AMP Super: APRA Imposes Compliance Orders

AMP Super: APRA Imposes Compliance Orders

AMP Super

APRA Imposes Compliance Orders

On 14 June, the Australian Prudential Regulation Authority (APRA) issued directions and additional licence conditions to AMP Super that were designed to deliver enhanced performance and member experience. The action was driven by “issues identified during APRA’s ongoing prudential supervision… along with matters that emerged during the Royal Commission”.

AMP Super forced to “make significant changes”

The compliance order required AMP Superannuation Limited and NM Superannuation Proprietary Limited to “make significant changes” to its business practices, including an instruction to “renew and strengthen” its board.

Currently, there are four board executives for AMP Super. Tony Brain took over from Rick Allert, who retired on the 9 May, as the interim Chairman. Cathy Doyle and Louise Dudley are both independent directors on the board with Darryl Mackay serving as director.

The prudential regulator said improvement must be made in areas including “conflicts of interest management, governance and risk management practices, breach remediation processes, addressing poor risk culture, and strengthening accountability mechanisms.”

AMP Super was further required to seek external auditors to report on “remediation and compliance with the new directions and conditions.”

AMP responded to APRA, saying it will “fully implement the directions and additional conditions”. The bank mentioned that it had been cooperative with APRA and had already taken action on a number of the issues raised, including reducing fees on their superannuation products.

AMP’s woes continue

The compliance move came as the Australian regulator attempted to expose AMP of its wrongdoings. AMP was revealed to have a long track record of misconduct related to its business practices. It all started when the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) was established back in 2017.

The Royal Commission, commissioned by Kenneth Hayne, revealed a culture of greed within several Australian financial institutions. For AMP, the court hearing indicated that the trustees of the bank appeared incapable of acting in the best interests of its members.

When the AMP Super former Chairman, Rick Allert, was questioned, he admitted that the fees for superannuation accounts were so high that members were earning negative returns. For three years, the cash option on the default fund had produced net negative returns for 12,500 members. The trustees were unaware of the fees until the regulator inquired. Mr Allert conceded that some members would have been better off with their money in other banks than in their AMP Super fund, and compensated $5 million to the affected members.

Additional inquiry showed that AMP Capital had been lowering AMP Super’s investment return targets because fund managers were struggling to achieve the performance target. AMP Capital was also incorrectly deducting fees from members in superannuation funds for years, totalling at least $27 million. This was something that the trustees may never have discovered themselves. AMP Super’s operations were outsourced to related parties, including AMP Life and AMP Capital, resulting in higher administration fees.

These misconducts took a toll on AMP’s business operation. As customers were taking their money elsewhere, AMP revealed that $1.8 billion funds were flowing out of its wealth management arm in the first three months of 2019. The cash outflow came after customers withdrew their funds from the bank to the tune of $1.6 billion during the last quarter of 2018. AMP Chief Executive Francesco De Ferrari said the Australian wealth management industry was “challenged” after the Royal Commission.

On 14 February, AMP announced that the company’s 2018 full-year profit was in a nosedive, plummeting 97% to $28 million. The bank made $848 million of profits in 2017, but $656 million was for customer remediation in the wake of the Royal Commission. The bank failed to achieve its earnings guidance of a $30 million profit for the 12-month period. Final dividend was reduced significantly, down 14.5 cents to 4.0 cents.

AMP’s woes continued when the bank was faced with a second class action over claims that it charged excessive administration fees to AMP Super members. The law firm, Maurice Black filed a proceeding against AMP, seeking refunds plus the extra returns superannuation members would have earned without the excessive fees.

Since the inception of the Royal Commission, AMP’s share price plunged more than 50%. In 2018, the share price peaked at $5.43. However, over the course of 2018, the stock dropped almost 55%, trading at around $2.45 by the end of the year. AMP’s share continued to hover in the range from $2.10 to $2.70. Following APRA’s announcement to take compliance action against AMP, it’s shares were trading 4% lower to around $2.15.

Uncertain outlook for AMP

It is difficult to determine AMP’s future, given that its downfall largely stemmed from the poor management. The revelation following regulators’ inquiry indicated that the bank had put profit in front of its customers. Though AMP Super had already implemented structural changes to its trustee boards, as well as offering sensible superannuation products, the bank will need to do more in order to gain the trust of the Australian public.

By Jack Lee

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