The Sad and Sorry Tale of AMP Limited
Published 27 March 2020
By Dr Peter J Phillips, Associate Professor (Finance & Banking) University of Southern Queensland
A downward spiral
In early 2020, AMP Limited shares were trading at $1.82. In May 2007, before the Global Financial Crisis, AMP Limited shares were trading at $10.80. In early 2001, before the 9/11 terrorist attacks, AMP Limited Shares were trading at $16.39. Earnings per share have fallen from 35 cents per share in 2011 to – 4 cents per share in 2019. During this time, operating cash flow fell from more than $3 billion to zero. Virtually every financial statistic for the company displays a similar pattern. The business problems experienced by the company have gradually accumulated for many years and the Banking Royal Commission’s (2019) unfavourable findings marked a new low point for the company’s fortunes. Despite this fall from grace, the 171 year old company still retains a place in the S&P/ASX 50 Index (the top 50 companies in Australia by market value).
Recent attention has been directed towards the company’s problematic core business model in the financial planning space. The general idea is that financial planners across the country would sell AMP products to their clients, collecting a fee for doing so. As the financial planning industry evolved, AMP and the advisers who sold its products on commission, generated strong revenues. This ‘vertically integrated’ model can lead to conflicts of interest and is now viewed as outdated at best and hopelessly compromised at worst. The Royal Commission did not recommend abolishing this business model, despite the obvious problems, but most commentators believe that its days are numbered and AMP faces the task of completely restructuring this part of the business alongside efforts to restructure over parts of the company (the company is trying to sell its life insurance business).
Reputational damage
AMP is just one Australian financial services company seeking to re-establish the trust of its clients, shareholders and the broader community. Through poor ethical behaviour and culture, many of Australia’s biggest financial institutions have done substantial damage to their own reputations and businesses. As John Price, Commissioner of the Australian Securities and Investments Commission (ASIC) noted in early 2019, “It would seem that some [financial services practitioners] have lost sight of the ultimate purpose of financial service delivery, which is about managing other people’s money (as opposed to maximising their own earnings). An undeniable example of this fact has been the unacceptable, and widespread practice of charging fees where no advice was provided.”
As we wait to see how the banks will react to the Royal Commission (including the speed with which they return stolen money) and whether there are any substantive and long-lasting changes to the culture prevailing in the financial services industry, it is worth keeping in mind that the regulators (ASIC and the Australian Prudential Regulation Authority, APRA) were also heavily scrutinised during the Royal Commission for perceived failures in performing their regulatory roles. Some early indications are positive (see the ABC’s one year on update). However, during the second week of February it was announced that AMP Limited’s chief would be awarded a pay rise of $1.76 million per year as the company posted losses of more than $2 billion. The press found this to be most interesting (see The Guardian’s report).
Discussion Question
How important are ethics and culture to ensuring good behaviour? Can banks simply rely upon rules of conduct or is deeper change (and deeper commitment) required?
Further Reading
For those interested in researching this topic further, see the early chapters of Financial Institutions, Instruments and Markets 9e, on banks and their regulators. For those interesting in pursuing the findings of the Banking Royal Commission in more detail, the reports and summaries are available on the Commission’s website.