Regulator had accused executives of failing to act in best interests of members

A federal court judge has thrown out a bid by the prudential regulator to ban from the superannuation industry the former chief executive of IOOF Chris Kelaher and other executives of the embattled financial group.

In a move that will alarm regulators, Jayne Jagot also said she did not accept that reserves set aside by super funds to deal with operational risks were “member’s money”.

The Australian Prudential Regulation Authority filed federal court proceedings in December seeking to disqualify Kelaher, the former IOOF chairman George Venardos and three other executives after a disastrous showing by the company at last year’s banking royal commission.

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Apra accused the executives of breaching superannuation law by failing to act in the best interests of retirement savers in relation to five superannuation funds run by IOOF. It also accused IOOF subsidiaries of breaches.

But Jagot threw out all the allegations and slammed Apra’s case, saying the regulator had not “realistically confronted the need for reliable evidence” of the breaches and Apra’s theory that IOOF was driven by a desire for profits in the way it dealt with them was “tenuous in the extreme”.

Her judgment is a major blow for Apra, which had never before taken legal action to disqualify superannuation executives to court – something that earned it criticism during the royal commission hearings.

In a move that will have consequences for the entire industry, Jagot also gave the green light for super fund operators to compensate retirement savers for errors made by the company by dipping into super fund reserves that are set aside to cover operational risks.

She said it was an Apra “construct” that super trustees should try to recover losses from whoever caused them before using the reserve money. “I do not accept the construct as a matter of principle,” she said.

She did not accept Apra’s proposition the reserves were “members’ money”, she said.

“This undermines a large swathe of APRA’s case, founded as it is on the impropriety of the respondents’ conduct in proposing the use of or using the [reserve] to reimburse members for certain losses,” she said.

She said the case against Apra’s main targets, Kelaher and Venardos, “fails at each step on the question of proof”.

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During the royal commission hearings Kelaher was confronted with evidence of minimal record keeping at IOOF, including handwritten board minutes. And during the court case, Apra relied on the failure of IOOF’s various boards to record conflicts of interest to support its case that the company had failed to properly deal with any such conflicts.

But Jagot said the minutes were “not required to record everything that was said”.

Venardos said he welcomed the ruling and would comment further “once the judgment has been reviewed in detail”.

His solicitor, Tim L’Estrange of Jones Day, said the decision was “consistent with the view that directors have an oversight role and can in appropriate circumstances continue to rely on the information and advice provided to them by management”.

Kelaher has been contacted for comment.

Apra deputy chair Helen Rowell said the regulator was disappointed by the decision but still believed the action was “an important case to pursue given the nature, seriousness and number of potential contraventions APRA had identified with IOOF”.

“Apra has seen significant improvement in the level of cooperation from IOOF since this case was launched,” she said.

IOOF told the stock exchange it was “reviewing the written judgment in detail and expects to issue a further announcement in due course”.