RCD.0001.0017.0002

Level 6, 161 Collins Street GPO Box 264 VIC 3000 Melbourne VIC 3001 Phone 13 13 69

29 January 2018

The Commissioner Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry

Email: [email protected]

Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry

IOOF Holdings Limited acknowledges receipt of your letter dated 15 December 2017 and accepts your invitation to provide responses to the questions contained in your letter.

IOOF Holdings Limited responds on its own behalf and on behalf of all of its associated entities (IOOF). Through these entities, IOOF provides a range of wealth management services, including:

 financial advice and distribution services;  platform management and administration;  investment management; and  trustee services.

Question One

Excluding cases of theft from the entity itself, or from an associated entity, has the entity identified any misconduct by the entity (including by its directors, officers or employees, or by anyone otherwise acting on its behalf) which occurred at any time since 1 January 2008?

Yes.

If so, what is the nature, extent and effect of that misconduct?

Please refer to Annexure A for details of the conduct which IOOF considers may constitute misconduct, or conduct falling below community standards, occurring at any time since 1 January 2008 which it has identified in the course of responding to the Commission’s request.

IOOF Holdings Limited ABN 49 100 103 722 www.ioof.com.au 1 RCD.0001.0017.0003

Question Two

Has the entity identified any conduct, practice, behaviour or business activity it has engaged in (including by its directors, officers or employees, or by anyone otherwise acting on its behalf) since 1 January 2008, which it considers has fallen below community standards and expectations?

If so, what is the nature, extent and effect of that conduct, practice, behaviours or activity?

Please refer the response to Question 1.

Further, in 2015, Fairfax media outlets reported allegations of misconduct by IOOF between 2009 and 2014. The principal allegations related to instances of “front running” and insider trading alleged to have been engaged in by Peter Hilton, who was then IOOF’s Head of Research. The allegations had been investigated and addressed by IOOF prior to the Fairfax media coverage.

IOOF does not believe that any of the conduct the subject of the Fairfax media articles constituted misconduct. IOOF does acknowledge that some aspects of this conduct may be considered to have fallen below community standards and expectations.

Following the publication of the Fairfax articles, these allegations were the subject of an ASIC inquiry. A ‘class action’ related court proceeding was also commenced in the Supreme Court of in 2015. A second ‘class action’ related court proceeding was also commenced in the Federal Court of in 2017. This second proceeding remains on foot.

Please refer to Annexure B for further information about this matter.

Question Three

If yes to either or both of question one and two: a. Is the identified conduct, practice, behaviour or activity the subject of another inquiry or investigation, or a criminal or civil proceeding?

Yes.

Please refer to Annexure A for details of these inquiries, investigations and/or criminal or civil proceedings. b. Does the entity attribute any of the identified conduct, practice, behaviour or activity to the particular culture or governance practices of the entity? If so, describe that culture or governance practice.

Yes, to some extent, some of the conduct identified in this response was attributed to the culture existing at the time within the relevant business unit of IOOF or the company more broadly.

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c. Does the entity attribute any of the identified conduct, practices, behaviour or activity results to some broader cultural or governance practices in the industry or sector of the industry in which the entity operates? If so, describe those culture or governance practices.

No. d. Does the entity consider that the identified conduct, practices, behaviour or activity results from other practices (including risk management, recruitment or remuneration practices)? If so, describe those practices.

Yes, in some respects.

Please refer to Annexure A.

IOOF also considers that the need for improvements in the following policies and practices contributed, to some extent, to one or more of the identified conduct, practices, behaviour:

 its compliance framework (including policies and procedures for minimising and identifying compliance breaches);  its compliance training;  its breach reporting policy and procedures and the control environment within IOOF’s Research team;  its recruitment practices, especially adviser ‘on-boarding’ and training of new employees; and  its KPI setting and remuneration practices. e. What steps has the entity taken to:

i. Remedy the consequences for consumers or other businesses of the identified conduct, practices, behaviour or activity;

Please refer to Annexure A.

ii. Prevent recurrence of conduct, practice, behaviour or activity of the kind identified?

Please refer to Annexure A.

In the last two to three years, IOOF has also taken a range of other measures to improve and enhance its overall compliance framework (please refer to Annexure C). IOOF anticipates that these measures will assist in preventing a recurrence of the matters referred to in Questions 1 and 2 above.

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Question Four

For an entity that is, or has a connection (other than an incidental connection) to, an RSE licensee of a registrable superannuation entity (as defined in the Superannuation Industry (Supervision) Act 1993 (Cth)):

a. During each of the past ten years (according to whatever annual reporting periods the entity has employed in the ordinary course of its operations) to what uses and in what amount has the entity applied members’ funds other than the investment of those funds, the administration of the superannuation fund and the payment of member benefits?

Other than the various IOOF Superannuation Fund Reserves described in the publicly available annual reports of the trustee of The IOOF Portfolio Service Superannuation Fund, The Portfolio Service Retirement Fund and the Lifetrack Superannuation Fund, members’ funds have not been applied other than as described above. (We note that the Lifetrack Superannuation Fund and The Portfolio Service Retirement Fund joined The IOOF Portfolio Service Superannuation Fund on 30 June 2010 and 18 June 2016 respectively.)

b. In respect of each kind of those other applications of members’ funds, why was that application in the best interests of members?

Not applicable.

c. What are the cost centre that make up costs attributed to administration in each of those years?

The following direct administration costs of each of the above funds are tracked separately to all other Group expenditure:

 Client & Process  Fund & Investment Accounting  Client Delivery  Product  Marketing  IT, including licenced software for the platform

Other matters

IOOF has prepared this response having regard to:

 the nature of the Commissioner’s questions (including the breadth and uncertainty in relation to the term ‘misconduct’ and the expression ‘community standards and expectations’, as used in the Terms of Reference);  the breadth of the subject matter potentially covered by the Commissioner’s questions;  the time period covered by the Commissioner’s questions; and  the time provided for preparing its response.

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It has also been necessary for IOOF to limit the scope of its consideration of and response to the Commissioner’s questions. For example, IOOF has not reviewed its HR files and records to identify potential ‘workplace related’ issues (such as allegations of unfair dismissals, harassment, discrimination and similar matters) even though it is possible that some of this sort of conduct might, at least on one view, fall within the broad definitions of ‘misconduct’ or conduct ‘falling below community standards and expectations’ used in the Terms of Reference.

Confidentiality

In around August 2017, ACA Lawyers announced that it was investigating a potential class action against IOOF. The proposed class action is said to relate to a failure by IOOF to disclose information related to “corporate misconduct” that IOOF is alleged to have engaged in from at least 2009. In November 2017, an application for preliminary discovery in relation to the proposed class action was commenced against IOOF in the Federal Court of Australia. The application seeks discovery of a range of documents relating to allegations of corporate misconduct within IOOF between January 2008 and June 2015. The application is listed to be heard before Justice Gleeson on 1 February 2018.

As indicated above, Annexures A and B to this letter set out further details of conduct which IOOF considers may constitute misconduct, or conduct falling below community standards, occurring at any time since 1 January 2008 which it has identified in the course of responding to the Commission’s request. The information set out in those annexures is confidential to IOOF and is also likely to overlap with the subject matter of the legal proceeding which has been commenced against IOOF, including the proposed class action. IOOF is therefore concerned that the disclosure of the information set out in Annexures A and B beyond the Commission may prejudice its rights in relation to the legal proceeding.

In those circumstances, IOOF respectfully requests that the Commission treats the information set out in Annexures A and B as confidential.

By its Managing Director

Christopher Kelaher IOOF Holdings Limited

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CONFIDENTIAL ANNEXURE

ANNEXUREA

Nature Extent Effect Cause Subject to inquiry Remediation Steps to prevent I or proceedings reoccurrence 1 Unclaimed Approximately Members' funds Human error - Yes, the ATO is Yes, the affected Refer Annexure A1 Superannuation 1,200 totalling $1M relevant currently custorners were for details. Monies superannuation we.re paid to the aecounts were considering this paid the estimate incorre.ctly paid client accounts A TO., rather than not coi:rectly issue. loss they incurred totheATO. have been paid invested on flagged. from not having totheATO in behalf of the their funds Refer to error over the member;s. This invested. AnnexureA1 period 2011- meant that the forfurther 2014 totalling relevant details and as around $1m. members lost illustrative of the benefit of the IOOF having· their approach to funds invested this conduct. durin,g the relevant period.

2 Unclaimed Isolated to $104,000 Error resulted No. Yes, the tax System changes were Superannuation 2013.. shortfall in from incorrect shortfall was paid implemented to Monies and withholding tax flag being to the ATO. ATO automate the Temporary paid to the ATO. chosen by the accepted IOOF application of the Resident No clients were insurance team disclosures and did rel.evant flag. payments affected. whiCh in tum not apply penalties. incorrectly caused incorrect reported to amount of

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CONFIDENTIAL ANNEXURE

Nature Extent Effect Cause Subject to inquiry Remediation Steps to prevent I or proceedings reoccurrence ATO as taxable PAYGto be inoome in Withheld. PAYG statements.

3 In 2013, funds 770 clients Clients did not Haman error - Breaeh of SIS Act Yes, funds IT system changes were paid to impacted. Total receive funds to incorrect was reported to returned and were implemented to closed.client of $788,751 which they were application of an APRA No ong0ing compensation of prevent payments to superannuation incorrectly entitled. integrity report. inquiJY or $120,000 paid to closed C!CCOUnts. accounts and paid. proceeding. impacted clients. not reallocated to open aceounts or returned to the payee.

4 Acivisers Dates back to Clients were Adviser error by No. Yes., $194,000 Additional adviser inadvertently 2013;five exposed to tax failing to be compensation paid training rolled out permitting clients penalties for across all of to impacted clients. clients to impacted. exceeding super clienfs affairs Ongoing monitoring exceed non- contribution cap. and super arrangements of concessional contribution adviser activities. superannuation sources. Also contribution caused by client caps by not fai[ing to update accurately adviser on recording all at client's

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CONFIDENTIAL ANNEXURE

Nature Extent Effect Cause Subject to inquiry Remediation Steps to prevent I or proceedings reoccurrence contribution super sources. centriPutions.

Refer to AnnexureA2 for specific examples.

5 An associate of Conduct Affected clients Fraudulent Yes, was subjectio Yes, $2.1M My Adviser AFSL an adviser occurred lost money that practice by ASIC investigation. compensation paid ceased operations practice between 2012 they invested in associate of an Enforceable te> impacted clients. effective 30 fraudulently and 2014. 19 bogus adviser practice. Undertakir1g September 2014. held My Adviser investments. ASIC alleged agreed between themselves out clients were My Adviser did My Adviser and Enhanced ar;id asa impacted. not meet ASIC. centralised adviser representative monitoring· and on-boarding of' My Adviser supervision Financial procedures have (a subsidiary of requirements Ombudsman been introduced. IOOF acquired under Service Systemic in 2012) and Corporations lssu.es Group also advised clients Act. conducted an to invest in investigation which certain has concluded. schemes. Separate proceedings (not involving My Adviser or IOOF) were instituted

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CONFIDENTIAL ANNEXURE

Nature Extent Effect Cause Subject to inquiry Remediation Steps to prevent I I or proceedings reoccurrence against the person who committed the fraud.

6 Advisers Approximately Clients were Advisers not ASIC has Yes, $50.,000 in Additional adviser charged service 10 clients charged for complying with commenced ad:- compensation paid training implemented fees to clients affected. some services their obligations hoc reviews of to affected clients without that were not individual advisers (usually in the form Ongoing monitoring services being provided. across the jndustry of a fee refund). arrangements of provided in full. (not limited to adviser activities. IOOF). .

7 Advisers failed Reportable Clients did not Advisers not IOOF has lod.Qed 9 Seven of the ten Cessation of licensing to provide issues receive SOAs or complying With breach notices with advisers have within IOOF-owned clients with a identified with djd not receive their obligations. ASIC. ceased to be AFS licences for: Statemernt of ten advisers them at the authorised within seven of these Advice (SOA) (including four required time. ASIC has any IOOF-<>wned advisers. when personal My Adviser commenced ad- AFS licence. advice was advisers). In hoc reviews of Additional adviser provided. some cases, individual advisers traihing implemented. conduct dates across tlie industry back to at least (not limited to Ongoing monitoring January 2008. IOOF). arrangements of adviser activities.

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CONFIDENTIAL ANNEXURE

Nature Extent Effect Cause Subject to inquiry Remediation Steps to prevent I I or proceedings reoccurrence 8 Advisers failed 21 reportable Clients did not Advisers not IOOF has lodged All affected clients Enhanced internal to provide, or issues receive complying with 21 breach notices were provided with procedures, including provided identified. complete and their obligations. with ASIC over the accurate FDSs for data review projects inaceurate, Fee accurate FDSs last three years. the relevant and employment of Disclosure within required periods. dedicated persormel Statements timeframes. ASIC has within some licences. (FD.S) to commenced ad­ cliehts. hoc reviews of Additional adviser indiv1dual ad;visers training implemented. Refer Annexure across the industry A3 for specific (not limited to examples. IOOF).

9 Adviser Isolated Clients agreed Adviser Yes, IOOF Yes, loans have IOOF revoked the solicited loans incident to make loans to breaching IOOF reported matter to been fully repaid to authorised from cfients in involving one their adviser. policy. ASIC when clients. representative status breach of IOOF adviser. The discovered in of the adviser internal adviser 2016. concerned. policies. solicited loans from five individual clients.

10 Adviser Isolated $30k Misconduct by Police report was Yes, all funds IOOF revoked the transferred incident in April misappropriated adviser. made aHhe time. recovered and authorised $30kfrom returned to clients. representative status clients' e~ernal

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CONFIDENTIAL ANNEXURE

Nature Extent Effect Cause Subject to inquiry Remediation Steps to prevent I I or proceedings reoccurrence cash account to 2.014 involving from cliel'lts' of the adviser his own one adviser. cash accounts. concerned. personal account.

11 Adviset used Isolated Clients' assets Adviser Notified to ASIC on Notified to ASIC on Adviser was client assets as incident in were misconduct. 11 April 2016. 11 April 2016. suspended during security for the March2016 inappropriately ASJC advised in investigation. IOOF advisers' involving one used as security. June 2016 that Clientsecurities revoked authorised personal adviser. matter was under were released. representative status margin loan. consideration. No of the adviser in April further information 2016. Refer Annexure received. A4 for further detail.

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CONFIDENTIAL ANNEXURE

ANNEXURE A1

Background

In December 2013, the ATO provided its final report on an audit of the 2011 lost member and unclaimed money data provided in respect of the IOOF Portfolio Service Superannuation Fund (IPS). The report identified that members who held multiple accounts within the fund were not being treated correctly in the fund’s lost member statements (LMS) and unclaimed superannuation monies statement (USM) reporting and payments.

The Master Member system was developed which ensured that USM were reported correctly from the June 2014 period onwards. IOOF completed a review of all members paid as USM to the ATO for the 31/12/2011, 30/6/2012 and 31/12/2012 reporting periods and using the Master member system identified where there was a corresponding active matched account within the same legal entity.

The unclaimed money list was provided to the ATO and on 28 April 2015 IOOF submitted amended USM files. There were 1,192 accounts paid in error over the period 2011-2014 totaling $1,024,499.16.

Compensation

The total amount of compensation payable by IOOF, calculated as monthly compound interest effective 31 May 2017, was $265,045.53.

IOOF then determined the following approach:

 Complete a Good Value Claim calculation to determine if members were disadvantaged;  Insurance review; and  Attempt member contact to ensure member was comfortable for us to apply USM amount to active matched account.

The number of investments held by the USM members, closure of the Master PST and introduction of MySuper provided challenges in determining a compensation method. We have settled on a simple method that can be applied to all members and are satisfied that this will cater for the majority. Should a member query our calculation and we determine that the member was disadvantaged we will apply an additional GVC amount for the difference.

We obtained an extract of assets that members held when the accounts were closed. For super fund accounts,

 we mapped to the applicable direct investment;  95% of members were invested in eight funds;  We reviewed the performance of those eight funds over three and five years and determined the weighted average return;  The majority of members were transferred to the ATO for the period ending 31 December 2012 which was paid 30 April 2013; and  We have applied a rate of 8% to calculate our GVC amount.

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CONFIDENTIAL ANNEXURE

Whilst some funds may have performed better during this period members have not been charged membership or administration fees which offsets any potential discrepancy.

We have performed several in depth compensation calculations including the higher value accounts and have found this method provides a favourable outcome for the member.

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CONFIDENTIAL ANNEXURE

ANNEXUREA2

Background

Examples of advisers inadvertently permitting clients to commit non-concessional cap breaches

Unit Name Date of Description IOOF Action Amount Paid Complaint

Bridges Financial Se.rvices Pty 2/10/13 Adviser from Bridges Port Macquarie identified Compensation paid to $30,000 Ltd that a client, had breached her non­ ·client concessional cap by just over $71,000. This resulted in excess tax of over $30,000 which may have to be borne by Bridges if the coAtribution was made und.er advice.

Bridges Financial Services Pty 15/12/14 Adviser advised client to make super Compensation paid to $41 ,850 Ltd con.tribution of $150k. Client had not informed client adviser that it had already made a $390k super contribution. The.further contribution of $150k caused the client to exceed non-coneessional super contributron cap. Client contacted adviser upon r.eceipt of A TO excess contribution letter.

Bridges Financial Services Pty 16/4/15 The adviser did not make inquiries to Compensation paid to $92,105. Ltd determine that the client had previously been client advised to make a non-concessional contribution by a former Bridges acMser. Adviser recommended a non-concessional super contribution that caused the client to incur excess contributions tax.

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CONFIDENTIAL ANNEXURE

ANNEXUREA3

Examples where advisers did not provide a FDS in a timely manner or issued an incorrect FDS

Unit Name Date reported to Details ASIC

Lonsdale FinanciaJ Group 30/5/17 An adviser provided FDSs to 196 clients in December 2016 which did not clearly distinguish between the services actually·provided and the services that the client was entitled to receive.

Bridges Financial Services 13/1 /17 For a Bridges Authorised Representative operating in Narellan NSW, it was identified for a number of FDSs provided to clients, that supporting records could not be lo~ted on the client files to swbstantial't~ the provision of ail services as disclosed in the FDSs as being 'Service Used'. Replacement FDSs were subsequently sent to the 52 impacted clients by tt:ie adviser.

Executive Wealth 4/11!16 For an EWMFS Authorised Representative operating in , WA, it was Management Financial identified that a number of Fee Disclosure Statements (FDSs) for existing clients Ser-vices had not been sent out within the required time frames.

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CONFIDENTIAL ANNEXURE

ANNEXURE A4

Corporate Practice X was a Authorised Representative of Lonsdale that provided financial advice via a Lonsdale Authorised Representative named Representative Y. Representative Y operated from his home office in Wishart, Queensland. His client base was predominantly made up of existing clients, however he continued to acquire a small number of new clients. Representative Y’s client files were stored on his office hard drive that was backed up weekly and taken offsite. However, he occasionally used XPlan software for creating advice documents.

On 30 March 2016, Lonsdale’s CEO received a notification from BT Financial Group that an authorised representative of Lonsdale (Representative Y) had a margin loan in his name and the assets guaranteeing this margin loan were those owned by his financial planning clients. This assumption was based on documentation BT received to request the transfer of these assets to Representative Y’s account.

The concerns raised were:

 Representative Y was holding assets for third parties who did not appear to be related to him.  Representative Y was borrowing against these assets.  From the documentation provided, BT believed Representative Y was the financial planner of the clients who owned these assets, securing his margin loan.

One of the third parties (a client of Representative Y) recently ‘loaned’ Representative Y’s margin loan account a large sum of money.

The principal issue raised by BT that Representative Y had used client’s securities for his Margin Lending account was substantiated.

The documents and information reviewed and interviews conducted by IOOF during the course of the examination indicate that Representative Y did transfer client’s investments as security against his personal margin loan account. No formal advice documents were given to any clients supporting this arrangement.

On 1 April 2016, Representative Y was interviewed by IOOF. During the interview Representative Y stated:

“he had used client securities against his margin loan and the purpose of the arrangement was to stop margin calls”

“the loan amount is about $215k - $220k”

“he was ‘chasing tail’ from a previous business and working hard to catch up”

“he was going to pay back (the client) by 30 June 2016 and (the second client) in two years”

“he did not give clients any written documentation to explain why their assets were transferred to his personal margin lending account. The only documents completed by clients was the BT application forms”

“all explanations of these transactions were verbal to clients”

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CONFIDENTIAL ANNEXURE

On 4 April 2016, Representative Y forwarded an email to the IOOF Head of Investigations explaining that “he had a gambling problem and the temptation to withdraw funds against is obvious”.

The concerns raised resulted in immediate action from the Licensee:

 Immediate suspension of Representative Y on 1 April 2016 pending the outcome of an investigation.  Retrieval of all soft copy documentation / information from Representative Y’s hard drive (at his home residence).  Compliance and Professional Standards review of ‘other’ client soft copy files.  Request BT Margin Lending to suspend all activity on Representative Y’s Margin Lending Account.  Request BT to quarantine the $45k redeemed from MAN OM-IP Eclipse and not to pay into Representative Y’s Margin Loan account.  Request Best Advice to review XPlan accounts, in particular, the Macquarie CMT for (the second client) to ensure dividends from equities have been paid.  Request IOOF Licensee Revenue team to stop all payments to Representative Y .  Review the Tri Partite arrangement with Macquarie Bank (Loan to establish Representative Y Financial Planning – Macquarie / Lonsdale / Representative Y).  Termination of Representative Y on 5 April 2016.  Notification to ASIC on 11 April 2016.

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CONFIDENTIAL ANNEXURE

ANNEXURE B

In June 2015, a number of articles appeared in Fairfax publications concerning IOOF’s Research team.

The Fairfax publications referred to allegations that improper conduct had occurred within IOOF’s Research team. The allegations were reported to have been made by a former research analyst in the research division (Employee A). The articles referred to a large volume of confidential documents belonging to IOOF which had been stolen and provided to Fairfax. Many of these documents also were, and continue to be, subject to a claim of legal professional privilege.

The main allegations which were reported in the Fairfax publications were:

1. one alleged instance of short-selling by an IOOF employee in 2009;

2. one alleged instance of insider trading by an IOOF employee in 2009;

3. an allegation that IOOF’s then Head of Research (Peter Hilton) had engaged in “front running” by making various trades over a number of years through his wife’s trading account in relation to equities that were the subject of research reports disseminated by the IOOF Research Division;

4. an allegation that on two occasions in 2009 Mr Hilton had allocated shares in an IPO/share placement to his wife or other IOOF staff in preference to clients;

5. an allegation that IOOF had plagiarised research reports;

6. an allegation that IOOF had misrepresented the performance of an equities model;

7. an allegation that Mr Hilton had asked junior colleagues in the Research team to complete training modules on his behalf; and

Each of the allegations referred to in the Fairfax publications had been investigated and dealt with by IOOF some years previously.

The table below summarises the actions that were taken by IOOF in relation to the allegations. We note that the investigation of the allegations by IOOF was undertaken for the dominant purpose of IOOF’s general Counsel providing legal advice to IOOF. IOOF claims legal professional privilege in the communications and documents created in the course of that investigation. In providing the information sought by the Commission in this paper, IOOF does not intend to waive privilege in those communications and documents.

As set out below, many of the allegations reported in the Fairfax media, including serious allegations of insider trading and front running lacked any proper foundation. IOOF does not believe that any of the conduct the subject of the Fairfax media articles constituted misconduct. However, IOOF acknowledges that some aspects of the conduct referred to below may be considered to have fallen below community standards and expectations.

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CONFIDENTIAL ANNEXURE

Allegation Outcome/ Action

Short-selling The allegatfon was unfounded; no short-selling had taken place. The relevant employee had sought to sell shares in the mistaken belief that he was the beneficial owner of the shares the subject of the trade. The issue was picked up prior to the tra.nsaction taking place, the transaction did not proceed, and no short-selling therefore occurred. However, the employee had not obtained "sign-off" for the proposed transaction in accordance with IOOF's employee share trading ·policy. This was brought to the attention of Mr Hilton and the relevant employee. IOOF subsequently made changes to strengthen its employee share trading policy and clarify the sign-.off procedures. No IOOF clients were affected.

2 Insider trading On on·e occasion in March 2009, an IOOF funds accounting manager (Employee B) placed a trade in shares of a company called ETC. At the time, the Manifest Fund (which was a fund managed by IOOF through its subsidiary, Questor Financial Services) held shares in ETC. As part ef his funds accountin_g role, Employee B was involved in internal discussions relating to Questor's plan to close the Manifest Fund. Employee B did not engage in insider trading as the information regarding the Manifest Fund was not price-sensitive information. However, Employee B breached IOOF's staff trading and Chi'nese Walls policy by failing to give prior notification and get aj!lproval for the trade in ETC.

Employee B was issued a formal warning, was required to provide IOOF with a register of all of his interests and was required to have alJ future trades approved by his manager. Employee B was al.so required to undertake further training on IOOF's Chinese walls and employee trading policies. Employee B volunteered to donate the profits ($1 ,850) he made from the ETC tr:ade to charity - which he subsequent)y did.

.3 Front running by Mr Hilton The allegation was that Mr Hilton had engaged in "front running" by placing personal trades through his wife's share-trading account in advance of IOOF issuing research reports.

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CONFIDENTIAL ANNEXURE

Allegation Outcome/Action

Front running is a form of insider trading which involves trading on advance price-sensitive information (such as price-sensitive research reports) immediately before that information is disclosed to the market.

IOOF reviewed Mr Hilton ahd his wife's personal share trading his~ory dating back to 1998. No instances of front running/insider trading occurred. Mr Hilton was nevertheless reprimanded and issued a formal warning for breaching IOOF's staff trading policy by failing to disclose the trading activity to IOOF and for trading in securities during staff trading embargo periods. IOOF also implemented changes to its staff trading policy, including by extending the trading embargo period from 2 days following publication of a research report to 10 days.

The issue re-emerged in late 2014 when Employee A alleged that Mr Hilton had engaged in a,round 50 instances of front running/insider trading between 1998 and 2009. Again, no instances of front running/insider trading occurred as Mr Hilton did not trade while in _possession of price-sensitive informati'on. Moreover, a large number of the alleged instances of front running/insider trading were totally baseless because the relevant trading activity in fact occurred several weeks or even months before or after a_research report was issued.

The allegations of front running/insider trading by Mr Hilton were arso investigated by ASIC in 2015/16. ASIC found no instances of insider trading and took no further action in relation to the allegations_

4 Share allocation IOOF had a policy ("placement policy") which allowed staff who are also subscribers to certain IOOF investment products to participate in IPOs and other capital raisings; provided such particip_ation was equitable between staff and was not detrimental to IOOF clients. The policy imposed limits on the percentage of shares/units that may be allocated to IOOF staff.

There were two instances IOOF looked at in 2009 where Mr Hiltol"!_ had allocated shares in a

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CONFIDENTIAL ANNEXURE

Allegation Outcome/Action

capital raising either to himself or his wife, or had approved allocations to IOOF staff. The first instance invalved.an ·allocatlon to Mr Hilton's wife of $100,000 of shares in an IPO for Platinum Asset Management. The allocation of shares was not made in preference to or prejudice IOOF clients, was not inequitable as between staff and did not breach IOOF's placement policy.

The second instance involved a case where Mr Hilton and various IOOF staff (Who were also customers of IOOF's "Portfolio Service" product) had applied for a total of 11 ,000 units in a capital raising for ING Office Fund. The staff (excluding Mr Hilton) were subsequently permitted to cancel their request when the IOF share price dropped, and their original allocation was re-allocated to an IOOF managed fund (Questor,) which was managed by Mr Hilton. The initial allocatkm of shares to staff was within the limits set out in the placement poficy, and was not inequitable to staff er prejudicial to IOOF clients. The re-allocation of shares to the Qµestor fund was discussed with and approved by Mr Hifton's manager at the time, who had judged that it was in the best interests of the fund to take up the additional shares.

IOOF sobsequently reviewec:I and updated tbe procedures set out in the placement policy. IOOF also replaced Mr Hilton as .the fund ma.nager for Questor. This was to address a potenttal conflict of interest between Mr Hilton's role as Questor fund manager and his role as the head of research. That potential conflict was an issue Mr Hilton had himself previously raised.

5 Plagiarised research reports In 2014, allegations were made of plagiarism in IOOF research reports and that Mr Hilton was not properly citing information in presentations. The plagiarism allegations related to the use of information from JP Morgan in research reports issued by IOOF under its own brands.

IOOF had contractual arrangements in place which permitted IOOF to use JP Morgan research as a basis for producing its own research reports. However, IOOF did not cite or

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CONFIDENTIAL ANNEXURE

Allegation Outcome/Action

attribute the parts of its reports which ineluded JP Morgan research. There were also instances where Mr Hilton had included extracts of information in a presentation he had given where the source of the information was not cited.

Following the investigation, IOOF established a plagiarism policy which it required each research employee to sign and accept. IOOF also entered into a new agreement with JP Morgan to ensure compliance with applicable ASIC regulatory guides and clarify the research­ sharing obligations. Finally, IOOF's legal team undertook a compliance review of IOOF's research reports against applicable ASIC regulatory guides.

6 Mrsrepresentation of equities Until mid-2014, the IOOF Research team model performance published a quarterly report detailing the performance of a "model portfolio" known as the "IOOF Advice Equities Moder (Equities Model). The model was a purely hypothetical portfolio of listed securities and managed fi.mds. and did not reflect the actual perfonnance of any of IOOF's managed funds or investment products.

Each financial year, a hyp6thetical $10,000 was Invested in each stock in the model portfolio. The quarterly report included a calculation of the extent to which the model portfolio hacl outp.e.rfonned tbe ASX 300 Accumulation Index over the same periocj. The Equities Model reports were one of a m.1mber of reports published by the research division to financial planners as a general information resource to assist them in giving financial adviee to clients.

In around March 2014, an employee (Employee C) made a complaint about Mr Hilton to IOOF's HR division. As part of tbe complaint, Employee B alleged that there was an error in the method used to calculate the performance of the Equities Model.

IOOF responded to the allegation by investigating .(a} whether there were any errors in the catculation methodology of the Equities Model and (o) what was the purpose of the Equities Model and how was. it bein9, used by

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CONFIDENTIAL ANNEXURE

Allegation Outcome/ Action

the research team and finaneial planners. IOOP detennined that: there may have been errors in some of the assumptiens underlying the methodology for the Equitles Model; the Equities Model was purely hypothetical and did not affect the.performance of any of IOOF's actual managed funds or: investment products; and the Equities Model reports had littJ.e 1,.1tifity as they were not being used extensively by financial planners. On that basis, IOOF decided to stop publishing the Equities Model reports in around mid-2014.

7 Asking junior empl0yees to The allegation was made as part of Employee complete trainiflg modules C's HR complaint in 2014. Mr Hilton admitted to having shared his IT password and asked junior colleagues to complete some training modules on his behalf. Mr Hilton was removed from Flis Responsible Manager duties, was given a formal w arn ing and was required to re-sit the training modules.

Following the publication of the Fairfax articles, AS IC commenced an inquiry into IOOF in relation to the allegations reported by Fairfax. In July 2016, ASIC announced that it had finalised its inquiries. ASIC did not identify any instances of insider trading or other misconduct or criminal behaviour by IOOF or IOOF staff. ASIC's review identified some concerns relating to IOOF's compliance arrangements, breach reporting, management of conflicts of interest; staff trading policy, disclosure, whistleblower management and cyber security. IOOF promptly completed actions to address these concerns, to ASIC's satisfaction.

In October 2015, Maurice Blackburn announced publicly that it was investigating a class action against IOOF in relation to the allegations of misconduct reported by Fairfax. IOOF subsequently obtained orders from the Supreme Court of Victoria restraining Maurice Blackburn from instituting the proposed class action and from making any further use of confidential and privileged documents that Maurice Blackbum had obtained from Employee A However, another class action law firm, ACA Lawyers, recently announced that it was investigating a potential class action against IOOF in relation to the allegations reported by Fairfax. On 18 October 2017, ACA Lawyers (on behalf of one of its clients) commenced a proceeding against IOOF in the Federal Court of Australia seeking preliminary discovery of documents related to the proposed class action. The application is listed to be heard before Justice Gleeson on 1 February 2018.

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Annexure C

IOOF has taken a range of measures to improve and enhance its overall compliance framework over the last two to three years, including the following:

 Introduced a range of enhanced policies and procedures (including a new Breach and Incident Reporting Manual, a new Rectification and Compensation Policy and a new procedure for reviewing and ‘spot checking’ incidents).

 Reviewed and amended where necessary the obligations in employee position descriptions to include additional risk and compliance competencies.

 Introduced an online compliance obligations register which requires staff to provide a positive assurance that they have met their compliance obligations. This system covers a range of business units and regulatory obligations, including AFSL, ACL and trustee obligations. The system provides a full audit trail with trend analysis.

 Introduced new KPIs requiring staff to meet ‘gatekeeper’ risk and compliance KPIs in order to meet minimum performance competency.

 Restructured its Research team and enhanced its compliance framework (including by updating the research division’s Securities Trading Register, improving IOOF’s staff share trading policies, and upgrading its Chinese walls and physical segregation controls)

 Expanded the group-wide compliance training program for existing and new staff, which is designed to both educate and encourage staff about the importance of engendering a good compliance culture across the IOOF group

 Engaged Governance leaders working with IOOF senior management to establish a “baseline” desired state for IOOF risk and compliance culture and staff surveys to establish this baseline assessment and identify gaps against desired state and benchmarks.

 Engaged an external compliance consultant to conduct a review of its compliance arrangements within all IOOF business units.

 Implemented a new on-boarding process for new advisers, including verification of information and documents, analysis of regulatory action and background checks (including complaints), induction training, initial supervision and review by IOOF’s Compliance and Professional Standards team.

 Introduced a new way of addressing client demand through a Client First strategy, by adapting and redesigning processes and systems to better respond to client needs.

 Introduced a group-wide purpose to improve the IOOF culture, being “Understand Me, Look After Me, Secure My Future”, along with associated strategic objectives and redefined values and behaviours.

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