When IOOF chief executive Chris Kelaher took to the witness box at the royal commission on August 10, two things started happening.

First, IOOF’s share price started a slide that has seen its market value fall by 6 per cent.

And within ANZ Bank’s wealth division, which was last year sold to IOOF in a $4.5 billion deal, a flurry of text messages began between key executives grew more concerned as Kelaher’s veered between combative, dismissive, exasperated and abrupt. One source says the ANZ wealth executives had one main reaction: We have to work for this bloke?

Those concerns won’t be diminished at all by the closing submissions from the royal commission’s round of hearings on superannuation, which argue that the issues that “Mr Kelaher appeared to lack insight into” include how IOOF “had preferred its own interests to the interests of the members of the superannuation fund” and “the fundamental obligations of a trustee and the directors of a trustee”.

It’s a damning assessment of the chief executive of one of Australia’s biggest pure-play wealth managers, a company with half a million customers and $126 billion of funds under management.

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But the submissions also suggest that IOOF has also cleverly read the regulatory environment and worked out – again, to the benefit of shareholders rather than fund members – just how toothless the Australian Prudential Regulation Authority actually is.

Senior counsel assisting the commission, Michael Hodge QC, honed in on exactly how IOOF made good super fund members following a over-distribution from an IOOF cash management trust.

Kelaher seemed bewildered that anyone would be worried about the details of this compensation – the clients were made good, and that’s what mattered.

But for Hodge, the way the members were made good – using the general reserve of their own super fund, rather than money from IOOF itself – was crucial.

Kelaher gave evidence that IOOF used this compensation arrangement because it had to balance the interests of the super fund members with other beneficiaries of the cash management trust.

But the closing submissions argue this misunderstands the obligations imposed by super laws, which state that the interests of super fund members must stand above all else.

The closing submissions explain how in December 2016, APRA wrote to IOOF to tell it that the “use of the general reserve to compensate superannuation members was ‘inappropriate'” and that it “ought to immediately replenish the general reserves utilising its funds as responsible entity. Not doing so would “escalate APRA’s concerns”.

IOOF refused.

Instead it wrote back to APRA, saying that “in terms of the so-called pub test, which in these circumstances is a proxy for members best interests, it is the board’s view that the test has been passed”.

APRA’s reaction to this effective middle finger was…to take no further action, of course.

In June 2017, the APRA team supervising IOOF wrote to APRA witness Stephen Glenfield, who is general manager of the regulator’s specialised institutions division.

The team told Glenfield it felt the IOOF board “fundamentally misunderstood” its duty to prioritise the interests of superannuation fund members, had “difficulty identifying conflicts in arrangements with related parties” and was “resistant to detailed documentation”.

The APRA meeting with the IOOF board resulted in another letter telling IOOF to review its own risk culture and conflicts management and comply with the super laws.

Heading into the ANZ merger, APRA also wants IOOF to change its governance structures such that boards of its wealth business and super funds are more formally split.

Here, at least APRA has had a partial win and IOOF will make some change – although not for the right reasons.

“Mr Kelaher did not agree that these changes were being made because IOOF… accepted that there were legitimate governance concerns that needed to be addressed. As he put it, for IOOF it was ‘a matter of indifference’. Rather, IOOF had made a pragmatic decision: it was easier to make the changes rather than having to keep dealing with the complaints from APRA.”

And IOOF won’t make all the changes APRA wants – a matter Glenfield says is ongoing.

The impression left from the closing submissions is that IOOF does not fully understand or respect the central requirement of super laws to put fund members above all else.

The pub test, and the importance of making money for shareholders, really does appear to have been used as a guiding principle at the group.

But equally, the closing submissions suggest this attitude has been allowed to flourish because IOOF sees APRA less as a regulator to be feared than an irritant to be dealt with.

James Thomson

j.thomson@fairfaxmedia.com.au

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