Macdonald (left) and De Ferrari

Former AMP planners expressed shock and elation on Wednesday after the courts ruled in their favour in their lawsuit against the wealth manager for reneging on contractual agreements under its controversial Buyer of Last Resort policy.

In August 2019, AMP sought to change the terms of the BOLR policy due to the changing market environment post-Hayne Royal Commission, sparking a class action litigation suit by affected practices.

The Federal Court on Wednesday ruled  plaintiffs Equity Financial Planners and Wealthstone incurred losses of $813,560 and $115,533, respectively.

The situation of both firms differed slightly – Equity never entered the buyback process while Wealthstone had pursued one.

AMP went into a trading halt before market opening this morning, with a later update stating it acknowledged the court decision but is “reviewing the judgement in detail”, leaving open the possibility of an appeal.

“Subject to any appeal, a process will be required to determine the impact of the decision on other group members,” the update said.

AMP declined to add any further commentary beyond the market update and will take its time to assess the outcome of the judgement.

Boris Gulshanov, a former AMP Financial Planning authorised representative and member of the class action, urged AMP and its senior leadership not to appeal the decision.

Gulshanov tells Professional Planner he and other class members felt vindicated by the court verdict but did not erase the personal toll taken by the dispute with his former licensee and subsequent legal process.

“It’s nice that it has been acknowledged, it’s a good feeling,” Gulshanov says, whose authorisation to provide advice ceased in 2020 and no longer works in the financial sector. “But it’s not going to bring back the sleepless nights and the pressure. There are people that remortgaged their homes, ended up in hospital [or worse].”

Neil Macdonald, CEO of The Advisers Association (which historically represented AMP planners) says he is pleased with the outcome, but is still absorbing the detail.

“We’re obviously pleased with Justice Moshinsky’s findings, he accepted all of the arguments our members put forward,” Macdonald says. “The fact that it’s taken quite a long time would mean that it’s a well-considered judgement.”

The class action was led by Corrs Chambers Westgarth, who declined to comment further.

Francesco fiasco

During the tenure of CEO Francesco De Ferrari, AMP announced in 2019 it would reduce the buy-out multiples of the BOLR agreement from 4.0x to 2.5x recurring revenue for ongoing revenue excluding grandfathered commissions.

Additionally, there would be a lower multiple for grandfathered commission revenue from 4x to 1.42x with a further “glide path” reduction of 0.833 per month until it reached zero by the start of 2021.

The class action was filed in July 2020 and commenced last October, with counsel representing AMP Financial Planning advisers presenting evidence showing the arrangement was changed to prevent a financial hit from the adviser exodus expected after the royal commission.

The court heard AMP was concerned about losing high-quality practices, but also having to pay a premium price for assets with diminishing value and used the royal commission as a catalyst the change the program.

“The delivery of the royal commission report in February 2019 creates a burning platform to act decisively,” the AMP communication presented to the court stated. “If we do not act, we are likely to see an acceleration of BOLR exits from early 2019 at a price point that maximises AMP’s capital exposure.”

Hayne had questioned the BOLR arrangements during the eponymous commission, arguing the arrangements treated clients books as a tradeable asset valued on revenue.

Unfit for the new world of advice

Further evidence presented to the court during the hearings noted AMP’s acknowledgement of the “economic disruption” of industry change, including recommendations from the royal commission, heightened professional standards under the FASEA regime, and the end of grandfathered commissions.

A memo from AMP business partnerships managing director David Akers to De Ferrari on 19 March 2019 outlined the changes and how these would impact the valuations of commission-reliant businesses that would not fit in the future advice ecosystem.

Akers noted that grandfathered commissions generated roughly a quarter of practice income, with the expected loss of ongoing fee revenue from passively-serviced clients adding another 5-10 per cent drop.

Additionally, any potential change to licensee terms, as well as the possible banning of risk insurance commissions further impacted the valuation of the practices.

“A large number [of AMP practices] will be unprofitable or much less profitable or facing debt serviceability issues,” the memo said.

“Many will struggle to restore their profit margins, while also adjusting to new pressures on service, compliance and educational standards.”

It was expected that over 700 practices could seek to exit the industry following in the following three years with an aggregate transaction value of $900 million.

It also noted that since the final royal commission report was published, 45 practices (combined value of $70 million) had submitted their exit notice.

Internally, AMP discussed the potential consequences of the BOLR change, noting the loss of trust to AMP and reduced mental wellbeing of practice principals.

The memo noted that AMP licensees had played a “benefactor role” to enable practices to withstand prior economic disruptions through capital and cashflow support.

“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,” the memo said.

“Many practices will be disappointed and angry that AMP is not protecting their downside capital risk.”

Join the discussion