4.3 The 2016 letter

4.3.1Background

In order to understand the issues relating to the letter, it is necessary to set out some background.

Before 2016, Questor was the RSE licensee for the TPS Fund.[1] Before 2014, Questor was also the RE of the CMT.[2] The CMT was a managed investment scheme that invested in cash deposits and short to medium term securities.[3]

Before 2016, Questor held some units in CMT as RSE licensee of the TPS Fund.[4] In its capacity as RSE licensee of the TPS Fund, Questor held the relevant units in the CMT on trust for the members of the TPS Fund.[5]

NCS was a subsidiary of NAB. NCS was the custodian of the assets of the CMT.[6] As custodian, it was responsible for holding CMT’s assets for safekeeping.

In 2009, Questor as RE of the CMT made an over-distribution of $6.16 million to the unit holders in the CMT.[7] The over-distribution occurred because NCS mistakenly treated an asset of CMT as income.[8] The error was discovered in 2011, when a new custodian of the assets of the CMT audited the assets of which it had been appointed custodian and found the asset was missing.[9]

In 2011, Questor sought to recoup, or ‘claw back’, the over-distribution and ‘restore’ the CMT.[10] From September 2011, Questor, as RE of the CMT, ‘reduced’[11] the distributions that it paid, including to itself as RSE licensee of the TPS Fund.[12] The ‘reduction’ in distribution was intended by those who implemented it to continue over three years.[13] The calculation had apparently been made that, by the end of three years, the ‘over-distribution’ would have been recouped.[14]

The Questor Board was told about the issue in early 2013.[15] There is no evidence that the board ever approved the ‘reduction’ in distribution.

The reduced distributions affected all members of the TPS Fund for whom some part of the amounts attributable to them in that fund were invested in the CMT. Some members of the TPS Fund had not been invested in the CMT at the time of the over-distribution and therefore did not receive the over-distribution. Some members may have increased their interest in the CMT since the time of the over-distribution. All of these members would suffer loss as a consequence of the reduction in the distribution.

At some time, before October 2013, somebody within Questor formed the intention to compensate those members who suffered loss as a result of the reduction in distribution, and to provide the compensation after the clawback had finished, in amounts that would be assessed then.[16] It is not clear when that intention was formed.

In October 2015, the board approved compensation to the TPS Fund members.[17] It decided that part of the compensation would come from the general reserve of the TPS Fund.[18]

The TPS Fund general reserve was made up of money from various sources, including unallocated interest and asset/liability mismatches.[19] It did not contain money taken from individual members’ contributions or returns. Although not allocated to individual members’ accounts, the general reserve was an asset of the TPS. It was vested in Questor on trust for the members.

4.3.2The letter to members

In 2016, Questor wrote to members of the TPS Fund. The letter said:[20]

Following a periodic review of the CMA, we identified a historical distribution error in an underlying investment of the CMA that resulted in income distributions being credited to your CMA at a lower rate than it should have been.

As is apparent from what has been set out above, this statement was untrue. There was no ‘periodic review of the CMA’ that identified a historical distribution error. There was no historical distribution error that resulted in income distributions being credited to members’ CMA at a lower rate than it should have been. The lower distributions were not an error by Questor. The lower distributions were the result of a deliberate decision made by some employees within Questor. The lower distributions continued after Questor’s Board was informed of the decision.

In its written submissions, IOOF submitted that the statement was not misleading. I say more about those submissions later when considering whether it is open to me to find that there may have been misconduct by Questor in relation to the letter.

The letter sent to members of the TPS Fund in 2016 also said that ‘to ensure you are not disadvantaged, we have calculated compensation to 30 June 2016’.[21] It then set out the amount that would be applied to the member’s account.[22] The letter did not explain why the over-distribution occurred or where the compensation money was coming from.


[1] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, 3 [14].

[2] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, 3 [15].

[3] Exhibit 5.120, 20 October 2013, Memorandum from Head of Risk to General Counsel, 34; Transcript, Christopher Kelaher, 10 August 2018, 4608.

[4] Transcript, Christopher Kelaher, 10 August 2018, 4608.

[5] Transcript, Christopher Kelaher, 10 August 2018, 4608.

[6] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, 7 [34].

[7] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, 7 [33].

[8] Exhibit 5.129, 18 August 2016, Memorandum Concerning Conflicts and Decision-making Map, 2.

[9] Transcript, Christopher Kelaher, 10 August 2018, 4610.

[10] Transcript, Christopher Kelaher, 10 August 2018, 46456.

[11] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, 9 [50(a)].

[12] Transcript, Christopher Kelaher, 10 August 2018, 4611.

[13] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, Exhibit CK-2 (Tab 17) [IFL.0029.0001.1190 at .1191].

[14] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, [50(a)(b)].

[15] Transcript, Christopher Kelaher, 10 August 2018, 4617.

[16] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, 11 [55(h)]; Exhibit 5.129, 18 August 2018, Memorandum Concerning Conflicts and Decision-making Map, 2.

[17] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, Exhibit CK-2 (Tab 10) [IFL.0029.0001.2611 at .2615].

[18] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, Exhibit CK-2 (Tab 10) [IFL.0029.0001.2611 at .2615].

[19] Exhibit 5.305, 19 August 2013, Reserves Policy, 5.

[20] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, Exhibit CK-2 (Tab 12) [IFL.0029.0001.1164 at .1164].

[21] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, Exhibit CK-2 (Tab 12) [IFL.0029.0001.1164].

[22] Exhibit 5.116, Witness statement of Christopher Kelaher, 26 July 2018, Exhibit CK-2 (Tab 12) [IFL.0029.0001.1164].