The old APRA has been investigating IOOF since 2015, but it’s the new APRA that got fed up yesterday and went thermonuclear against the wealth manager.
This is the new regulatory environment in the financial services industry.
Delays, obfuscation and legal hair-splitting will not be tolerated, and the caution that’s been part of the culture of ASIC and APRA, in particular, are from a bygone era.
Royal commissioner Ken Hayne’s galvanising lament in his interim report that ASIC rarely went to court to seek public denunciation and punishment for misconduct, and that APRA “never went to court”, was the main catalyst.
But don’t underestimate the impact of the $700 million fine extracted from Commonwealth Bank for multiple money laundering transgressions.
Austrac’s action in that case spoke a lot louder than weasel words from politicians about “tough cops on the beat”.
The same approach can be expected from APRA, which has been promising for months that it has taken Hayne’s withering criticism on board.
The prudential regulator flayed IOOF paragraph by paragraph in its show cause notice, which was dispatched on Thursday to the company’s blue-chip law firm King & Wood Mallesons.
Disqualification proceedings have been started against five individuals. APRA is also seeking to impose additional licence conditions and issue directions to APRA-regulated entities (ARE) in the IOOF group.
The five targeted individuals are managing director Chris Kelaher, chairman George Venardos, chief financial officer David Coulter, general manager legal, risk and compliance Paul Vine and general counsel Gary Riordan.
IOOF said the allegations were misconceived, and its executives would “vigorously” defend the proceedings.
APRA’s core concern, formally identified in a December 21, 2015 letter, is that decisions were made at IOOF which appeared to favour the interests of shareholders over the beneficiaries of superannuation funds. In particular, customers were compensated from their own reserve funds rather than the trustees’ funds or third-party compensation.
While two independent directors were appointed to the ARE board in January 2017, some of the IOOF directors remained, including Kelaher and Venardos.
The board had only recently moved to the required majority of independent directors.
APRA also raised concerns about the ARE directors’ inadequate understanding of the conflicts of interest in IOOF’s business model, and their failure to identify details of conflicts — or actions taken to manage the conflicts — in the minutes of board, committee and other meetings.
The regulator required IOOF to engage an independent expert to conduct a review of its risk culture and management of conflicts.
The subsequent final report from Ernst and Young raised “numerous issues and concerns”, according to APRA.
On September 4, 2018, the watchdog set out a managed action plan (MAP) for IOOF, but alleged that there had already been delays.
The regulator said IOOF did not hold its first monthly meeting with APRA until November 15, almost two months after agreeing to implement the MAP.
“The ongoing delay in progress on the MAP is unacceptable to APRA, particularly given that the concerns have been raised since at least 2015 and many of the specific items included in the MAP have been raised since March 2018,” the show cause notice says.
“The concerns have not been addressed to APRA’s satisfaction for an unacceptable period and APRA is not satisfied with the progress of the implementation of the MAP to date.”
IOOF said it had been working co-operatively with APRA to implement the agreed initiatives, and that the “historical” matters were disclosed to the regulator a number of years ago.
The company said it had already addressed the issues, or was in the process of addressing them.
It’s unclear when the Federal Court will hear the case.
Already, though, IOOF has suffered a blow to its credibility.
It’s effectively at war with its regulator, and on that basis alone it’s hard to see IOOF continuing in its current form.
IOOF said the allegations were misconceived, and its executives would ‘vigorously’ defend the proceedings