AMP had a $1.2b BOLR liability and feared an adviser ‘run’

ANALYSIS

AMP’s total BOLR liability across around 800 practices was $1.2 billion in 2018 and that explains why the company acted as it did in seeking to change the BOLR contracts and ended up fighting a Federal Court class action.

The company, quite simply, feared a “BOLR run”.

That was the central message of a memo taken to the AMP Board in 2018 and, just as importantly, that memo noted that “Since 2016, AMPFP has undertaken an average of 60 Bolr transactions a year, at average $1m each (ie. aggregate ~$60m transaction value pa)”.

“Prior to 2015, annual Bolr was ~$30-40m pa, with the recent uplift being linked to accelerating industry disruption. The strategic plan for Advice forecasts that Bolr volumes will remain at an elevated level over the next 5 years driven by adviser demographics and increasing industry professionalisation standards (est. $80m pa).”

Further along, the memorandum stated:

“As AMPFP continues to evolve its adviser proposition and respond to industry change, it is likely that Bolr will need to be modified so as to value advice businesses as a “going concern” rather than on the basis of their held client registers. For mature businesses, this is likely to be … based on a profitability multiple rather than a revenue multiple. Future changes to Bolr will also need to reconsider the relevance and value of institutional ownership terms. To minimise disruption that might trigger an acceleration of exits, changes are likely to be introduced over an extended transition glidepath”.

In other words, in the years before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services industry and before the advent of the Financial Adviser Standards and Ethics Authority (FASEA) regime AMP had been content with the value it derived from its BOLR contracts but in 2018 recognised that the contracts represented an accelerating liability and needed to be addressed.

It was the manner in which AMP sought to address and minimise its exposure to a “BOLR run” which saw it lose the class action mounted by AMP financial planners in the Federal Court with Mr Justice Moshinski.

The judgement held that the manner in which AMP sought to address and minimise its exposure to BOLR was problematic, particularly the basis upon which it sought to change the BOLR contracts, notably the so-called LEP Provision which it argued covered legislative, economic or product change.

The judgement found that LEP Provision did not provide a reason for AMP’s actions, including that the “the changes to the multiple for grandfathered commission revenue cannot be supported on the basis of ‘legislation change’.

Just as importantly, the judgement held that AMP Financial Planning had fallen short of its obligations to consult on the changes it intended to make.