with in those proceedings. I make no findings about the particular contraventions alleged in those proceedings. Whether other forms of proceeding could or should be instituted in respect of these matters is a matter for APRA and I say no more about it.

As I said at the outset, however, it remains appropriate to deal here with one related matter: a letter Questor sent to members of the TPS Fund in respect of Questor’s over-distribution.

[1] APRA v Christopher Francis Kelaher & Ors, NSD 2274/2018.

[2] Concise Statement filed on behalf of APRA dated 6 December 2018. See also Originating Process filed on behalf of APRA dated 6 December 2018.