That AMP Limited faces a number of challenges in the wake of the issues raised by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is not news. What is news is how the company intends to ensure its survival.
AMP last month announced the sale of its so-called “wealth protection and mature businesses” for which read its struggling life insurance platform with the buyer being Resolution Life in a transaction which, while not garnering as much as some shareholders believed it should, had the virtue of enabling the company to rid itself of myriad legacy issues.
Just why the AMP board chose the Resolution Life transaction over other options was explained in great detail a week later in an update filed with the Australian Securities Exchange (ASX) within which the company explained why retaining or floating the businesses was not an option given the level of risk involved and the amount of capital required.
AMP said that the sale represented the preferred alternative considering costs, future capital requirements and potential risk and the manner in which it enabled the release of capital and certainty of proceeds.
However, while the board of AMP was mulling over the sale of the insurance business and, indeed, the float of its New Zealand wealth operations, the company’s executives were seeking to maintain control of another significant liability – the company’s buyer of last resort (BOLR) exposure in the face of looming, likely adverse findings from the Royal Commission.
What AMP advisers have told Money Management and what has been obliquely confirmed by the company is that AMP has been studiously exercising its right to weigh the compliance records of advisers against the ultimate value of their BOLR payments. Affected advisers have suggested that it has become common for this to result in pay-outs being reduced by as much as 25 per cent.
Given the nature of the BOLR arrangements and the manner in which they attach to AMP’s long tradition of buying and then selling books of clients to relatively new advisers, some of whom took out loans to purchase those books, it is little wonder that anxious advisers have seen fit to consult their lawyers.
When the Future of Financial Advice (FoFA) legislation came into effect in 2013 outlawing trailing commissions on all new business, the writing should have been on the wall for the sale of books of clients and therefore BOLR arrangements but, as the Royal Commission heard, AMP sought to maintain the grandfathered status of many client relationships and therefore the value of its books.
That was a commercial strategy which has arguably back-fired on the company.
It remains to be seen what Commissioner Kenneth Hayne recommends with respect to grandfathered commissions and how this will impact commercial relationships between institutions and their advisers, but whatever strategy AMP intends to pursue to ensure its survival in the wealth management space will need to be premised on an ever-diminishing quantum of trailing commissions and life without BOLR.