AMP has lost a pivotal class action case in Australia that could cost the group $100 million or more in settlements with financial advisers over disputed practice buy-out prices.
In a judgment handed down in the Australian Federal Court, Justice Moshinsky found in favour of two representative AMP financial advice businesses, Equity Financial Planners and Wealthstone, awarding the groups over A$813,000 and A$115,000, respectively, in damages.
Moshinsky ruled AMP had failed to justify its unilateral decision in 2019 to almost halve practice valuation metrics under the controversial buyer-of-last-resort (BOLR) system.
Under the reign of former chief executive, Francesco De Ferrari, AMP chopped the BOLR multiple from 4-times recurring revenue to 2.5-times (excluding grandfathered commissions) in August 2019, citing economic and legislative triggers that were laid in buy-out contract terms. Grandfathered commissions – or those ongoing investment product payments contracted prior to a ban on the practice in 2013 – were valued at about 1-times in the AMP BOLR agreements, later fading out to zero after the Australian government ended the grandfathering carve-out early in 2021.
However, the ruling says AMP did not prove there were adequate ‘legislation or economic changes’ to force through the BOLR price cuts. Moshinsky also found AMP had failed to properly consult with the AMP adviser body on the proposed BOLR changes, as required under a previous agreement.
While the damages pay-outs only relate to Equity Partners and Wealthstone, the legal win leaves AMP at risk of similar claims from perhaps 100 or more advice businesses caught short by the BOLR about-face.
“I was informed by AMPFP that approximately 135 group members have signed buy-back agreements with AMPFP,” Moshinsky says in the judgment. “About 120 of those agreements contain releases, but they are not all in the same form.”
But the ruling has cast a doubt on the validity of release statements signed by advisers, waiving future legal claims against AMP as part of BOLR settlements.
WealthStone, which had inked a release with AMP to access BOLR money “is entitled to an order declaring the release void to the extent that it would preclude its claims in this proceeding”, Moshinsky says.
The AMP share price plummeted about 9 per cent in the wake of the ruling to close at about A$1.04.
In a statement to the ASX, AMP said: “Subject to any appeal, a process will be required to determine the impact of the decision on other group members [in the class action].
“Noting the complexity of the matter, AMP is reviewing the judgement in detail to determine the full effect of the judgment and its next steps.”
Aside from the immediate legal and financial consequences, the Moshinsky ruling showcases AMP’s desperate scramble to limit BOLR pay-outs as advisers rushed for the exit following the 2018/19 Hayne Royal Commission into financial services.
Internal AMP documents filed for the case show the group had a total BOLR liability of about A$1.2 billion across about 800 advice businesses prior to the Royal Commission.
“Propensity modelling indicates that >700 practices may seek to exit within 1-3 years at an aggregate transaction value of $900m (incl. 175 already exiting),” one AMP internal memo says. “Since the Hayne Report was published, 45 practices ($70m value) have submitted their exit notice.
“… Under the current circumstances and following the Royal Commission, AMP it is no longer reasonable or economically feasible for AMP to play this role and absorb the majority of the financial impact. Many practices will be disappointed and angry that AMP is not protecting their downside capital risk.”
The AMP communications also acknowledge the BOLR multiple cuts would cause financial and mental health stress to some advisers. Most advisers in the AMP network borrowed from the AMP Bank to help fund business purchases, leaving many facing financial distress post the BOLR downgrade.
An AMP executive giving evidence admitted that “if the multiple were changed to 2.5x (and the glide path were adopted for grandfathered commission revenue), 73% of practices by number would experience a reduction in the value of their register rights of more than 50%”, Moshinsky says in the ruling.
AMP reset the BOLR terms in 2014 as a flat 4-times recurring revenue to meet new financial advice laws passed at the time. Previously, AMP advice businesses received a higher BOLR valuation for using in-house investment and insurance products. Historically, AMP also offered BOLR terms to NZ financial advisers.