Category: Wealth Management

MLC sale ‘complicated and messy’

NAB says all options are still on the table for the sale of its wealth business after rival CBA secured a buyer for Colonial First State Global Asset Management, via InvestorDaily.

 Following the announcement of its full-year financials on Thursday (1 November), which saw NAB’s profit slide by 14 per cent to $5.7 billion, the bank provided an update on its MLC sale.

“On the wealth separation, it is progressing well, including the appointment of Geoff Lloyd as CEO of MLC,” NAB group executive of finance Gary Lennon said. “We continue to target a public market exit by the end of the 2019 calendar year.

“All exit options including demerger, IPO and trade sale are still on the table.”

Rival CBA announced the sale of Colonial First State Global Asset Management (CFSGAM) days before the release of NAB’s results. The surprise $2.9 billion sale to Japanese bank Mitsubishi UFJ Financial Group was over 17 times CFG’s annual profit.

The deal has thrown a new light on NAB’s plans to offload MLC and who a potential buyer could be. In 2016, Japanese group Nippon Life acquired 80 per cent of NAB’s life insurance business for $2.4 billion.

“NAB confirms good progress in work to separate MLC, but we see the process as very complicated and messy and delays will not surprise,” Morningstar analyst David Ellis said.

“The operating environment for all major banks is tough, with legal, regulatory, political and public scrutiny escalating, at the same time earnings growth is slowing,” he said.

“The combined effects of a royal commission, increased regulatory oversight, a weakening housing market, slowing credit growth, softer Chinese economic conditions, rising global interest rates, investment market jitters and the escalating debate around culture, governance and trust in the banking sector means the major banks’ earnings power is under pressure.”

NAB will provide an MLC investor briefing before May 2019.

AMP agrees to sell wealth protection and mature businesses

AMP Limited has announced the successful completion of its portfolio review including an agreement to divest its Australian and New Zealand wealth protection and mature businesses (AMP Life) and reinsure New Zealand retail wealth protection for total proceeds of A$3.45 billion.

The stock dropped (in a down day) to a new low.

  • AMP will exit its Australian and New Zealand wealth protection and mature businesses via a sale to Resolution Life1 for total cash and non-cash consideration of A$3.3 billion; transaction expected to complete in 2H 2019; subject to regulatory approvals.
  •  Binding agreement with Swiss Re2 to reinsure New Zealand retail wealth protection, releasing additional capital of up to A$150 million to AMP prior to completion of sale; subject to regulatory approvals.
  • Intention to seek divestment of New Zealand wealth management and advice businesses via initial public offering (IPO) in 2019 subject to market conditions and regulatory approvals, unlocking further value.
  • Significant capital release will strengthen AMP’s balance sheet and provide strategic flexibility; all options for use of proceeds to be evaluated and update to be provided following transaction completion.

Wealth protection and mature – Resolution Life transaction summary

Under the terms of today’s agreement, AMP will sell its Australian and New Zealand wealth protection and mature businesses (AMP Life) to Resolution Life for a total consideration of A$3.3 billion, which comprises:

  • A$1.9 billion in cash.
  • A$300 million in AT1 preference shares in AMP Life (issued on transaction completion).
  • A$1.1 billion in non-cash consideration:

o   Economic interest in future earnings from the mature business, equivalent to A$600 million; expected to provide steady ongoing earnings to AMP of approximately A$50 million after tax per annum, assuming an annual run-off at 5 per cent.

o   A$515 million interest in Resolution Life, focused on the acquisition and management of in-force life insurance books globally.

AMP expects to monetise all non-cash consideration over time.

Together with the New Zealand reinsurance agreement, the total value equates to approximately 0.82x pro forma embedded value of the sold businesses at 30 June 2018, excluding franking credits.

Resolution Life assumes risk and profits of the wealth protection and mature businesses from 1 July 20183, subject to Australian wealth protection risk-sharing arrangements.

A new relationship Agreement has been established with Resolution Life and AMP Capital will continue to manage wealth protection and mature assets under management. AMP Capital will also join Resolution Life’s global panel of preferred asset managers.

The transaction is subject to regulatory approvals and other conditions precedent and is expected to complete in 2H 2019.

Partnering to ensure smooth transition for customers

Resolution Life is an international insurance and reinsurance group whose management has a 15-year track record in providing quality service to in-force insurance customers.

The transaction has been designed to ensure all existing terms and conditions will be retained. The teams supporting existing AMP customers will largely transfer on completion to maintain continuity of service.

AMP and Resolution Life will work closely together to ensure a smooth transition for customers.

New Zealand wealth protection reinsurance

AMP has entered into a binding reinsurance agreement with Swiss Re for the New Zealand retail wealth protection portfolio which is expected to release up to A$150 million of capital to AMP, subject to regulatory approval. The agreement is expected to be effective from 31 December 2018, and will cover approximately 65 per cent of the New Zealand retail wealth protection portfolio for new claims incurred from that date.

The reinsurance agreement is expected to reduce New Zealand profit margins by A$20 million on a full-year basis. The reinsurance outcomes are factored into the Resolution Life transaction.

New Zealand wealth management and advice businesses 

AMP is today also announcing its intention to seek divestment of its New Zealand wealth management and advice businesses via an IPO in 2019. The decision to proceed with an IPO and its timing remain subject to market conditions and regulatory approvals.

These businesses have FY18 pro forma operating earnings of approximately A$40 million on a standalone basis. The IPO would release capital to AMP and create a standalone New Zealand wealth management and advice business.4

Portfolio review outcomes will release capital, simplify portfolio and create strategic flexibility

The completion of the portfolio review will strengthen AMP’s balance sheet and provide strategic flexibility. All options for use of proceeds will be considered including growth investments and/or capital management activity.

The exit from Australian and New Zealand wealth protection and mature will also significantly simplify AMP and its earnings profile, enabling it to focus on its higher growth businesses of Australian wealth management, AMP Capital and AMP Bank.

The simplification and separation costs related to the Resolution Life sale transaction are expected to be in the order of A$320 million post-tax.

Additional capital from the transaction with Resolution Life will facilitate a reduction in AMP’s corporate debt of up to A$800 million.

The financial impacts of the transaction on AMP post-separation are outlined in the investor presentation.

AMP will exclude the 2H 18 earnings from the discontinued businesses in determining the FY 18 dividend. AMP continues to target a total FY 18 dividend payout within, but towards the lower end of its dividend guidance range of between 70 – 90 per cent of underlying profit.

Further guidance on use of proceeds will be provided following the completion of the transaction in 2H 2019.

ASIC releases guidance on code of ethics compliance schemes for financial advisers

ASIC has today released guidance on its proposed approach to approving and overseeing compliance schemes for financial advisers (RG 269).

The financial advice professional standards reforms include obligations for financial advisers to, from 1 January 2020, comply with a code of ethics and be covered by an ASIC-approved compliance scheme under which their compliance with the code of ethics will be monitored and enforced.

RG 269 explains our process and criteria for determining whether to grant approval to a compliance scheme. It also sets out:

  • our expectations for the governance and administration, monitoring and enforcement processes, and ongoing operation of compliance schemes
  • how we will exercise our powers to revoke the approval of a compliance scheme and to impose or vary conditions on the approval, and
  • the notifications that monitoring bodies must make to ASIC.

ASIC Deputy Chair Peter Kell said that ASIC is committed to ensuring robust, transparent, fair and consistent compliance schemes that effectively monitor and enforce compliance with the code of ethics.

‘Effective compliance schemes are a key component of the reforms that will require higher standards of ethical behaviour and professionalism among financial advisers.’

‘Our guidance requires high standards for compliance schemes, reflecting the significant responsibility that monitoring bodies operating compliance schemes will have. This includes the responsibility to effectively monitor and sanction adviser members if required,’  he said.

The code of ethics is being developed by the Financial Adviser Standards and Ethics Authority (FASEA). Consultation on an exposure draft of the code of ethics released by FASEA closed on 1 June 2018. At this time, FASEA has not released the final code. If there are significant changes from the draft code, we may need to revise our guidance when the final code is released.

Download

  • Regulatory Guide 269 Approval and oversight of compliance schemes for financial advisers (RG 269)
  • Report 595 Response to submissions on CP 300 Approval and oversight of compliance schemes for financial advisers (REP 595)
  • Consultation Paper 300 Approval and oversight of compliance schemes for financial advisers (CP 300) and submissions

Background

  • The Corporations  Amendment (Professional Standards of Financial Advisers) Act 2017 amended the Corporations Act 2001, and commenced on 15 March 2017. It introduced a number of new requirements for financial advisers who provide personal advice to retail clients on more complex financial products.
  • From 1 January 2020, all financial advisers must be covered by an ASIC-approved compliance scheme under which their compliance with a new single, uniform code of ethics will be monitored and enforced. These compliance schemes will be operated by monitoring bodies.
  • In May 2018, ASIC released Consultation Paper 300 Approval and oversight of compliance schemes for financial advisers (CP 300) which sought feedback on a number of proposals in relation to the approval and oversight of compliance schemes for financial advisers.
  • The consultation period for CP 300 closed in June 2018 and we received 11 submissions.

Class action lawsuit launched against bank-owned funds

Slater & Gordon is launching the ‘Get Your Super Back’ campaign today and says it will involve a series of class actions with Colonial First State and AMP likely to be their first targets.

“The firm will allege the big bank-backed super funds failed to obtain for members competitive cash interest rates on cash option funds, and charged exorbitant fees, affecting millions of members who held part or all of their superannuation in bank owned funds,” they said.

The allegations arise from evidence given to the Royal Commission into the banking industry and information released in the Productivity Commission report.

The Productivity Commission report released in May found that retail super funds only brought in members 4.9 per cent per annum in contrast to the 6.8 per cent per annum brought in by industry funds.

The Productivity Commission report also found that retail funds frequently underperformed and charged more fees than industry funds

Why AMP and IOOF went rogue

From The Conversation.

The ‘M’ in AMP stood for Mutual. Like another former mutual, IOOF, it was owned by, and set up to benefit, its members.

Both AMP and IOOF were presented with draft findings that they acted against the interests of their members at the conclusion of the round five hearings of the Royal Commission into Banking and Financial Services.

Although both are now purely commercial organisations, each has marketed itself as different from the others because of its cooperative history and founding ethos.

So what went wrong?

The early twentieth century German sociologist Max Weber argued the culture of an organisation was the product of its history, institutional structure and a consciously held shared ethos of its members. It was a different view to that of mainstream economists who these days assume organisations attempt to maximise profits and that of so-called behavioural economists who assume cognitive biases make decision making less rational.

In his book the Protestant Ethic and the Spirit of Capitalism Weber outlined the ways in which the ascetic sensibilities of the Protestant sects had influenced the growth of commerce in post reformation Northern Europe and 19th century America. They were concerned with thrift as much as with profit.

The ‘P’ in AMP stood for Providence. The AMP was set up to help its members save.

Disengagement, demutalisation and corporatisation changed AMP and IOOF forever

The move away from the government provision of services in the 1970s and Margaret Thatcher’s famous claim in the 1980s that there was “no such thing as society” saw a move away from mutuals and cooperatives in tandem with a move away from thrift.

In the 1990s AMP and IOOF ‘demutualised’, becoming companies listed on the sharemarket. Value that had been accumulated for generations was turned into tradable shares. Members who voted for the change were accused of intergenerational theft. Those who didn’t feel the least bit thrifty cashed-out by selling their shares.

Laws were changed to make it easier.

From a Weberian perspective the current governance problems of AMP and IOOF can in part be attributed to abandoning of the original founding ascetic ideal in favour of an unconstrained focus on profit maximisation for the benefit of shareholders rather than members.

The change in the culture of such organisations in Australia and overseas was accelerated by decisions to put independent directors and executives with “commercial savvy” on boards.

Turning back the clock won’t work

While Weber suggests organisations founded on a particular set of values can be highly disciplined the process of demutalisation/listing can create the conditions for misconduct. Appointing directors and outside managers who have no understanding of the mutual’s ideal allows an aggressive commercial culture to take root. The argument can be extended to former public sector corporations such as the Commonwealth Bank.

Despite calls to wind back the clock very few former cooperatives or public sector entities have. Once they have taken even a half step to corporatisation, as did Telstra, the Commonwealth Bank and the Murray Goulburn Cooperative, the die has been cast. The organisation and its ethos has changed.

Appointing high profile directors and executive directors with CVs that include community involvement is only going to paper over the change.

What might work

Mutual organisations are not misconduct and misstep free. They are vulnerable to ‘groupthink’ in which managers back each other up in order to aviod disharmony.

But commercial organisations that prioritise profits create incentives for managers to rationalise away breaking the law in order to lift short-term profitability or boost share prices and bonuses.

If he were alive today Weber might suggest subjecting such organisations to increased and more effective regulatory scrutiny and increased internal and external democratic accountability would be a necessary first step to improve governance.

Weber might very well argue the Banking Royal Commission itself is helping the community forge a new ethos grounded in community expectations about corporate conduct and purpose, buttressed by strong laws to back them up that will guide individual conduct and organisational governance.

AMP Names New CEO

Former Credit Suisse South East Asia chief executive Francesco De Ferrari has been named as AMP’s new boss.

AMP has announced this morning that Mr De Ferrari would take over from Mike Wilkins, who had been acting as interim CEO since April.

Prior to joining AMP, Mr De Ferrari spent 17 years at Credit Suisse where he served as chief executive, South East Asia and frontier markets, as well as heading up private banking in Asia Pacific.

The appointment means Mr Wilkins will work with Mr Ferrari during the handover period and be returning to the board as a non-executive director.

AMP chairman David Murray said Mr De Ferrari was an “outstanding leader with a strong track record in international wealth management and extensive experience in redesigning business models to drive turnaround and growth”.

The AMP board had conducted “an extensive global search” in order to find a suitable leader, Mr Murray said.

“Francesco is a proven change agent who will bring the strategic acumen and expertise to spearhead the transformation needed in our business.”

The AMP chairman added that Mr De Ferrari had established “a culture that balanced the interests of clients, shareholders and all other stakeholders” during his time at Credit Suisse.

“His experience of transforming and driving growth in businesses in Asia and Europe will be invaluable as he addresses the significant challenges facing both our business and the wider financial services sector in Australia.

“We have designed a remuneration structure to drive the recovery of AMP and recognise the degree of challenge in the task ahead.

“His remuneration and incentives are directly aligned with the interests of shareholders. With his track record of commitment to clients and business performance, I have no doubt Francesco is the right person to lead the recovery of AMP and set the strategy for future growth.”

Commenting on his own appointment, Mr De Francesco described AMP as an “iconic Australian company with strong, market-leading positions in wealth management, insurance and asset management” and said he felt privileged to be selected to the role.

“Throughout its history, AMP has been driven by a strong sense of purpose, helping customers plan for tomorrow and supporting them through the critical moments of their lives.”

He also noted that 2018 had “clearly been a challenging year for the business”.

“I’m confident we can earn back trust which will underpin the recovery of business performance.

“I’m encouraged by the process of change already initiated by the board, and I’m committed to accelerating this change, while maximising the opportunities we have both in Australia and internationally.

“I am excited by the opportunity and am looking forward to working with board and the team at AMP to restore the company to a position of strength and drive its future growth.”

AMP super governance under scrutiny

AMP’s superannuation funds are permitted to underperform for five years before the investment committee is obliged to inform the relevant fund’s board, the royal commission has heard, via InvestorDaily.

The royal commission has been told that a consistently underperforming AMP fund could be underperforming for five years before the board of directors becomes notified.

The royal commission hearings into superannuation continued on Thursday, with AMP Superannuation Limited chairman Richard Allert in the witness box.

Mr Allert faced questioning by counsel assisting Michael Hodge about how AMP management and board addresses poorly performing investment funds.

The royal commission was told that ‘quarterly investment management reports’, which contain information about the performance of AMP’s funds in a given quarter, are put together by AMP’s Group Investment Committee.

However, the board of AMP Superannuation does not receive this report. Instead, it goes to AMP trustee services.

Mr Hodge confirmed with Mr Allert that the report would only be raised with the board if trustee services found an issue with the report, or if there was an “exception”.

“Unless an exception was triggered, then you wouldn’t expect this report to be provided to the board?” Mr Hodge asked.

“Correct,” Mr Allert said.

The royal commission heard that such an ‘exception’ would have three criteria: the first was the ‘identification’ criteria, which meant pinpointing “significant under-performance against peers/benchmarks over rolling 36 month period”.

The second criteria was a period of ‘further investigation’, and the third and final criteria was an exceptions report that was issued “if an investigation remains under investigation … for a period of eight or more quarters”.

“So it would seem as if it would be necessary for an investment to underperform for five years before it would be reported to the board,” Mr Hodge put to Mr Allert.

“No, I couldn’t accept that,” he responded.

After a protest from AMP legal counsel Robert Hollo, who called the question “a little unfair”, Royal Commissioner Kenneth Hayne AC QC interceded and Mr Hodge rearticulated his question.

“Is it possible for an exceptions report to come to the board about investment performance any earlier than where the underperformance has occurred over a five-year period?”

Mr Allert said it was possible. “If there was something that was really bothering the Group Investment Committee and relaying it to the Trustee Services or was bothering our trustee services representative on the GIC, they would alert the board to that fact.”

But this would occur outside of the exceptions framework, the royal commission was told.

One instance where Mr Allert could recall AMP trustee services raising an issue with the board this year was “in relation to products that had a cash element”.

Challenger and HUB24 join forces for annuities on platform

HUB24 and Challenger Limited have announced they are working together to provide Challenger annuities to advisers and clients on the market-leading HUB24 platform.

Challenger annuities will be available to advisers and their clients on HUB24 via the innovative technology of ConnectHUB – a collaboration between HUB24 and their subsidiary Agility Applications.

ConnectHUB allows product solutions to be rapidly and seamlessly integrated and provides advisers and their clients with a complete view of their portfolio. Advisers will be able to purchase annuities for their clients as they would any other investment on HUB24.

The teams at Challenger and HUB24 are now working together to build the solution.

Andrew Alcock, Managing Director of HUB24, said: “We are committed to continually enhancing our platform and providing choice for our advisers and their clients.

“We’re delighted to be working with the team at Challenger who are well-known for providing market-leading retirement solutions to deliver their products to our rapidly growing client base.”

Challenger Chief Executive Officer Brian Benari said: “HUB24 is one of the fastest growing platforms in the market and is recognised for its innovation and customer focused approach.

“This relationship further demonstrates superannuation industry leaders moving to meet the needs of retirees as lifetime income stream products become a mainstream option in retirement.”

Challenger is an investment management company that is focused on providing customers with financial security for retirement. It is Australia’s largest provider of annuities.

The Australian Stock Exchange-listed HUB24 connects advisers and their clients through innovative solutions that create opportunities. The business is focussed on the delivery of the HUB24 platform and the growth of its wholly owned subsidiaries Paragem, a financial advice licensee, and Agility Applications which provides data, reporting and software services to Australian stockbroking and wealth management market. HUB24’s award-winning investment and superannuation platform offers broad product choice and an innovative experience for advisers and investors. Its flexible technology allows advisers and licensees to customise their platform solution to fit their individual business, so they can move faster and smarter. It serves a growing number of respected and high profile financial services companies.

Challenger Limited (Challenger) is an investment management firm that is focused on providing customers with financial security for retirement. Challenger operates two core investment businesses, a fiduciary Funds Management division and an APRA-regulated Life division. Challenger Life Company Limited (Challenger Life) is Australia’s largest provider of annuities.

Responsible Investments hit Major Milestone

Responsible investment in Australia has hit a major milestone, with a new report finding over half of all professionally managed investments in Australia are now invested as responsible investments. Environmental, social, corporate governance and ethics considerations now sit alongside financial as critical components informing the investment decisions of the majority of Australia’s professional investors.

The 17th annual Australian Responsible Investment Benchmark Report 2018 (KPMG), the most comprehensive review of the responsible investment sector in Australia, reveals the industry hitting new heights with $866 billion now managed as responsible investments, representing 55 per cent of all professionally managed assets in Australia, up from $622 billion in 2016 (growth of 39% year on year).

“This is a major milestone to reach with a majority of funds invested in Australia now being invested under commitments to responsible investment,” said Simon O’Connor, CEO of RIAA. “We are now at a stage whereby issues such as climate change, human rights, corporate culture, diversity and a whole range of other important sustainability issues are right at the forefront of consideration by Australia’s finance community.”

O’Connor explained the uplift in assets was largely due to mainstream investment funds making a switch to incorporate responsible investment, such as incorporating negative screening, systematically assessing environmental, social and governance (ESG) factors as well as engaging directly on these issues to influence corporate Australia.

“Nearly two decades of progress in responsible investment has this year reached an important tipping point, which we believe will only gain further momentum in light of growing calls for transparency and accountability across finance along with a growing consumer demand for investments that align with their values,” said O’Connor.

Broad Responsible Investment

RIAA and KPMG research reviewed Broad Responsible Investment strategies of 112 asset managers in Australia, finding 24 managers could demonstrate a leading approach to ESG integration, constituting $679.3 billion AUM, up by 22% year on year

Asset managers cited ESG factors positively impacting portfolio performance as now the greatest driver of growth in responsible investment (up by 20 per cent year on year)

Core Responsible Investment

Core Responsible Investments using negative or positive screening, sustainability themed investments, impact investing and community finance have also reached a record level of $186.7 billion representing 12% of all professionally managed assets, more than tripling between 2015 and 2017.

This growth in absolute and relative terms reflects both a surging demand for ethical, sustainable and impact investments as well as a further embedding of negative screens across mainstream financial products and mandates – particularly across tobacco and controversial weapons
Core responsible investment Australian share funds outperformed their benchmark over three, five and ten years

Responsibly invested international share funds outperformed the benchmark in the one and three-year time horizons, with comparable performance over ten years; and responsibly invested balanced portfolios outperformed their benchmark over the three, five and ten year periods
“Our research continues to show us Australians don’t want to build their retirement savings and other investments off the back of harmful activities without compromise to financial performance. The investment industry is responding, by providing more investment opportunities that align with these values, but also building these considerations into the bulk of the market.

“While it’s hugely positive to see responsible investment now with the lion’s share, our aspiration is to see this number grow as the understanding of ESG factors on positive portfolio performance increases,” said O’Connor.

Update on financial advice institutions’ fees for no service refund programs

ASIC says AMP, ANZ, CBA, NAB and Westpac have now paid or offered customers $222.3 million in refunds and interest for failing to provide advice to customers while charging them ongoing advice fees. This represents a further $6.4m in payments and offers from these institutions since the last ASIC media release (17-438MR) on the fees for no service (FFNS) project, which provided compensation figures as at 31 October 2017.

In addition, ASIC is overseeing FFNS remediation programs by other Australian financial services (AFS) licensees that have identified potential FFNS failings, including Bendigo Financial Planning Ltd, Police Financial Services Ltd (trading as BankVic), State Super Financial Services Australia Limited (trading as StatePlus), and Yellow Brick Road Wealth Management Pty Ltd. The total amount now paid or offered to customers across both groups of licensees is $259.6m.

ASIC is also aware that five AFS licensees or institutions have provisioned for future remediation payments, with four of these to date providing to ASIC amounts for future remediation (see below in notes). If all of these provisions are paid in full, FFNS remediation may exceed $850m.

The table provides compensation payments and estimates reported to ASIC as at 30 June 2018. Some institutions’ total estimates have changed since ASIC’s previous media release as they have further investigated the compensation required and, in some cases, identified additional failures needing remediation.

Group Compensation paid or offered (1) Estimated future compensation (2) Total estimate
AMP $5,010,637 $370,000 (3) $5,380,637
ANZ $50,793,257 $8,443,300 (4) $59,236,557
CBA $118,040,178 $25,274,717 $143,314,895
NAB $5,690,797 $1,019,623 (5) $6,710,420
Westpac $6,896,237 Not yet available (6) $6,896,237
Bendigo $0 $2,500,000 $2,500,000
StatePlus $37,223,999 Not yet available (7) $37,223,999
Yellow Brick Road $0 $101,477 $101,477
Total (personal advice failures) $223,655,105 $37,709,117 $261,364,222
NULIS Nominees (Australia) Ltd $35,900,408 (8) 67,000,000 (9) $102,900,408
Total (personal and general advice failures) $259,555,513 $104,709,117 $364,264,630

Source: Data reported by the AFS licensees to ASIC as at 30 June 2018.