Australian regulator loses landmark pension fund court battle

By Paulina Duran and Byron Kaye

SYDNEY (Reuters) - Australia's banking watchdog lost a landmark case on Friday after a court ruled it had not proved its case alleging wealth manager IOOF Holdings had breached pension laws.

The dismissal of the case, which sent IOOF's shares soaring by 8%, was the second setback in as many months for regulators looking to clamp down on misconduct in the financial sector.

Federal Court judge Jayne Jagot said the Australian Prudential (LON:PRU) Regulation Authority (APRA) had failed to demonstrate its allegation that top IOOF Holdings officials breached pension laws by using reserve funds to make up for investment losses.

"I have found APRA's approach unpersuasive," Jagot said. "The underlying facts have not been proved."

APRA said it was "disappointed" by the decision. IOOF said it welcomed the ruling, adding it would review the 307-page judgment in detail before commenting further.

The ruling is the first in a case that originated directly from last year's powerful Royal Commission inquiry into the financial sector, which uncovered widespread misconduct at the expense of consumers.

It also underscores a disconnect between intense political pressure for regulators to ramp up their financial sector enforcement and a legal system still bound by rules of evidence.

"This case examined a range of legal questions relating to superannuation law and regulation that had not previously been tested in court," APRA Deputy Chair Helen Rowell said.

"Litigation outcomes are inherently unpredictable, however, APRA remains prepared to launch court action – where appropriate – when entities breach the law or fail to act in an open and cooperative manner."

Just last month, the Federal Court rejected a case by the securities regulator, the Australian Securities and Investments Commission (ASIC), against Westpac Banking Corp alleging the No. 2 bank approved mortgages without adequate credit checks.

Since the retired judge presiding over the Royal Commission lashed regulators earlier this year for being too soft on the sector, both watchdogs have given public statements promising to take a more hardline approach to enforcement.

UNPRECEDENTED CASE

APRA had sought to use the Federal Court action to disqualify five IOOF executives for failing to act in their customers' interests, an unprecedented move in Australia.

The regulator accused IOOF of using money belonging to pension fund customers to compensate them for losses caused by the company and said it had been working with the company to resolve concerns about unaddressed conflicts of interest since 2015.

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Both IOOF's managing director Christopher Kelaher and chairman George Venardos stepped aside to fight the court case.

Although Jagot dismissed the regulator's claims of wrongdoing, she put off making a formal decision about whether to disqualify the IOOF directors to a later date. She ordered APRA pay the wealth manager's legal costs.

"The inescapable fact is that APRA's case fails at each step on the question of proof. It is not possible to conclude that in acting as he did Mr Kelaher contravened any of his director's covenants," Jagot said.

IOOF's shares jumped as much as 8.1% to A$6 ($4.07) following the news, their highest since early May.

"It's been a costly exercise for APRA," said Andrew Grant, a senior lecturer at The University of Sydney Business School. "(Regulators) are taking a few shots and the punches aren't really landing."

($1 = 1.4728 Australian dollars)