BMA735 Case Study 2 IOOF PDF

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BMA735ManagementEthics  Assessmenttask2:Casestudy2  IOOFHoldings(TheAustralianFinancialReview,June21,2015andABCNews,December7, 2018)  AscandalatfinancialservicesgiantIOOFinvolvingclaimsofinsidertrading,frontrunning and"misrepresentation"ofperformancenumbersraisesissuesaboutcultureandthe insidiousnessofverticalintegration.InternalemailsanddocumentsobtainedbyThe AustralianFinancialReviewrevealbreachesanderrorsinunitpricinginsomeofIOOF'scash managementtrusts.AJuly2014RiskandComplianceCommittee(RCC)documentprepared forthegroup'sadvicedivisiondescribesanincidentin2009wereclientswerepaidtoo muchintheircashmanagementaccount,whichresultedinclientssincethen"receivinga diluteddistribution".Thedocumentsaid:"Communicationtofinancialplannersandclients –nonetodate."  Anemailexchangebetweentwocomplianceofficerstaskedwithcompilingalistof breachesinahandfulofIOOF'scashmanagementtrusts,madethebombshellcomment: "Thereseemstobejustasmanyunitpricingincidentsastherewerebreaches."Theemails, composedonMarch31,2014,arereferringtoarequestbytheAustralianPrudential RegulationAuthority(APRA)tosupplyallinvestmentbreachesandunitpricingerrorsin severalIOOFFunds,includingQuestorandIIML.Itlists15separateincidentsbetween2012 and2013.TheyincludeaPlatinumAssetManagementunitpricingerrorinlate2012anda QuestorCashManagementFundissueinSeptember2012,whichoverdistributedtoafew internalunitholderstothetuneofatleast$6million.  Whatbeganin1846astheVictorianGrandLodgeoftheIndependentOrderofOddFellows friendlysocietyhasgrownintoa650,000‐customerlistedcompany.IOOFcontrols$150 billionofinvestorfundsandusesalmost1200financialplannerswhostrugglewitha hotchpotchoftechnologycourtesyofacquisitionsandalow‐costresearchdepartment. IOOFdemutualisedin2002,butithasgrownsignificantlyinthepastfewyearsthrough acquisition,includingbuyingBridgesFinancialServices,Shadforth,Lonsdaleandamajority stakeinOrdMinnett.ThemergerfrenzyhasmadeIOOFthesecondlargestnon‐bank financialplanningnetworkinthecountry.  Theacquisitionshavecreatedthechallengeoftryingtomarryahotchpotchoftechnologies, platforms,dealergroups–bothalignedandownedbyIOOF–anddifferentcultures.Atthe sametime,costshavebeenslashedtohelpboostprofitmargins–andbonuses.Asformer stockbrokerandfundmanagerMikeMangansaid,however:"Itseemsthewholefinancial servicesindustry,withrareexceptions,isunethicalatbest;corruptatworst.Occasionally someonewithethicscomesalonglikeanIOOFwhistleblower.Andtheygetfiredfortheir ethicalstand."  IOOFhashadanumberofwhistleblowersoverthepastfewyearswhohavenotsurvived thecompany.Inthemostrecentcase,thewhistleblower,anequitiesanalyst,spokeupto thehumanresourcesdepartment,thenendeduponstressleavethenbeingsackedinMay,

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whilehewasinthemiddleofaFairWorkcasewithIOOF.IOOF’scompliancereportsreveal investigationsintopossiblefrontrunning,evidenceoftrainingandcompliancecheatingand themisrepresentationof"outperformance"numbers.Thesematterswereallhandled internallyratherthanbeingreportedtotheAustralianSecuritiesandInvestments Commission.OneseniorIOOFstaffmemberwasinvestigatedbythecompanyin2009over suspicioustrading,forexample,despiteinsidertradingbeingacriminaloffense.Afirstand finalwarningwasputonthestaffer'sfileandhewastoldtorepaytheprofitsmadeonwhat IOOFitselfdescribedas"insidertrading"toacharityofIOOF'schoice.  ThescandalatIOOFalsoputsthespotlightontheproblemswithverticalintegrationof investmentmanagementandfinancialplanning.Financialplannersarerequiredbylawto offerclientsadvicethatisintheirbestfinancialinterestsnotthoseoftheircompany.Butan emailsentbyoneofIOOF'stopfinancialadvisersatitsBridgessubsidiaryinlate2013said: "I…waswonderingifsomeonefromResearchcouldexplainwhyyouarerecommendingwe place50percentofourclients'managedfundportfoliosintofundsthathaveconsistently underperformedtheirrespectiveMorningstarBenchmarks."Thefinancialadviseraskedthe researchdepartment:"What'sgoingonhere?Ican'thelpbutfeelourresearchdepartment hasfinallybeencompromised."TheunderperformingfundswereIOOFfundsandavailable onthecompany'sapprovedproductlist(APL).  AfurtherscandalatIOOFwasrevealedinAugust2018attheHayneRoyalCommission whereitwasrevealedthatIOOFhadpaidcompensationtoitssuperannuationmembersout theirownretirementsavings.IOOF’smanagingdirectorChrisKelaher,alongwithfoursenior executives,arenowfacingallegationsthattheyfailedtoactinthebestinterestsof superannuationmembers.APRAhasnowtakenlegalactionagainstIOOFclaimingthatthere wasa"reasonablebasis"toconcludethatIOOF—alongwithitslicenseesIIMLandQuestor FinancialServices—breachedtheSuperannuationIndustrySupervision(SIS)Actandfailed tomeetprudentialstandards.  TheRoyalCommissionheardinAugustthatIOOFhadmadeanaccountingerrorandsought tocompensateitsmembersforthatmistake.Butinsteadofdippingintoitsowncorporate resources,IOOFtookmoneyoutofthesuperannuationfundsitmanaged.Thisledto MichaelHodgeQC,counselassistingtheRoyalCommission,toaccusethecompanyofusing members'moneytocompensatethemselves.HealsoaccusedIOOFofbreachingitsduties asasuperannuationtrustee—dutiestoputmembers'interestsaboveallelse,evenprofit.  APRAisalsoseekingtodisqualifyIOOF'schairpersonGeorgeVenardos,chieffinancial officerDavidCoulter,companysecretaryPaulVine,andgeneralcounselGaryRiordan.Ifthe actionissuccessful,theywillnotbeabletocontinueintheirroles,astheywouldbe prohibitedfrom"beingoractingasaresponsiblepersonofatrusteeofasuperannuation entity".Furthermore,APRAwantstoimposeadditionalrestrictionsonthelicencesofIOOF, alongwithitsrelatedentitiesIIMLandQuestor.TheregulatorattemptedtoworkwithIOOF forseveralyearsbut"considereditwasnecessarytotakestrongeractionafterconcluding thecompanywasnotmakingadequateprogress",saidAPRAdeputychairHelenRowell.  ThereisariskofthecourtactionderailingANZ'sattempttosellitsfinancialplanning businesstoIOOF.ANZagreedtosellitsOnePathPensionsandInvestmentsbusinessesto

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IOOFforjust$975millioninOctober2017—asitsoughttoexitthewealthmanagement businessliketheothermajorbanks."GiventhesignificanceofAPRA'saction,wewillassess thevariousoptionsavailabletouswhileweseekurgentinformationfrombothIOOFand APRA,"saidAlexisGeorge,ANZ'sdeputychiefexecutive.  ButthefinalwordsshouldbeleftwithMangan,whomakessomethought‐provoking commentsabouttheindustry,thebehavioursandthetypeofpeopleitattracts."Ifcheats areallowedtoprosper,itforceseveryoneelseintoadownwardspiraltothebottom,"he said."Youcan'tsuccessfullycompeteagainstcheaterswhoarenotheldtoaccount.Itis mathematicallyimpossible."Mangansuspectsthefinanceindustryisdominatedby psychopathsandsociopaths."BythatImeanpeoplewhohavezeroempathyforanyonebut themselves.Ifyouhaveapathologicalinabilitytoseetheharmyouarecausing,a pathologicalinabilitytorelatetoyourvictimsasanythingbutmarks,you'renotgoingto changeyourbehaviourunlesssomeserioussanctionscanbebroughttobearonyou.”  ...