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APRA trips at an early hurdle against IOOF

Updated: Nov 15, 2021

In the post Hayne Royal Commission, the outcome of these types of prosecutions will always be the subject of close scrutiny. It seems that the Federal Court was very unimpressed with the case which APRA was presenting. Maybe the case theory requires more scrutiny.


IOOF cleared of ripping off super members

AFR - Sep 20, 2019 — 6.21pm

The collapse of the highest profile case to emerge from the royal commission is a major setback for the prudential regulator's litigation drive and has cast doubt on its ability to safeguard the retirement savings of millions of Australians.

Federal Court Justice Jayne Jagot on Friday cleared wealth company IOOF and its former chief executive, Chris Kelaher, of any wrongdoing in relation to superannuation members and awarded them costs.

She described the case brought by the Australian Prudential Regulation Authority as “unpersuasive” and “inadequate”.

"It was for APRA to prove the primary facts on which the allegations of contraventions depended," Justice Jagot said.

"The way in which it sought to do so was fundamentally inadequate."

It is the second major court blow for financial regulators in the post-Hayne world.

Last month the Australian Securities and Investments Commission lost a case against Westpac alleging the bank breached responsible lending laws.

ASIC is appealing.

APRA's case against IOOF largely turned on the claim that Mr Kelaher and other directors acted improperly when they reimbursed members for losses using what is known as a "reserve".

In a lengthy judgment, Justice Jagot said it was unhelpful to characterise the reserve as "members' money" and there was nothing to suggest a reserve "cannot be used for purposes for which they were established and are maintained, including the compensation of members".

"It is not the case that the use of the [operational risk financial reserve] without 'exhausting other means of risk management' is necessarily not in the best interest of beneficiaries," she said.

"This proposition appears to be central to APRA’s case yet it is not founded in the statutory scheme or any principle of trust law which APRA has identified."

Seizing on allegations heard by the royal commission, the APRA launched court proceedings against IOOF in late 2018, alleging breaches of best interests duties.

APRA had intended to seek disqualification orders for Mr Kelaher and four other IOOF directors and employees, including former chairman George Venardos.

But because it was unable to prove any contravention of the Superannuation Industry (Supervision) Act, the disqualification orders cannot be sought.

APRA is still deciding whether it will appeal.

Berrill & Watson principal John Berrill said the judgment was a "slap in the face for APRA's new litigation-or-bust approach".

"APRA's apparent attempt to get a quick kill by relying on a document trail and not calling witnesses to prove their case was a terrible misstep," he said.

"APRA owes it to super fund members to protect their retirement savings. That means putting in the time and resources to hold trustees accountable for bad behaviour."

Justice Jagot dismissed APRA's claim that IOOF's decision to use the reserve was motivated by greed.

"To the extent that APRA’s case was that conduct was driven by the relevant companies saving expenditure on reimbursing beneficiaries for losses, the case theory is tenuous in the extreme," she said.

Deputy chairman Helen Rowell vowed an ongoing resolve to bring important cases to court.

“Litigation outcomes are inherently unpredictable,” she said.

“However APRA remains prepared to launch court action – where appropriate – when entities breach the law or fail to act in an open and cooperative manner.

"APRA still believes this was an important case to pursue given the nature, seriousness and number of potential concentrations APRA had identified with IOOF.”

Mr Kelaher stepped down after appearing at the Hayne royal commission and the company's share price has plummeted.

Arnold Bloch Leibler partner Matthew Lees , who acted for Mr Kelaher, said APRA’s claims had been tested over the course of a three week trial and decisively rejected by the court.

In a statement Mr Venardos said: “I welcome the judgment delivered today by Justice Jayne Jagot in the Federal Court related to action brought by APRA against me in my role as a non-executive director of IOOF.

IOOF welcomed the decision and said it was "reviewing the written judgment in detail and expects to issue a further announcement in due course".

Mr Kelaher did not respond to telephone calls.

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