ASIC deputy chair Peter Kell said there was a “very high likelihood of proceedings commencing in the very near future” over the fee-for-no-service scandal involving the big four banks and AMP.
The total amount of remediation involved would be more than $1 billion, he told the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry on its final day of hearings into the $2.6 trillion superannuation sector on Friday.
He also gave his view about grandfathered commissions in general, saying Parliament had, under the pretext of a “transition issue”, put in place an “extremely expansive provision, both in terms of the circumstances in which grandfathering can continue and the time period over which it may continue”, which was “not in the interests of consumers”.
This provision “enables the continuing payment of commissions that generate conflicts of interest and unnecessary cost widely across the financial system”, Kell said.
He said it “would be highly desirable for it to be fixed at a policy level” in the interests of consumers.
IOOF and APRA
Earlier, the commission heard that the Australian Prudential Regulation Authority declined to take legal action against the board of investment management company IOOF after it flatly refused to meet APRA’s demands that it repay super fund members from its own pockets after raiding the general reserve.
Counsel assisting, Michael Hodge, explored a long and troublesome relationship between APRA and IOOF dating back to 2011, when APRA discovered some concerning behaviour from two years earlier, through a review of board papers.
In 2009, IOOF had incorrectly recorded an amount of money as income rather than an asset, then distributed it to members of its cash management trust. IOOF later clawed that back by reducing the distribution being paid from units in the cash management trust, which may have been reasonable for the members paid the additional money but came at the expense of new members who had joined since.
An onsite review by APRA in 2016 found the issue had progressed, and the company had raided the super general reserve to compensate members of the super fund, rather than seeking compensation from the responsible entity (RE) itself.
APRA general manager Stephen Glenfield said: “I would expect whilst you can possibly use the reserve to put the members back to the position they should be in immediately, you would, nonetheless, follow up the [responsible entity] RE for compensation.”
“Except in this case, the RE is the trustee,” Hodge replied.
“Which is the challenge, yes,” Glenfield responded.
Hodge fired back: “It seems actually like it’s not much of a challenge at all, in the sense that if the company is acting properly in accordance with its statutory obligations, it just has to put its hand into its pocket and compensate the members for its mistake.”
In the years that followed, APRA identified a range of problems in correspondence with IOOF and these findings were displayed as evidence at the hearing. They included favouring shareholders over members and that “a legalistic approach to decision-making is often taken [as] a means to shield IOOF from obligations that may be in members’ best interests”.
When APRA expressed the view in a December 2016 letter that IOOF subsidiary Questor should replenish the general reserve using its own funds and threatened to escalate the matter if it didn’t, IOOF chief Chris Kelaher flatly refused, saying the company had passed the ‘pub test’ on members interests.
Legal advice suggested a poor prospect of success for APRA, so it decided not to take legal action. One reason was Questor’s reserve policy permitted the use of the general reserve to compensate members. But at the hearings, this policy was compared with an older version and it had been changed after the compensation incident occurred.
Cost constraints for APRA
Earlier, Hodge questioned APRA deputy chair Helen Rowell about why the organisation had taken no superannuation cases to court in the last 10 years.
Between 2003 and 2008, APRA had the right to apply to the court to administratively disqualify someone it thought was not fit and proper for the job, and during that period, APRA disqualified 133 people under that provision.
Since 2008, APRA has applied only once to the court to disqualify someone – a director of the fraudulent Trio Capital group.
Hodge asked if one of the concerns APRA had was the cost involved in legal action.
That is a consideration, Rowell said, as achieving enforceable undertakings was a more efficient and timely way to remove someone from the industry than going through a court proceeding.