While AMP’s share price peaked around AUD$ 5 begin of 2018, now shares can be purchased for around AUD$ 2. What happened? Over the past few years, is was quiet around AMP, i.e. it was business as usual, no major scandals, no news headlines and no public outcry.
With its 170 years of history, it is one of Australia’s iconic organisations. AMP serves 3.5m customers in Australia and New Zealand providing a variety of different products & services including banking, financial advice, investments, life insurance and superannuation. The organisation operates globally in 11 countries in Asia, Middle East, Europe and North America.
Regulatory inquiries and findings of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry uncovered various incidences of misconduct at AMP. ASIC even alleges that senior executives tried to interfere with an independent report which aimed at shedding some light on circumstances around charging fees for no service. Legal action is currently persecuted with executives potentially facing criminal charges. In addition, AMP admitted to or is alleged to have :
- misled the regulator with various statements.
- remediated the minimum number of customers ignoring clients with similar criteria.
- avoided a root cause analysis to identify systemic issues of misconduct.
- paid and received grandfathered commissions. In fact, these commissions constitute a substantial part of AMP’s income but were supposed to be phased out over the past few years.
All these items indicate a misalignment between governance, remuneration practices, customer remediation and risk & compliance management. Investors and customers reacted consequently. The 2018 financial figures indicate that AMP’s Australian Wealth Management business experienced a negative cashflow of almost AUD$ 4bn. The share price crumpled, paid bonuses are at risk with clawback clauses and ASIC is pursuing criminal charges. Various stakeholders assign responsibility for the fallout to the board, i.e. the board’s inactivity to address these issues in a timely manner. In fact, pre-empting a protest vote of shareholders several board members resigned “voluntarily”. The chair of the board and former CEO stepped down as well.
The Journey So Far
Faced with such unprecedented events, AMP initiated various changes. In search of a new CEO, AMP looked outside of Australia for suitable candidates. Since international banks went through a similar “wakeup call” after the financial crisis, AMP recognised that such international experience would be invaluable for the new CEO. In Francesco de Ferrari, an experienced Wealth Manager from Credit Suisse, the board found a new CEO with the required competence profile. In addition, new board members were appointed – some with similar international experience.
Furthermore, to support the Royal Commission AMP already paid AUD$ 32m on external legal and consulting fees. However, these costs represent only the starting point of the journey ahead. For the Financial Year 2018, AUD$ 470m were allocated for advice remediation. To reflect other necessary organisational changes, this number was increased to almost AUD$ 800m. The enhanced scope includes risk management, governance and development of a future strategy. However, even the AUD$ 800m may not suffice to cover costs of necessary transformations. According to a forecast of Macquarie Bank, AMP could face a total cost of AUD$ 1.46bn if a cost-per-adviser method is applied.
The Journey Ahead
With the release of the Final Report of the Royal Commission, changes to legislation and regulatory enforcement are expected. That means, AMP will face various litigation cases for past misconduct. Its cooperation with the regulator will be indicative how much the organisation has learnt already from past mistakes. If the recent debate with ASIC about the release of documents is any indication, the road to a collaborative approach with regulators may still be a long one.
On the transformational side, AMP is in a more difficult position compared to the Commonwealth Bank of Australia (CBA). CBA accepted an Enforceable Undertaking agreeing to all recommendations made in the prudential inquiry into Governance, Accountability and Culture. In contrast, AMP must define necessary changes by itself and deliver on them in the “hope” to address expectations of the regulator and community to their fullest extent.
More specifically, that means:
- The business model needs to be reviewed and adjusted to focus on customers and community expectations.
- The cooperation with the regulator needs to be strengthened – especially in light of increased scrutiny of regulatory supervision.
- Client advisors need to be retained even though remuneration models will be adjusted.
- Trust of consumers and community needs to be rebuilt.
These objectives can only be realised if:
- information flows across all hierarchy levels in both directions.
- the organisation is capable of transforming itself and learns from past as well as future mistakes.
- risk & compliance management is standardised, governance is strengthened and controls are consistently applied. Both functions need to be staffed with personnel possessing a “broad” competence profile, so that the gap between business and supporting functions can be bridged.
- the Three Lines of Defence Model is strengthened and audit is enabled to conduct frequent as well as consistent reviews.
- all remediation activities are centralised with direct reporting lines to the executive committee. The scope should encompass a full remediation of all clients whereby customers ought to receive only consolidated messages, i.e. as single client receives a consolidated update on all relevant issues pertaining that client.
- the performance monitoring and reporting of outsourcing arrangements is enhanced. This includes but is not limited to arrangements between trustees and related parties.
As with all large scale and complex business transformations, such organisation-wide changes may require several years to accomplish. The question arises, which mechanisms AMP has in place to track the progress of transformations and how success is measured.