This was a case brought by Australian Prudential Regulation Authority (APRA) seeking disqualification of the then Managing Director, Chairman and three executives of IOOF Group. The disqualification orders were sought on the basis of alleged contraventions by the directors and two IOOF responsible superannuation entities (RSEs) of covenants contained in the Superannuation Industry (Supervision) Act 1993 (SIS Act). The case arose out of case studies examined in the Financial Services Royal Commission. It was the first major case by a regulator since the Royal Commission looking to establish contraventions of the law against a large financial services company.
At the core of APRA’s case was an allegation that the RSEs and the IOOF directors had breached their respective covenants to prioritise, and act in, the best interests of superannuation members by deciding on various occasions to fund compensation payable to those members out of the reserves of the superannuation fund rather than out of the RSE’s own assets.
Justice Jagot dismissed APRA’s case. Her Honour held that APRA had failed to prove that the IOOF RSEs were liable, or that it was even reasonably arguable that they were liable, for the administration errors which gave rise to the need to pay compensation to members. Her Honour further held that the use of the reserves to fund the compensation to members did not amount to a breach by the RSEs or directors of any of their regulatory obligations, nor did it amount to a breach of their duties to prioritise, and act in, the best interests of members.
The decision emphasises the evidentiary burden that regulators must meet in seeking to establish statutory breaches. Her Honour was critical in that respect of APRA’s attempt to rely upon breach reporting notices lodged with APRA by the RSEs as alleged admissions of those breaches, rather than adducing its own evidence to establish the facts giving rise to the breaches. The decision also carefully examines the core statutory duties of RSEs and their directors and clarifies a number of aspects of the law in that regard. For example, in relation to the best interests covenant her Honour emphasised that the test is to be applied objectively and prospectively, from the perspective of the trustee at the time of the decision, not with the benefit of impermissible hindsight. Another important aspect of the decision is her Honour’s finding that an RSE’s liability to members for breaches of the statutory covenants contained in s 52 of the SIS Act cannot be excluded by the relevant trust deed. Although this finding did not impact the outcome of the case, absent legislative intervention, it will likely have implications for any existing or future proceedings, including member class actions, against superannuation trustees for breaches of the SIS Act.