APRA does not appeal IOOF judgment; may seek regulatory or legislative changes

On 17 October, APRA announced it would not be appealing the decision of Jagot J in its Federal Court proceedings against five IOOF group officers and two IOOF group entities. As it stated in its press release, APRA had initiated the action last December due to its view that IOOF entities, directors and executives had failed to act in the best interests of their superannuation members. Her Honour had found that APRA had failed to prove any of the contraventions alleged against the respondents and that APRA’s application for declarations and disqualifying orders should be dismissed with costs.

The facts

The case, the basic facts of which were set out in APRA’s concise statement of claim, stemmed from four alleged failures on the part of two IOOF group entities, IIML and Questor, each of which were trustees of superannuation funds and also responsible entities (REs) for certain managed investment schemes (MISs).There were two alleged failures to implement investor directions, an overpayment, and a rejection of a proposed successor fund transfer. In broad terms the focus of the litigation was both the supposed failures themselves and also the extent to which the entities were entitled to draw on reserve funds rather than make good the failures in some other way, such as through their own funds or through pursuing litigation against IOOF group entities which might themselves have some liability for the failures (such as IOOF Service Co, which employed the relevant IOOF group employees).

APRA alleged various breaches on the part of the corporate trustees of the duties of care, skill and diligence and of the duty to exercise powers in the best interests of beneficiaries as required by s 52(2)(b) and (c) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). APRA also alleged corresponding contraventions on the part of the directors of the corporate trustees of various obligations in ss 52A(2)(c), (d) and (f), as well as of s 55(1). As well as declarations under s 21 of the Federal Court of Australia Act 1976 (Cth), disqualification orders were sought against the five officers under s 126H of the SIS Act.

The outcome

The judgment of Jagot J ([2019] FCA 1521) is a comprehensive rejection both of the substance of the allegations and also of the manner in which APRA’s case was put. APRA had chosen to call no witnesses and to rely entirely on a documentary case. It had also placed great reliance on the content of IOOF’s own self-reporting to APRA in which it characterised its own earlier behaviour. APRA had also referred to its own statements and opinions extensively in the course of prosecuting its case.

Her Honour had this to say about the way APRA put its case (at [4]):

For a number of reasons I have found APRA’s approach unpersuasive. The documents [from IOOF] were all produced with the benefit of hindsight. Apart from the opinions or conclusions expressed as to breach of the statutory covenants, the documents are expressed at a high level of generality, assuming knowledge on the part of the reader as to IOOF’s systems, policies and procedures (which remained unproved by other evidence). I also do not accept that there can be an effective admission of a legal conclusion, which is a matter for the Court based on the whole of the evidence. Even if such a statement could constitute an admission I would not be persuaded as to its reliability. It was for APRA to prove its case of contraventions by such evidence as it saw fit. The fact that it has chosen to run a purely documentary case means that it must take the documents as it finds them – as documents brought into existence for specific purposes, mostly by authors whose qualifications and experience are unknown, using the benefit of hindsight, often expressed at a high level of generality, and assuming otherwise unproven knowledge of IOOF’s systems, policies and procedures.

Her Honour expressly agreed with a submission that, if APRA correctly described the law, or the required course of action in particular circumstances, then it must prove that in the proceedings by means other than its own prior statements, adding that “APRA’s reliance on these matters is indicative of the weakness of its case” (at [137]-[138]).

The case also contains interesting observations on the detail of sections 52 and 52A of the SIS Act. On the central questions of the best interest duties and of conflicts of interest, Jagot J observed:

APRA has effectively cast the trustees in the role of insurer to the beneficiaries, which is contrary to principle. APRA has also sought to extend legal principle by applying the kind of requirements to which a trustee is subject in deciding whether or not a beneficiary is entitled to a payment out of the trust, […] to the day-to-day decisions which a trustee of a large fund must make in the administration of the trust. APRA has not explained why this extension of legal principle is warranted and, as explained below, I am unpersuaded that it is warranted: at [5].

The extension of the principle which APRA proposes appears onerous in the extreme and highly impractical: at [34].

[I]t must be recalled that the no conflicts [provision] is not about avoiding conflicts of interest. Conflicts of interest are inevitable. It is about managing conflicts of interest. And the conflicts which need to be managed are actual conflicts which have the capacity to significantly impact on the duty to act in the best interests of beneficiaries. Potential or theoretical conflicts of interest are not to the point: at [79],

The future?

APRA’s Press Release announcing its decision not to appeal the judgment rather intriguingly left open the possibility of APRA potentially reversing the decision or aspects of it in other ways:

APRA is considering any further action that may need to be taken in relation to these [issues of wider importance for APRA in its supervision of superannuation trustees], such as revising its prudential standards or seeking legislative amendments, to ensure that member interests are protected to the maximum extent possible.