The validity of AMP’s move last year to reduce valuation metrics underpinning its buyer of last resort (BoLR) agreements from four times annual revenue to 2.5 times will be raised in a parliamentary committee in mid-July by Labor senator for NSW, Deborah O’Neill (pictured).
O’Neill, who is on the Education and Employment, Community Affairs and Corporations and Financial Services committees, noted the Australian Small Business and Family Enterprise Ombudsman has received “over a hundred complaints” since AMP’s CEO Francisco De Ferrari announced the change as part of the company’s plan to ‘reshape advice’ in August last year.
“This decision has drastically devalued the businesses of many financial advisers. This was also applied retroactively to many planners who had purchased client books in good faith ahead of this guarantee,” O’Neill stated in a letter to ASIC chairman James Shipton, who is expected to participate in the parliamentary committee hearing scheduled for July 15. The letter asked Shipton to “immediately commence” an investigation into the matter.
An ASIC spokesperson declined to comment on the request.
The parliamentary committee nominated by O’Neill to raise the issue of AMP’s BoLR agreements is responsible for monitoring and reviewing activities of ASIC and the operation of the corporations legislation. Its members include the Liberal Party’s James Paterson, Andrew Bragg, Jason Falinski, Celia Hammond and Bert van Manen, the Labor Party’s Patrick Gorman, O’Neill, Louise Pratt, and the Greens’ Peter Whish-Wilson.
In the last Oversight of ASIC parliamentary committee hearing in September, the group discussed prioritisation of Hayne’s royal commission recommendations, litigation instigated by ASIC since the Hayne royal commission, responsible lending guidelines and potential unintended consequences of structural change.
O’Neill said AMP Financial Planning issued Notices of Termination to an estimated 250 advisers assessed to be of ‘lower profitability’, “forcing many to sell their businesses for less than one tenth of what they were worth before these changes,” the letter to Shipton outlined.
Professional Planner’s own analysis has found that some 640 authorised representatives have exited AMP’s aligned advice businesses – AMP FP, Hilross and Charter Financial Planning – since the start of last year. Only some of these advisers are likely to have drawn on the buyer of last resort arrangement.
Ninety-eight million dollars was paid for executed buy-back arrangements during the 12 months to the end of December 2019, according to AMP’s financial disclosure. These disclosures indicate there is a further $228 million of buy-back arrangements in the pipeline expected to be invoked during the current calendar year.
The value of the buyback arrangements in the pipeline this year could represent the client books of approximately 330 advisers – this is an estimate based on average client book sizes and recurring revenue calculations and is not official guidance.
AMP’s BoLR agreements are defined as contractual arrangements with financial advice businesses in the AMP advice network to purchase client registers at agreed value subject to certain conditions being met and understood to be funded by the group’s own lender. Advice businesses must register their intention to invoke buy-back arrangements, which have six to 18-month lead times and are subject to audit prior to finalising the purchase price, AMP outlines in its own disclosures.
Out of step
Commissioner Kenneth Hayne questioned the intention and validity of BoLR arrangements in his final report, saying these arrangements not only facilitate but actively encourage the treatment of client books as a trade-able asset to be valued as a multiple of annual income earned.
Advisers often had more customers on their books than they could monitor and advise annually, Hayne noted in his final report. He also pointed out that advisers with excess clients often acquire or inherit those clients from some other advisers which is a feature of the BoLR agreement.
But rather than debate the philosophical existence of BoLR agreements, O’Neill is likely to raise the fairness of the change in AMP’s buyback terms, the letter to Shipton suggests. O’Neill mentions that the new BoLR terms apply changes ahead of the legislated commencement date in addition to the retroactive application valuation metrics and forced sales.
A spokesperson for AMP was contacted but had not responded to a request for comment by press time.