A failure to provide a valid ‘legislation, economic, or products’ (LEP) reason to make changes to the buyer of last resort (BOLR) policy forms the crux of AMP Financial Planning’s defeat in a class action on 5 July.
In the Federal Court in Melbourne, Justice Moshinsky ruled AMPFP lost the case on all counts and ruled in favour of the lead applicant Equity Financial Planners and sample member Wealthstone.
AMP could now face paying more than $900,000 after the court ruled it should pay the lead applicant $813,560 and sample member $115,533, but there is the possibility AMP will appeal the case.
The class action was filed in July 2020 on behalf of advisers who had been authorised by AMPFP. The claim related to changes made by the firm to its BOLR policy in August 2019. This had seen AMPFP cut its BOLR terms without notice from 4x recurring revenue to a maximum of 2.5x with immediate effect.
In his ruling, Justice Moshinsky raised the matter of the LEP provision and how AMP had used it to unlawfully force the BOLR change.
In June 2017, the AMPFP BOLR policy included a clause for its 542 practices that stated: “AMPFP has the right to make any change to this policy should legislation, economic, or product changes render any part of this policy inappropriate following consultation with ampfpa. In particular, where AMPFP believes any provision contained in this policy will, or may, cause it to breach or be subject to a penalty under any laws.”
AMPFP used this clause as a reason to change the multiple from 4x to 2.5x and a glide path would have seen this reduce incrementally by 0.1x per month to reach 0x from 1 January 2021.
The firm argued it did not have to identify the specific economic or legislation change that necessitated the change nor state how they rendered the policy inappropriate.
In the court documents, it stated this economic change was a sustained or quantifiable decrease in market value of register rights linked to ongoing revenue or a material change in the supply and demand for financial advice services and practices. Changes to grandfathered commission revenue also provided a legislation change reason, AMPFP said, under the LEP provision.
Justice Moshinsky ruled the changes “were not authorised by the LEP provision” for any of three reasons and were ineffective. He also ruled AMPFP failed to consult with ampfpa and that AMPFP did not give 13 months’ notice of the changes.
He particularly took umbrage at the use of the word ‘economic change’ and said the changes to the BOLR policy were not proportionate to the economic change that rendered the policy inappropriate.
“…. The amount of the decrease in the market value of register rights was between approximately 0.5x and approximately 1.0x. However, the 8 August 2019 changes reduced the multiple for ongoing revenue (apart from grandfathered commission revenue) from 4.0x to 2.5x, a reduction of 1.5x, and reduced the multiple for grandfathered commission revenue to the glide path. This went too far. It was not proportionate to the decrease in the market value of register rights,” Justice Moshinsky said.
Regarding the second change about the supply and demand change for financial advisers, Justice Moshinsky similarly ruled the BOLR change was disproportionate with the problem.
“The multiple payable under the BOLR policy was not expressly or impliedly linked to the supply of or the demand for financial advice services (or to any consequent fall in the value of financial advice practices). It was simply the basis for calculating an amount that AMPFP agreed to pay to practices in prescribed circumstances,” Justice Moshinsky said.
“As set out above in relation to the first alternative economic change, the fact that the contractual bargain may have become less attractive — or even unattractive — for AMPFP is not to the point. The multiple set out in the BOLR policy continued to fulfil its purpose (of being an integer in calculating the amount to be paid by AMPFP) notwithstanding the reduction in the supply of financial advice services and the reduction in the demand for financial advice services (and any consequent fall in the value of financial advice practices).”
Finally, regarding grandfathered commission, it was ruled that AMPFP could not rely on “anticipated legislation” and legislation change should only apply to statue or delegated legislation.
At the time of the BOLR change, the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 had only been introduced to the House of Representatives a few days before on 1 August 2019.
The ‘glide path’ was in relation to the reduction in grandfathered commissions, which AMP was reducing around 1 year too early, just because this helped out AMP – they didn’t have to take those revenues into account when paying BOLR, and they used the advance date as PR spin to show they were good guys with clients.