Friday’s “blow-torch” royal commission hearings could result in vertically integrated firms like IOOF being dismantled by the regulator, says Morningstar.
On Friday (10 August), the royal commission learned that IOOF put its own interests ahead of 29,000 of its superannuation members earlier this year when it decided to make fee reductions voluntary rather than automatic.
The revelations come at a difficult time for IOOF and cast doubt over the future of financial advice as the big banks look to offload their wealth divisions. IOOF is in the process of acquiring ANZ Wealth, which includes the bank’s OnePath business and aligned dealer groups.
“Australia’s wealth industry is poised for change after revelations of misconduct at the 2018 financial services royal commission,” Morningstar analyst Chanaka Gunasekera said.
“We expect that vertically integrated businesses like IOOF will be more proactively regulated by ASIC, incur higher compliance costs, and may find it harder to attract funds and advisers.
“If regulators ultimately require the dismantling of vertically integrated models, this would be even more damaging.”
The analyst noted that “the potential for a breakup has increased” following the IOOF’s appearance at the Hayne royal commission, although Morningstar does not think this will be the most likely outcome.
A ‘weak’ performance, but no AMP
While IOOF’s general manager of distribution, Mark Oliver, did not admit that the group had breached its trustee’s best interest duty, Morningstar believes the commission hearings revealed that this may have occurred.
Counsel assisting Michael Hodge, Mr Oliver and IOOF chief executive Chris Kelaher at Friday’s hearings.
Chief among Mr Hodge’s concerns was an issue raised by APRA about the dual role played by IOOF’s trustee, IIML, which acts as both the responsible entity and the registrable superannuation entity for IOOF’s super products.
APRA has repeatedly recommended that the dual roles of IIML be separated in order to reduce the likelihood of conflicts of interest.
“The royal commission put IOOF under the blow-torch at the end of last week, and while there wasn’t the same level of fallout as after AMP’s appearance a few months ago, we still believe it was a weak performance,” Morningstar’s Mr Gunasekera said.
The analyst does not believe IOOF’s position is sustainable or passes what Mr Kelaher calls the “pub test”, which, in his view, means acting within community expectations.
“We think community expectations would require IOOF to compensate members out of their own funds and not use the trust’s assets, which is what we expect will be the royal commission’s position.”
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