FEDERAL COURT OF AUSTRALIA

Equity Financial Planners Pty Ltd v AMP Financial Planning Pty Ltd [2023] FCA 741

ORDERS

THE COURT ORDERS THAT:

1.    Within 21 days, the applicant file a minute of proposed orders to give effect to the Court’s reasons, together with a short outline of submissions (of not more than five pages) in support of those orders.

2.    Within a further 14 days, the respondent file a minute of proposed orders to give effect to the Court’s reasons, together with a short outline of submissions (of not more than five pages) in support of those orders.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

TABLE OF CONTENTS

REASONS FOR JUDGMENT

MOSHINSKY J:

INTRODUCTION

1    The applicant, Equity Financial Planners Pty Ltd (Equity), is and was at all relevant times a financial planning practice in the network of financial planning practices established by the respondent, AMP Financial Planning Pty Ltd (AMPFP).

2    Equity brings this proceeding, which is a representative proceeding under Pt IVA of the Federal Court of Australia Act 1976 (Cth), on its own behalf and on behalf of all persons who, as at 8 August 2019:

(a)    were a party to an authorised representative agreement with AMPFP and were named as the Practice in that authorised representative agreement; and

(b)    had not received a confirmed exercise date (for the purpose of AMPFP’s Buyer of Last Resort Policy (BOLR Policy)) of 8 August 2019 or earlier,

(group members).

3    The proceeding relates to changes made (or purportedly made) by AMPFP to the valuation methodology under its BOLR Policy on 8 August 2019. The BOLR Policy formed part of the contractual relationship between AMPFP and each financial planning practice in its network. As at August 2019, there were approximately 542 practices in the AMPFP network (described below). The BOLR Policy gave practices in the AMPFP network that wanted to exit the network the ability to sell back their register rights (defined below, but broadly the contractual relationships with customers including the right to commissions) to AMPFP on 12 months’ notice (or less in some cases). Under the BOLR Policy as it stood before the 8 August 2019 changes, subject to certain exceptions and qualifications, the register rights were to be valued on the basis of a multiple of 4x ongoing revenue (i.e. ongoing revenue received by the practice in the prior 12 months) and the practice would be paid that amount by AMPFP.

4    On 8 August 2019, AMPFP amended (or purported to amend) the valuation methodology under the BOLR Policy (the 8 August 2019 Changes) with immediate effect. The changes were broadly as follows:

(a)    changing the multiple for the purposes of the BOLR Policy from 4x to 2.5x in respect of ongoing revenue other than grandfathered commission revenue; and

(b)    changing the multiple for grandfathered commission revenue:

(i)    initially, from 4x to 1.42x; and

(ii)    then, reducing by 0.8333 per month (referred to as a “glide path”) from 1 September 2019, such that the multiple would be zero by 1 January 2021.

5    The changes to the multiples were applied by AMPFP not only to practices that submitted a BOLR application after 8 August 2019, but also to practices that had submitted a BOLR application before 8 August 2019 with an exercise date after 8 August 2019. Under the terms of the BOLR Policy, those practices could not withdraw their application once it had been submitted unless AMPFP consented.

6    The central issue in this proceeding is whether the 8 August 2019 Changes were effective. The BOLR Policy had been in place for many years, and had been revised from time to time. The latest version of the policy as at 8 August 2019 was the version of the policy that commenced on 1 June 2017 (the 2017 BOLR Policy). That version of the policy contained a term relating to amendments that had been agreed between AMPFP and the AMP Financial Planners Association Ltd (ampfpa), which was an organisation representing financial planning practices in the AMPFP network (described below). The amendment term (on page 5 of the policy) was as follows:

Changes to this policy

The AMP Financial Planners Association Ltd Board (ampfpa) and AMPFP have agreed in writing to the terms of this policy effective 1 June 2017.

–    Unless a shorter period of notice is agreed to by the ampfpa, AMPFP will give 13 months’ notice of a change to the valuation methodology for registers and to any other change having a materially adverse financial or other significant effect on a practice.

–    Subject to the above, AMPFP may make any other changes to this policy following consultation with the ampfpa.

–    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 the ampfpa. In particular, where AMPFP believes that any provision contained in this policy will, or may, cause it to breach or be subject to a penalty under any laws.

–    The Buyer of last resort terms that apply are those terms in force on the Buyer of last resort exercise date or the date the practice surrenders its AR [Authorised Representative] Agreement, whichever is the later.

(Emphasis added.)

7    I will refer to the third indented paragraph, which refers to “legislation, economic or product” changes, as the LEP Provision. (The paragraph was referred to as the “LEP Exception” in Equity’s submissions and as the “LEP Provision” in AMPFP’s submissions. Whether the paragraph constitutes an exception forms part of an issue in the proceeding, namely the issue of onus. I will therefore adopt the neutral expression, “LEP Provision”.)

8    Equity contends that the 8 August 2019 Changes were not authorised by the LEP Provision (or otherwise authorised by the amendment term). In summary, Equity contends that:

(a)    AMPFP did not consult with ampfpa in relation to the changes as required by the LEP Provision and the Master Terms (referred to below);

(b)    AMPFP did not identify the economic or legislation changes it was relying on in making the changes, and did not state how these rendered the policy inappropriate;

(c)    there was no “economic change” or “legislation change” within the meaning of the LEP Provision;

(d)    if (contrary to the above) there was an economic or legislation change, it did not render any part of the policy “inappropriate” within the meaning of the LEP Provision; and

(e)    if (contrary to the above) there was an economic or legislation change that rendered a part of the policy inappropriate, the changes to the multiples were not reasonably necessary to address that circumstance (Equity contends that this is a requirement of the LEP Provision, properly interpreted).

9    Accordingly, Equity contends that the 8 August 2019 Changes were ineffective and that AMPFP acted in breach of contract in putting forward BOLR valuations based on those changes. Equity seeks a declaration that the changes were ineffective and claims damages for loss and damage. In the alternative, Equity claims that AMPFP acted in breach of a contractual obligation of good faith in relation to the changes. In the further alternative, Equity contends that AMPFP engaged in unconscionable conduct within the meaning of s 21 of the Australian Consumer Law, being Sch 2 to the Competition and Consumer Act 2010 (Cth) (the Australian Consumer Law), in relation to the changes. Further, Equity contends that AMPFP engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, in connection with the changes in contravention of s 18 of the Australian Consumer Law.

10    In response, AMPFP contends that the 8 August 2019 Changes were authorised by the LEP Provision (and were effective immediately). In summary, AMPFP contends that:

(a)    while there was a contractual obligation upon AMPFP to consult (within the meaning of cl 1.4 of the Master Terms) with ampfpa, the obligation was not “jurisdictional”; that is, a breach of the obligation does not have the effect that the changes are ineffective; the breach merely sounds in damages for the loss of opportunity to consult, but this results in an award of only nominal damages;

(b)    in any event, on the facts, AMPFP did consult (within the meaning of cl 1.4 of the Master Terms) with ampfpa in relation to the changes;

(c)    it is not a requirement of the LEP Provision that AMPFP identify the economic or legislation change that it relies on; nor is it a requirement that it state how these render the policy inappropriate;

(d)    there was an “economic change” that rendered the policy inappropriate, namely either:

(i)    a sustained and quantifiable decrease in the market value of register rights linked to ongoing revenue; or

(ii)    a material change in the supply of and demand for financial advice services and practices;

(e)    further, in relation to the changes to grandfathered commission revenue, there was a “legislation change” that rendered the policy inappropriate; and

(f)    the changes that were made were responsive to the economic and/or legislation changes (this being the relevant requirement, on AMPFP’s interpretation of the LEP Provision).

11    In the alternative, AMPFP contends that the 8 August 2019 Changes were effective 13 months later, that is, on 8 September 2020.

12    The hearing of this proceeding in October and November 2022 involved the trial of Equity’s claim against AMPFP on all issues of liability and the amount of any damages. Equity did not enter into a buy-back agreement with AMPFP and still holds its register rights.

13    The hearing also involved the trial of the claim of one sample group member, WealthStone Pty Ltd (WealthStone), on all issues of liability and the amount of any damages. Unlike Equity, WealthStone did enter into a buy-back agreement with AMPFP. That agreement contained a release in favour of AMPFP. AMPFP contends that the release defeats WealthStone’s claim against it. In response, the applicant contends that:

(a)    the condition precedent to the operation of the release – the payment of the BOLR benefit (properly calculated) – has not been satisfied;

(b)    the release is void under s 23 of the Australian Consumer Law, which applies to unfair terms of small business contracts; and

(c)    AMPFP’s conduct in procuring the release was, in all the circumstances, unconscionable within the meaning of s 21 of the Australian Consumer Law.

14    I was informed by AMPFP that approximately 135 group members have signed buy-back agreements with AMPFP. About 120 of those agreements contain releases, but they are not all in the same form.

15    In summary, for the reasons that follow, I have concluded as follows:

(a)    the 8 August 2019 Changes were not authorised by the LEP Provision on the basis of AMPFP’s first alternative economic change contention;

(b)    the 8 August 2019 Changes were not authorised by the LEP Provision on the basis of AMPFP’s second alternative economic change contention;

(c)    the changes to the multiple for grandfathered commission revenue (which were part of the 8 August 2019 Changes) cannot be supported on the basis of a “legislation change”;

(d)    the requirement to consult (within the meaning of cl 1.4 of the Master Terms) is a precondition to the effectiveness of the change;

(e)    AMPFP failed to consult within the meaning of cl 1.4 of the Master Terms in relation to the proposed changes; and

(f)    it is unnecessary to determine whether AMPFP breached a contractual obligation of good faith.

16    It follows from the above that the 8 August 2019 Changes (with immediate effect) were not authorised by the LEP Provision and were ineffective.

17    Insofar as AMPFP contends, in the alternative, that the 8 August 2019 Changes were effective 13 months later (on 8 September 2020), I reject that contention.

18    In light of the above conclusions, it is unnecessary to determine whether AMPFP engaged in unconscionable conduct in relation to the 8 August 2019 Changes.

19    It is not necessary to resolve the misleading or deceptive conduct claim to determine the individual claims of Equity or WealthStone, and I therefore prefer not to do so at this stage.

20    In relation to Equity’s claim, I am satisfied that Equity has suffered loss and damage as a result of AMPFP’s breach of contract, and is entitled to damages in the sum of $813,560 (subject to the possible need to adjust this figure as discussed in [675] below).

21    In relation to WealthStone’s claim, I have concluded in summary that:

(a)    the condition precedent to the operation of the release has been satisfied;

(b)    the release is not void under s 23 of the Australian Consumer Law; and

(c)    AMPFP’s conduct in procuring the release was, in all the circumstances, unconscionable.

22    WealthStone is entitled to an order declaring the release void to the extent that it would preclude its claims in this proceeding. Further, WealthStone is entitled to damages in the sum of $115,533.51 (subject to the possible need to adjust this figure as discussed in [719] below).

PLEADINGS

23    At the commencement of the hearing, Equity’s pleading was its second further amended statement of claim. On day 3 of the hearing, I granted leave (by consent) for Equity to amend its pleading and file its third further amended statement of claim (the statement of claim). Broadly, the amendments introduced additional causes of action (in particular, breach of an obligation of good faith and unconscionable conduct). The amendments were partly responsive to an application by AMPFP to amend its defence (see below) and partly so that the pleaded case aligned with the case as opened.

24    Shortly before trial, AMPFP provided a proposed second further amended defence. Some of the proposed amendments were opposed. AMPFP filed an interlocutory application dated 9 October 2022 seeking (inter alia) leave to amend. Most of the amendments were ultimately consented to. The only outstanding dispute was AMPFP’s application for leave to amend the defence to include paragraph 38(b), alleging that the applicant had failed to mitigate its loss. The issue was agitated on day 3, and I gave leave to AMPFP to amend to include this paragraph. AMPFP subsequently filed its third further amended defence to the third further amended statement of claim (the defence), which incorporates those amendments as well as pleadings in response to Equity’s amended pleading. I note for completeness that the particulars to paragraph 38(b) of the defence include three lines that are redacted. On day 19, senior counsel for AMPFP stated that AMPFP does not rely on the redacted portion of those particulars. In other words, the Court does not need to have access to the words that have been redacted and they can be put to one side.

25    In addition to the above pleadings, there is an amended reply. This was not amended during the hearing.

26    The parties prepared points of claim and points of defence in relation to WealthStone’s case. These documents were amended during the hearing. The latest versions of the documents are the further amended points of claim (the points of claim) and the further amended points of defence (the points of defence). There is also an amended reply to points of defence, which was not amended during the hearing.

THE HEARING AND EVIDENCE

27    Equity relied on lay evidence from the following witnesses:

(a)    Kylie Braschey, a director of Equity;

(b)    Leanne Scott, a director of Equity;

(c)    Michael Finch, the sole director and majority shareholder of WealthStone;

(d)    Neil Macdonald, the Chief Executive Officer and Company Secretary of ampfpa;

(e)    Damien Jordan, a director and the Chair of ampfpa at the relevant times;

(f)    Timothy Jones, a director of ampfpa at the relevant times (he was not required for cross-examination);

(g)    Neill Brennan, the Managing Director of Augusta Ventures (Australia) Pty Ltd; the company is part of the Augusta group, which provides litigation funding (he was not required for cross-examination); and

(h)    Louis Young, a director of Augusta Ventures Ltd and Augusta Pool 523 Limited (Augusta Pool 523), the litigation funder for the proceeding (he was not required for cross-examination).

28    Ms Braschey gave evidence in a clear, honest, helpful and straightforward manner. I accept her evidence.

29    Ms Scott’s evidence was largely corroborative of Ms Braschey’s evidence and the cross-examination of Ms Scott was brief. Apart from one factual error in her first affidavit (referred to below), which is of no consequence, I accept Ms Scott’s evidence.

30    Mr Finch displayed a clear recollection of the relevant events and a good grasp of the detail of the documents and other relevant matters. His answers to questions were careful and precise. I accept his evidence.

31    Mr Macdonald was a good, honest and careful witness. He has a deep and thorough knowledge of the industry. He gave precise answers to questions and sought to assist the Court. If and to the extent that it was suggested in cross-examination that Mr Macdonald lacked objectivity because of ampfpa’s role in bringing this proceeding about, I reject that suggestion. I accept his evidence, save where otherwise indicated below (in respect of certain minor matters).

32    Mr Jordan was not always responsive to questions put to him during cross-examination. His answers were on occasion unnecessarily discursive. That said, I am satisfied that he gave evidence honestly and accept him as a reliable witness. I accept his evidence, save where otherwise indicated below (in respect of certain minor matters).

33    Equity relied on expert evidence from the following witnesses:

(a)    Mr George Siolis, a partner of RBB Economics, based in Melbourne;

(b)    Mr Robert Neill, a financial services adviser; and

(c)    Ms Dawna Wright, a forensic accountant (she was not required for cross-examination).

34    I will make observations about the expert witnesses who were cross-examined later in these reasons.

35    AMPFP relied on lay evidence from the following witnesses:

(a)    Damian Byrne;

(b)    David Akers;

(c)    James Scott; and

(d)    Natalie Tatasciore, a partner of King & Wood Mallesons (she was not required for cross-examination).

36    Mr Byrne was the Senior Manager, Value Exchange & Proposition, within the Advice business of the corporate group headed by AMP Limited (the AMP Group or AMP) from July 2017 to July 2021. The title of the position subsequently changed to Head of Commercial Offer. At the relevant times, within AMP’s Australian Wealth Management division, Mr Byrne was regarded as the custodian of the BOLR Policy, in the sense that he was regarded as the expert concerning, and the person responsible for, the terms of the BOLR Policy; queries about the BOLR Policy’s intended operation, necessary changes, or interpretation and clarifications came to him. Mr Byrne reported to Mr Akers for most of the relevant period.

37    Mr Byrne was careful and precise in answering questions during cross-examination. He endeavoured to assist the Court. He made reasonable concessions. He was an excellent witness. I accept his evidence in relation to factual matters, save where otherwise indicated below (in relation to certain minor matters). Insofar as Mr Byrne expressed opinions (for example, as to whether there was an “economic change”), I accept that he held those opinions, but do not necessarily accept them.

38    Mr Akers was the Managing Director of Business Partnerships of the Australian Wealth Management division of the AMP Group between March 2019 and July 2021. Prior to that period, Mr Akers held the roles of Director of Channel Strategy and Services (between April 2017 and April 2018) and Acting Group Executive of Advice (between April 2018 and March 2019). He was also a director and the Chairperson of the AMPFP Board from March 2018 to July 2021.

39    Mr Akers was a good witness. He answered questions clearly and confidently. I accept his factual evidence, save for the matters discussed below. Insofar as Mr Akers expressed opinions (for example, as to whether sufficient time was allowed for consultation, and whether AMPFP had a right to amend the BOLR Policy under the LEP Provision), I accept that he held those opinions, but do not necessarily accept them.

40    Mr Scott was the National Manager of Transaction Strategy within Business Partnerships for the AMP Group from November 2018 to September 2021. In that role he was responsible for leading the Transaction Strategy team that supported AMP aligned practices, including those in the AMPFP network (described below), with merger and acquisition activity, including client register transfers. His role included supporting the Aligned Advice Licensees (described below), including AMPFP, in meeting their governance requirements around client register transfers. Mr Scott holds a Bachelor of Science from Loughborough University, England. He is a Chartered Management Accountant. From June 2012 to November 2017 (apart from a period of 12 weeks), he worked as a management accountant in a number of finance-related roles supporting Aligned Advice Licensees in the AMP Group. From November 2017 to November 2018 he was Transaction Strategy Manager in the Transaction Strategy team.

41    Mr Scott gave evidence in a precise and careful way. He made concessions where appropriate. I accept his evidence on all factual matters. Insofar as he expressed opinions, I do not necessarily reach the same opinions.

42    AMPFP filed an affidavit of Brian George, who was the Acting Managing Director of AMPFP from April 2019 to September 2020. However, AMPFP did not call Mr George to give evidence at the trial. The reasons were explained in an affidavit of Ms Tatasciore, parts of which are confidential.

43    AMPFP relied on expert evidence from the following witnesses:

(a)    Professor Mark Brimble, Professor of Finance and Dean, Griffith Business School;

(b)    Professor Alexandro Frino, Professor of Economics, Wollongong University; and

(c)    Mr Warren Tappe, the Valuations & Technical Manager of the Valuations team, which forms part of the broader M&A Services team in the Advice division of the AMP Group, a position he has held since June 2018 (he was not required for cross-examination).

44    As noted above, I will make observations about the expert witnesses who were cross-examined later in these reasons.

45    In addition to the documents annexed to affidavits, the parties tendered a number of other documents.

46    The expert evidence was presented as part of each party’s case, rather than concurrently.

47    Following the hearing, the parties provided a Revised Court Book (Revised CB) containing the documents that went into evidence.

FACTUAL FINDINGS

AMPFP and the AMPFP network

48    At the relevant times, AMPFP was a wholly-owned subsidiary of AMP Limited, and the holder of an Australian Financial Services Licence (AFSL). AMPFP was one of three entities in the AMP Group that appointed representatives pursuant to authorised representative agreements. The other two entities were Charter Financial Planning Ltd (Charter) and Hillross Financial Services Ltd (Hillross). The effect of the authorised representative agreements was to authorise individuals and companies to provide financial services under the licensee’s AFSL. In Mr Akers’s first affidavit, AMPFP, Charter and Hillross are each referred to as an “Aligned Advice Licensee” and they are together referred to as the “Aligned Advice Business”. I will adopt these expressions.

49    At the relevant times, the majority of financial planners who provided advice under an AFSL held by a member of the AMP Group were not employed by the AMP Group; they either operated as a sole trader or were employed by a corporate entity or through a trust arrangement. The remainder of the financial planners who provided advice under an AFSL held by a member of the AMP Group were employed by an AMP service entity.

50    The Aligned Advice Business offered its advisers and advice practices various services, such as access to compliance and business systems including financial advice tools, education and learning opportunities, to assist with their businesses. Historically, each Aligned Advice Licensee had its own unique characteristics, including in relation to service offerings, brand options and commercial proposition.

51    At the relevant times, AMPFP was the largest of the three Aligned Advice Licensees. More than half of the advisers (that is, financial planners who provided advice under an AFSL held by a member of the AMP Group) were appointed as authorised representatives of AMPFP.

52    The expression “AMPFP network” refers to the network of financial planning practices providing services under an authorisation from AMPFP.

ampfpa

53    As noted above, ampfpa was an organisation representing financial planning practices in the AMPFP network. The members of ampfpa were current and former authorised representatives and/or accredited mortgage consultants of AMPFP.

54    At the relevant times, there was also a body called the Hillross Advisers Association, Inc (HAA). This was also a body representing financial planners. Subsequently, in January 2020, ampfpa and HAA merged. After that date, their combined activities were carried on by ampfpa. In February 2020, ampfpa changed its name to The Advisers Association.

55    At all relevant times, ampfpa’s membership included all of the authorised representatives of AMPFP. AMPFP notified ampfpa of new and departing authorised representatives, and ampfpa also checked the Australian Securities and Investments Commission (ASIC) register about once a year to ensure that its list of AMPFP authorised representatives was up to date. Membership fees were paid to ampfpa by financial planning practices (on behalf of themselves and any authorised representatives and accredited mortgage consultants they employed). In 2019, practices paid an annual membership fee of $700 as well as a fee per authorised representative/accredited mortgage consultant of $450.

56    At all relevant times, ampfpa was governed by a Board of Directors, all of whom were members of ampfpa. Under ampfpa’s Constitution, the Board was solely responsible for the affairs of ampfpa (clause 9.1). The Board had power to exercise all powers of ampfpa, other than those required to be exercised by members under the Constitution or the Corporations Act 2001 (Cth) (clause 9.3(a)).

57    During 2019, the members of the Board were:

(a)    Damien Jordan;

(b)    Scott Weeks;

(c)    Willem Beimers (from 16 September 2019);

(d)    Mark Borg (21 May 2019 – 20 December 2019);

(e)    Karen Grant (until 31 October 2019);

(f)    Todd Jeffrey (until 21 May 2019);

(g)    Timothy Jones;

(h)    David Kelsey (until 19 August 2019); and

(i)    Khoung Tang (from 22 January 2019).

58    Mr Macdonald was not a member of the Board, but he attended meetings of the Board in his capacity as CEO. The Board had a Chair and a Vice Chair. During 2019, the Chair was Mr Jordan and the Vice-Chair was Mr Weeks.

59    Aside from Mr Macdonald, ampfpa had three full-time staff and one contractor in 2019. Their roles were to deal with the day-to-day operations of ampfpa, manage member benefits that ampfpa arranged and provided, and address queries and complaints regarding ampfpa members’ relations with AMPFP.

60    At the relevant times, one of the subcommittees established by ampfpa Board was the Remuneration Committee (RemCo). During 2019, the members were:

(a)    Mr Jordan (as Board Chair);

(b)    Mr Weeks (as Board Vice-Chair);

(c)    Mr Kelsey;

(d)    Mr Jones (from 17 June 2019); and

(e)    Mr Macdonald.

61    At the relevant times, RemCo was responsible for, among other things, engaging with ampfpa’s members and with AMPFP regarding proposed changes to the BOLR Policy. RemCo did not hold a delegation from ampfpa’s Board to conduct “consultation” with AMPFP for the purpose of the Master Terms and BOLR Policy.

Some key concepts – institutional ownership and register rights

62    At the relevant times, AMPFP maintained “institutional ownership” of each client register. The concept of “institutional ownership” is conveniently described in the 2017 BOLR Policy (in the definition of “Practice and client institutional ownership”):

Consistent with the terms of the AR [Authorised Representative] Agreement, AMPFP retains the relationship with those clients that were introduced to, and serviced by, the practice while an authorised representative of AMPFP. This is called “institutional client ownership”. If the AR Agreement is terminated, the clients that have been serviced by the practice principal (or by an adviser within the practice) will remain with AMPFP and continue to be serviced by AMPFP or by another authorised representative of AMP. Neither the practice nor the practice principal has any goodwill or other proprietary rights in relation to the clients. As per the Master Terms, for a period of 6 months after termination of the AR Agreements, the practice and the practice principal must not, either on their own account or in association with any other person approach, entice, induce, or encourage an existing client (as defined in the Master Terms) to transfer or remove custom from AMPFP. Subject to any other agreement reached with the practice, AMPFP does not claim institutional client ownership for those clients of the practice that were existing clients of the practice prior to the practice signing the AR Agreement with AMPFP (or a previous agency agreement with AMP Life).

(Footnotes omitted; emphasis added.)

63    The concept of “register rights” is also described in the 2017 BOLR Policy (in the definition of “Register and register rights”):

For each practice, AMPFP creates a client register.

The client register records the name and address of the client and the products held or services agreed by that client and for which AMPFP considers the practice to be the servicing practice of that client. The register includes, but is not limited to, those clients, products and services that have been allocated by AMPFP to the practice from the register of another practice or from an AMPFP register.

[I]f the practice holds an AR [Authorised Representative] Agreement with AMPFP and is recognised as the owner of the register rights, the practice has contractual register rights in relation to those clients and products on the register, namely:

–    The right to contact and provide advice and other financial services to any client recorded on the register as authorised under the AR Agreement, subject to continued compliance with the obligations of the AR Agreement. This right does not prevent AMPFP contacting clients in line with any client protocols agreed from time to time between ampfpa and AMP and does not prevent the client approaching any other practice for advice and other financial services.

–    The right to access the client’s files and records for the purpose of contacting and providing such advice and other financial services.

–    The right to receive payments when they are made, e.g., permissible ongoing fee for service or commission, as agreed under the AR Agreement in return for providing financial advice and other services as long as the clients and policies remain on the register.

The practice is able to accumulate and build on the value attached to those register rights. The practice may realise the value in the manner noted below:

–    Complete a practice-to-practice transfer, where the practice seeks AMPFP’s approval to surrender its register rights and transfer some or all of their clients on the register to another practice and for AMPFP to appoint the other practice as the servicing practice for those clients.

–    Apply to AMPFP for a Buyer of last resort benefit.

(Footnotes omitted; emphasis added.)

64    As stated in the passage set out at [62] above, if an authorised representative agreement was terminated, the clients on the register would remain with AMPFP and continue to be serviced by AMPFP or another authorised representative of AMP.

65    Further, as the above passages record, the practice did not have proprietary rights in relation to the client register. The 2017 BOLR Policy allowed a practice to realise the value of its register rights by completing a practice-to-practice (P2P) transfer of some or all of its register rights (with AMPFP’s approval) or by applying to sell back its register rights to AMPFP under the BOLR Policy.

The key contractual documents

Authorised representative agreements

66    The evidence includes a number of examples of the template for the authorised representative agreements. There were two different versions: one for a corporate practice and one for a sole trader practice. It appears that the template for each version was updated from time to time.

67    By way of example, the Authorised Representative Deed of Agreement between AMPFP and Equity (which utilised the template for a corporate practice) stated in the “Background” section that: AMPFP had a “Licence” (defined as meaning an AFSL and an Australian credit licence); the Practice (i.e. Equity) had submitted an application to AMPFP to be given an “Authorisation” (defined as meaning an authorisation for the purposes of Ch 7 of the Corporations Act to provide the specified financial services on behalf of AMPFP and an authorisation for the purposes of the National Consumer Credit Protection Act 2009 (Cth) to provide specified credit services on behalf of AMPFP); and AMPFP had agreed to give the Practice an Authorisation on the terms of the agreement.

68    Clause 2 (headed “Authorisation”) provided (inter alia) that AMPFP agreed to give the Practice an Authorisation as set out in Item 5 in the Schedule (which referred to a Financial Services Authorisation and a Credit Authorisation).

69    Clause 3.1 provided that the Master Terms formed part of the Agreement. The expression “Master Terms” was relevantly defined as meaning the “document (in electronic form) entitled ‘Authorised Representative – Master Terms’ which … sets out the additional terms applying to the Authorisation and includes reference to … the Practice Documents …”. The expression “Practice Documents” was not defined in the agreement, but clause 1.2(c) provided that words defined in the Master Terms “have the same meaning in this Agreement”.

Master Terms

70    The document titled the Authorised Representative Deed of Agreement – Master Terms (the Master Terms) went through a number of versions. The version to which the parties referred in their submissions is the third version, published in June 2015. I will refer to this version of the Master Terms in these reasons.

71    The Master Terms contained a number of definitions in clause 1.1. These included a definition of “Practice Documents” as follows:

Each of the following documents:

(a)    the Register and Buyer of Last Resort (BOLR) Policy; and

(b)    the Settlement and Recognition terms

as Published from time to time by AMP Financial Planning or otherwise Notified by AMP Financial Planning to the Representative from time to time.

72    It is clear from the above that the expression “Practice Documents” included the BOLR Policy.

73    The expression “Representative” was defined as meaning the person that had been given an Authorisation by AMPFP and had signed an authorised representative agreement and included the Practice.

74    Clause 1.4 of the Master Terms provided a definition of the word “Consult” for the purposes of clauses 3.2 and 10.2 of the Master Terms. Clause 1.4 provided:

1.4    Consultation process

The parties agree that a reference to Consult in clauses 3.2, and 10.2, means that there is no obligation on AMP Financial Planning to reach any agreement with the ampfpa but that AMP Financial Planning will:

(a)    give the ampfpa reasonable prior notice about the proposed changes having regard to the urgency with which the changes must be made;

(b)    advise the ampfpa about the proposed timetable for when those changes will come into effect;

(c)    explain why AMP Financial Planning considers that those changes are required and their implications for Representatives as a whole; and

(d)    consider, but not necessarily accept, any responses, options or alternatives offered by the ampfpa about those changes provided always that such responses, options or alternatives are provided to AMP Financial Planning promptly having regard to AMP Financial Planning’s timetable for when those changes will come into effect.

75    Clause 2 of the Master Terms dealt with matters relating to the authorisation of the Representative.

76    Clause 3 dealt with professional standards and Practice Documents. Clause 3.2 was in the following terms:

3.2    Practice Documents

(a)    Without limiting the generality of any other obligations imposed on the Representative by this Agreement, the Representative agrees to comply with and be bound by the Practice Documents.

(b)    From time to time, AMP Financial Planning may change, up-date or issue new provisions of the current Practice Documents or issue new Practice Documents dealing with other issues affecting the Representative. The Representative must comply with, and be bound by, the terms of any changed or up-dated Practice Documents or any new Practice Documents.

(c)    Prior to any change to any Practice Documents or the issue of any new Practice Documents that, in the reasonable opinion of AMP Financial Planning, will have an adverse financial or other significant effect on the Representative, AMP Financial Planning will Consult with ampfpa about the changes or issue but there is no obligation on AMP Financial Planning to reach any agreement with ampfpa in connection with the changes or issue.

(d)    Where the Representative is Working for the Practice, the Practice Documents only apply to the Practice.

(Emphasis added.)

77    It is common ground in this proceeding that, whether because of clause 3.2 of the Master Terms or otherwise, before making the 8 August 2019 Changes, AMPFP was required to consult with ampfpa within the meaning of clause 1.4 of the Master Terms.

BOLR Policy

78    As noted above, the version of the BOLR Policy in place at the time of the 8 August 2019 Changes was the 2017 BOLR Policy.

79    On pages 3-5 of the policy, a number of “principles and definitions are set out”. These include:

(a)    The first of these is headed “Parties to the arrangement”. This states that the policy forms part of the authorised representative agreement between each practice and AMPFP, and that, “[w]hen exercising the [BOLR] facility, all parties will act in good faith”.

(b)    The description of “Practice and client institutional ownership” has been set out above. Likewise, the description of “Register and register rights” has been set out earlier in these reasons.

(c)    In the definition or description of “Control of entitlement” on page 4, it is stated that, if on termination of an authorised representative agreement a practice has not been an authorised representative for at least four years, it is not entitled to a BOLR benefit.

(d)    The description of “Discretion to discount or pay on special conditions” states that “AMPFP retains the right to apply a discretionary discount to a practice’s Register Valuation (RV) at the time it is exercising [BOLR], if in AMPFP’s reasonable opinion it is prudent to do so”. The description includes:

The basic rationale behind BOLR is that AMPFP will pay a practice a BOLR benefit where the practice is closing down and that practice has been unable to find another AMPFP practice to take over all or part of the register. In exchange for the [BOLR] payment, however, AMPFP expects to receive clear title to the register without any undue threat that the practice, or those associated with the practice, will materially diminish the value of the client base or encourage clients to move away from AMPFP.

80    The amendment term, which is located on page 5 of the 2017 BOLR Policy, has been set out in the Introduction to these reasons (see [6] above).

81    The 2017 BOLR Policy states on page 6 that “AMPFP has agreed to provide a Buyer of last resort facility on terms outlined in this policy”.

82    In the section dealing with eligibility criteria, on pages 6-7, it is stated that the practice has the right to access BOLR only where (among other things) “the practice principal and all equity holders in the practice undertake not to compete”. This section also deals with the practice having made reasonable endeavours to transfer the register rights to another practice authorised by AMPFP prior to exercising the BOLR rights.

83    On page 8 of the policy, the valuation methodology is set out. It is stated that, under Buyer of Last Resort terms, “a practice’s client register will be valued at 4.0x annual ongoing revenue received by the practice in the prior 12 months”. It is then stated that “[o]ngoing revenue is defined as the recurrent revenue to which the practice is entitled in relation to the register rights being transferred, including permissible trail commission, renewal income and ongoing fees”. (I note that one type of ongoing revenue referred to in documents in evidence is ongoing fee arrangement (OFA) revenue.) Further details are then provided for the purposes of calculating ongoing revenue. There are also certain exclusions from ongoing revenue and register value. These include “[w]here AMPFP considers the revenue to be temporary and is expected to cease within 12 months of the exercise date” (page 9).

84    The 2017 BOLR Policy states (on page 9) that, once lodged, a BOLR application may not be withdrawn by the practice unless AMPFP agrees. This point is emphasised in Equity’s submissions in the proceeding. When AMPFP introduced the 8 August Changes, subject to certain exceptions, they applied to practices (such as Equity and WealthStone) that had submitted a BOLR application prior to 8 August 2019, and those practices were not entitled to withdraw their BOLR application unless AMPFP agreed.

85    The 2017 BOLR Policy also states that “[i]f the other parties to the BOLR Licensee Buy-Back Agreement refuse to sign that Agreement after AMPFP has given those parties at least 7 days to do so, the entitlement to a Buyer of last resort payment will lapse”.

86    The 2017 BOLR Policy contains terms relating to the notice period for exercise of the BOLR rights (at pages 10-11). The document states that the minimum notice period is “typically 12 months”. However, for practices with more than 15 years’ tenure at the exercise date, or practices willing to accept a register discount, the notice period is a minimum of 6 months. Further details are provided regarding the amount of the discount where a notice period less than 12 months is sought. For example, where the practice’s tenure is over 4 years and up to 10 years, the register value is to be discounted to 80%.

87    The 2017 BOLR Policy contains terms relating to “Buyback assessment” (at pages 11-15). This section describes a process of assessment of client files, with four discrete components: (1) client file assessment; (2) minimum client data requirements; (3) compliance concerns; and (4) ongoing fee arrangement assessment. The assessment of these matters could result in the discounting of a client register, or the reduction in the amount to be paid by AMPFP to the practice.

88    Payment terms are dealt with on pages 15-16 of the 2017 BOLR Policy. Various “exit scenarios” are outlined, and details are provided for a certain percentage of the total amount to be paid at the exercise date, with the balance to be deferred to 6 or 12 months later (depending on specified criteria).

89    A document that provides a useful overview of the BOLR Policy and its commercial context (before the 8 August 2019 Changes) is a memorandum dated 17 July 2018 from Mr Akers to the AMP Limited Board titled “Overview of Buyer of Last Resort (Bolr) Schemes” (the Akers July 2018 Memorandum). The purpose of the memorandum was stated to be “to update the Board on key features and risks of Buyer of last resort (Bolr) and other buyout programs within the Advice business”.

90    The section headed “AMP’s Buyout Programs” stated:

AMP has several buy-back models in place across its advice licensees, each with different terms and valuation methodologies. AMPFP’s Buyer-of-last-resort (Bolr) model represents the highest valuation, the largest exposure, and is the most commonly utilised of AMP’s buy-back models and this paper will focus primarily on the Bolr program. AMP’s exposure to Hillross’ EBB program is significantly smaller. The other programs (Hillross LBB and Charter) do not represent a premium to market, are infrequently [utilised] and are not considered to represent a material exposure.

91    As is apparent from the above extract, different buy-back models were in place in relation to AMPFP, Charter and Hillross. The buy-back model for the AMPFP network was referred to as the “BOLR” policy. The buy-back models in place for the Charter and Hillross networks were not referred to in this way. Consistently with this, when I refer in these reasons to the “BOLR Policy”, I am referring to the policy in place for the AMPFP network.

92    Despite the above table indicating there were 800 practices in the AMPFP network, Mr Akers gave evidence in his first affidavit, which I accept, that: at the start of 2018, AMPFP had approximately 640 practices in its network; and, as at 8 August 2019, AMPFP had approximately 542 practices in its network.

93    Under the heading “The Bolr Ecosystem”, the Akers July 2018 Memorandum stated:

AMPFP’s Bolr program is a buy-back arrangement under which practices may sell their client registers to the licensee and exit the industry, with AMP obliged to purchase based on a prescribed valuation methodology. All AMPFP practices with 4+ years tenure are eligible to exercise Bolr.

An “ecosystem” has developed to support the … transfer of client registers from practice-to-practice or between practices and AMP, and based on reciprocal benefits to AMP and practices as shown in the chart below.

AMPFP has several options to manage client books acquired from selling practices under Bolr, including (i) transfer/sell the client book to another servicing practice; (ii) maintain the practice as a “going concern” within AMP Advice’s employed adviser model; (iii) transfer high-touch clients to an existing AMP Advice practice; (iv) transfer low-touch clients to the AMP Assist direct servicing model.

Bolr has historically supported several objectives for AMP, practices and clients including:

•    Support practice through life-cycle: through the transfer of client books to practices looking to grow inorganically, or to seed start up practices with initial client books.

•    Provide continuity for clients when a practice exits: The client book of the exiting practice is transferred to another practice, with client servicing rights and obligations intact.

•    Enhanced adviser value proposition: Bolr is highly valued by practices and historically has been a key component of AMPFP’s adviser value proposition. Practices principals that have successfully grown their business view Bolr as their nest-egg providing post-retirement security. Some practices also utilise Bolr as part of their internal business management activities, such as employee participation schemes and succession planning.

(Emphasis added.)

94    In the section headed “Bolr Valuation and Terms”, the memorandum stated:

Bolr valuation is based on a flat multiple of 4x ongoing income (both fee and commission income). One-off or upfront income is not included. Bolr is product-agnostic – income is valued whether linked to an AMP or non-AMP product. Bolr valuation is subject to discounting where an exit audit indicates that the practice has not maintained adequate client records or met servicing and compliance standards.

A review of recent transactions indicates an average discount of 20%, with most practices receiving discounts within the range of 10-25% (implying a valuation of 3.0-3.6x ongoing revenue). Deferred terms (12 months) also incentivise an adviser to provide effective handover to the next servicing adviser, and acts as downside protection should issues be found post settlement.

(Emphasis added.)

95    As indicated in the above extract, in many cases where a practice sold its client register to AMPFP under the BOLR Policy a discount was applied by AMPFP. This could arise, for example, where AMPFP’s audit of the client files revealed deficiencies in the records kept by the practice. In some documents (including the memorandum currently being discussed) this was said to imply a valuation of less than a 4x multiple of ongoing revenue. However, generally, including in Mr Scott’s evidence, the multiple for a transaction was a matter that was treated separately from the question whether any discounts applied to the transaction.

96    Appendix 1 to the Akers July 2018 Memorandum sets out key terms of the 2017 BOLR Policy. The appendix stated:

(Emphasis added.)

97    The emphasised passages in the above extract draw a link between the BOLR Policy and institutional ownership terms. As explained above, under institutional ownership terms, AMPFP retained the relationship with the clients and, if the authorised representative agreement was terminated, the clients remained with AMPFP rather than with the practice; neither the practice nor the practice principal had any goodwill or other proprietary rights in relation to the clients. While these terms placed restrictions on practices, practices were prepared to accept this in circumstances where the BOLR Policy existed and the multiple payable under the BOLR Policy was above that payable in the external market (that is, the market for the sale and purchase of financial planning practices not subject to institutional ownership terms with AMPFP or like terms with another AFSL holder) (the external market).

98    Another document that provides commercial context for the BOLR Policy (before the 8 August 2019 Changes) is a draft memorandum dated December 2018 from Mr Byrne to Mr Paff and Mr Symons titled “Buy back (BOLR) Strategy” (the Byrne December 2018 Memorandum). The evidence includes a number of versions of this draft memorandum, prepared during the period from March 2018 to January 2019. The Byrne December 2018 Memorandum included the following text under the heading “Real or notional benefits of existing [buy]back models”:

Maintain customer servicing via market creation: From a customer perspective, BOLR supports ongoing servicing when a practice exits the industry. This is achieved with a guaranteed valuation and service alignment approach that supports the transition of client servicing rights from exiting practices to new or existing practices or AMP (Appendix 3).

Practice value proposition: From a practice perspective, BOLR / EBB [a reference to one of the Hillross buy-back policies] represent a significant premium to market valuations and are therefore highly valued by incumbent practices. This practice value has encouraged practice recruitment and retention and provided an additional incentive for practice recurring revenue growth.

Practice, customer, and value retention: From AMPs perspective, the premium paid under BOLR and EBB is a key reason for practices accepting institutional ownership terms, which have restricted practices from exiting the licensee without exiting the industry. These terms have been effective at retaining clients within the network and have discouraged AMPFP and EBB practices from becoming self-licensed or joining competing licensees.

Support practice life cycle (start up, grow and exit): Historically AMP has resold acquired client registers to practices looking to grow inorganically, or to seed start up practices through PSO offers. This activity is more constrained now as AMP is actively acquiring registers and scaling internal servicing capabilities.

(Emphasis added.)

99    In the first emphasised passage in the above extract, it is stated that the BOLR Policy represents a “significant premium to market”. A large number of other documents in evidence also refer to the BOLR multiple representing a “premium” to market, being the external market. See, for example: the PowerPoint presentation dated April 2018 (AMP.5800.0116.0046 at _0001 and _0003); the draft memorandum dated May 2018 (AMP.5800.0093.0237, first page and _0002); the PowerPoint presentation of July 2019 (AMP.5800.0020.9035 at _0003). Further, Mr Byrne gave evidence in his affidavit that it was widely acknowledged within AMPFP and by practices that the valuation offered by the BOLR Policy was a premium to the external market value of the registers. In light of those documents and that evidence, I find that the BOLR multiple (prior to the 8 August 2019 Changes) represented a premium to the external market.

100    I note also that, in the second emphasised passage in the above extract, a link is drawn between the premium payable under the BOLR Policy and the acceptance by practices of institutional ownership terms. This is the same point as discussed at [97] above.

The period before May 2017

101    On 1 July 2013, the Future of Financial Advice (FOFA) reforms became mandatory. (The reforms were voluntary from 1 July 2012.) Relevantly for present purposes, the reforms banned conflicted remuneration, but commission arrangements that were already in place were “grandfathered”, meaning they could continue to be paid. These commissions were referred to by AMPFP as grandfathered advice revenue or “GAR”. In addition, certain other commissions remained permissible under FOFA (such as those relating to insurance and mortgages). Other than these commissions, conflicted commissions were prohibited by FOFA. As a result of these changes, where commission revenue was not available to subsidise advice, financial planning practices needed to charge clients an explicit advice fee; this could be a one-off fee paid by the client, but more often was a fee paid pursuant to an ongoing fee arrangement, with the fee deducted from the client’s product and remitted by the product issuer via the AFSL licensee.

The period May 2017 to August 2018

102    During this period, AMPFP made a strategic decision to keep (rather than on-sell) a portion of the client registers that it purchased under the BOLR Policy. (Historically, the large majority of client registers acquired by AMPFP under the BOLR Policy had been on-sold to an existing or a new practice in the AMPFP network.) Also during this period, early strategic thinking commenced within AMPFP as to a future “end state” in relation to the BOLR Policy.

103    The evidence includes a memorandum from Justin Morgan (Head of Licensee Value Management at AMP) and Mr Akers to AMP’s Advice Leadership Team dated 11 May 2017 on the subject “Buy Back and Planner to Planner Process Change”. Mr Akers was taken to this document during cross-examination and gave the following evidence, which I accept:

… what you were there identifying is a recommendation that AMP increase its ownership and ongoing servicing of customer registers purchased through licensee buyback policies?---Yes.

…

… But it did represent an intention to hold a greater proportion of registers than might have historically been the case in the past?---Yes.

Yes. And so rather than acting as a clearing house of all registers through the buyer of last resort policy what this reflected was a change in strategy to retaining a proportion of those registers?---That’s correct.

104    The evidence includes a memorandum dated 25 June 2017 from Mr Morgan to the AMP Life and NMLA Audit Committee on the subject “Customer Account Register Pool and Strategic BOLR review update”. The memorandum’s purpose was stated to be to provide an update on:

•    Changes to AMP’s strategic approach to the purchase and onsell of client registers.

•    The Strategic Review of BOLR including Project Derby phase 3

105    The executive summary of the memorandum stated:

•    The establishment of a direct servicing capability through AMP Direct and AMP Advice has led to a change in our approach to managing business transactions across the network. Management is no longer actively working to minimize inventory levels.

•    Under our revised approach, exiting businesses are assessed to determine the most appropriate transaction pathway, with options including (i) internal succession, (ii) install new ownership in a viable existing business, (iii) sell the client registers to another practice and (iv) acquire and develop a direct servicing relationship.

•    This approach is being implemented and will be applied to the 75 business transactions scheduled to take place between July 2017 and June 2018. AMP expects to acquire a significant number of clients that will be serviced directly by AMP.

•    Policies in Register Company (except for leased policies) will now be held as intangible assets, rather than as inventory. ~$45m was transferred from inventory to intangible on 30 June 2017.

•    A program of work to update processes and systems relating to managing BOLR under changes to policy announced in 2016 is now almost complete.

(Emphasis added.)

106    “AMP Direct” and “AMP Advice” were explained in the “Background” section of the memorandum. That section included the following:

Under AMP’s historical approach to managing the buy-back ecoystem, management has actively worked to on-sell a high proportion of purchased client registers, and reduce AMP’s inventory level, to seed new business growth and to provide a growth channel for established practices.

At the AMP Investor Strategy day in May 2017, management highlighted our intention to enhance AMP’s operating margins through broader participation in the Advice value chain. One of the key opportunities to realise this objective is to implement a direct servicing capability that enables AMP to develop a service-based relationship for clients purchased through practice buy-back transactions.

The establishment of (i) AMP Direct as a remote servicing model for low-touch clients and (ii) AMP Advice as a face-to-face servicing model for high touch clients, provides the opportunity to increase AMP’s ownership of customer registers in a manner that would maximize AMP economic value, and offer a broader, deeper and more scalable servicing model to segments that are currently either non-serviced or else under-served. Under this approach, AMP can capture and maintain service fees attached to policies acquired by AMP (these fees are currently switched off).

This revised approach is currently being implemented. Consistent with this approach, management is no longer actively working to minimize inventory levels, and expects to acquire a significant number of clients that will be serviced directly by AMP.

Under our revised approach, exiting businesses are assessed to determine the most appropriate transaction pathway in the interests of our customers and the distribution network. Outcomes may include:

1.    Internal succession within the business, where appropriate successor is identified.

2.    Restructure and maintain the business as a viable going concern, owned by AMP, a new practice principal, or else under an equity partnership model.

3.    Business to business transactions, which will continue to be supported where consistent with AMP’s strategic interests.

4.    Buy back and service through AMP Direct and/or AMP Advice, with all commission and/or servicing revenue accruing to AMP.

(Emphasis added.)

107    “AMP Direct” was subsequently re-named “AMP Assist”. The name “AMP Advice” remained the same.

108    During cross-examination, Mr Byrne provided the following explanation of AMP Assist and AMP Advice. AMP Assist was a phone-based advice service. AMP Advice was a face-to-face advice service. AMP Advice involved both: (a) employed advisers providing advice in AMP offices; and (b) self-employed practices operating under the processes, technology and systems of AMP Advice.

109    During cross-examination, Mr Scott gave the following evidence, which I accept:

… at the time of the commencement of the buyer of last resort policy, in effect, from 1 July 2017, you were aware that AMP was changing its strategy with respect to on-selling registers by increasing the number of registers it would retain and have serviced by AMP Assist and AMP Advice?---Yes.

And that strategy involved not on-selling as many registers as had occurred historically?---Yes.

And concerned – rather than acting as a clearing house of registers through the buyer of last resort policy acting as a company which held a proportion of registers for direct servicing?---Yes.

110    The evidence includes a memorandum dated 4 July 2017 from Mr Scott to James Georgeson and John O’Farrell (of AMP) on the subject “Buyback update”. The “Purpose” section of the memorandum stated that the paper explained the change in accounting treatment for “buyback transactions resulting from the strategic decision to service more policies internally” and for “external policy write downs on purchase”. The executive summary included:

The Advice business are making changes to practice transaction processes based on a revised decision-making framework that will support a range of outcomes for business transactions across the network including buyback, on-sell and planner to planner.

Exiting businesses will be assessed, with a recommendation developed as to the most appropriate outcome in the interests of customers and the distribution network. Outcomes may include planner to planner transactions, internal succession within the business, and unbundling then allocating customers to an appropriate service channel. This will be aligned with a strategy to participate more in the Advice value chain and service policies internally.

The change in strategy by the Advice business requires a reclassification of buyback policies held on the balance sheet. AMP accounting policy is that client registers which are held for sale in the ordinary course of business are classified as inventory.

However, individual client policies will not be classified as inventory where either:

(a)    a decision has been made by the business not to sell the policy; and/or

(b)    the policy has an attribute that is been systematically excluded from sale

(Emphasis added.)

111    The evidence includes a memorandum dated 22 November 2017 from Mr Akers to the AMP Limited Board titled “Revised approach to acquire client registers”. The purpose of the memorandum was stated to be:

To provide the Board with an update on our strategy under which AMP will acquire client registers from aligned practices through buyout transactions and providing direct servicing to clients through AMP Assist and AMP Advice.

112    The executive summary of the memorandum stated:

AMP has implemented a revised approach to acquisition of customer registers, under which customers will be served through the channels most appropriate to meet their needs, including AMP Assist and AMP Advice.

Previously AMP has on-sold acquired client registers wherever feasible to other servicing practices or as part of Practice Start-up Offers. Our revised approach will retain a growing portion of these registers to be serviced through AMP-owned channels. This approach is expected to deliver returns to the Advice business through the in-housing of existing product commissions and fee-for-service client relationships, while also recognising the potential value to AMP Group of expanding our addressable customer base.

Over the next 5 years we expect to acquire ~$50m in customer registers per annum, with an aggregate capital investment of $250m. The financial impact is expected to approach hurdle excluding amortization and assuming lower cost to serve.

We are well positioned to execute on this strategy given the investment in underlying technology and infrastructure in recent years, enabling us to digital engage and serve clients in a more personalized yet scalable manner.

This strategy also enables us to take control of the inevitable increase in aligned businesses accessing buyer-of-last-resort terms over the coming years driven predominantly through the key deadlines for education standards; the trend of sub-scale businesses opting out and through more deliberate interventions by AMP on higher-risk and / or underperforming businesses.

(Emphasis added.)

113    On 14 December 2017, the Commonwealth Government established the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (the Financial Services Royal Commission or the Royal Commission). The Honourable Kenneth Hayne AC QC was the sole commissioner.

114    In 2018, the Financial Adviser Standards and Ethics Authority (FASEA) announced educational requirements that advisers would need to meet. These changes placed pressure on advisers to consider their careers and their individual plans. This was particularly so for older advisers who were nearing retirement age and were concerned about taking educational courses and examinations for the first time in a long time.

115    During cross-examination, Mr Scott gave evidence, which I accept, that the strategy of AMPFP keeping (rather than on-selling) a portion of the registers acquired under the BOLR Policy was fully operational by early 2018. He gave evidence, which I accept, that from that point on (until August 2019), BOLR transaction registers (that is, registers acquired under the BOLR Policy) mainly went to AMP Advice and AMP Assist.

116    Further, Mr Scott gave evidence, which I accept, that AMP’s strategy in the period early 2018 to August 2019 involved placing as many clients as possible with AMP Advice and AMP Assist and then finding a home for remaining clients that did not meet the exceptions criteria and accreditation criteria for clients of AMP Advice/AMP Assist. Where clients could not be placed with AMP Advice/AMP Assist, or there were other reasons for not placing them with AMP Advice/AMP Assist, the clients were on-sold. This was referred to in the evidence as a “partial on-sell transaction”; in other words, it involved the on-sale of only part, rather than the whole, of a register.

117    The evidence includes a draft memorandum dated March 2018 from Mr Byrne, Chris Fernie (the Head of Channel Strategy at AMP) and Julian Cappe (a consultant engaged by AMP’s Australian Wealth Management division) to Mr Akers and Michael Paff (Managing Director of AMPFP and AMP Advice) titled “Buyback review”. The draft memorandum set out an “early hypothesis of end state”, which included a move away from the then current BOLR valuation methodology, and discussed an “early hypothesis of transition”. In relation to the latter topic, the draft memorandum discussed “tactical changes” (described as phase 1) and a “glide path” (described as phase 2). The draft memorandum stated in part:

Phase 2 – Glide path: As we move from the current BOLR valuation methodology to end state models it is recommended that an extended glide path be put in place. The concept of the extended glide path is to reduce the recurring revenue multiple very slowly so that growing practices are incentivised to remain in business and, over time, the new models become more attractive.

With an anticipated 13 month notice period and a minimum of 3 months of consultation with the ampfpa, (and need to have some key tactical changes such as run clause in place before any engagement) it is unlikely that the glide path would commence until early 2020 at the earliest. The rate at which the multiple reduces by and the time horizon of the glide path can be modelled, but an indicative approach may be a five year transition where the multiple decreases by 0.03x per month (0.36 or ~9% pa).

(Mark-up in original.)

118    During cross-examination, Mr Byrne gave the following evidence, which I accept, in relation to early 2018:

And your view in early 2018 was that AMPFP should change its model to remove institutional ownership and remove any premium payable under BOLR, wasn’t it?---Over an extended period of time, I saw that as, yes, something that the business should consider.

Let me be clear: my question was different to the question that you sought to answer. Your view in early 2018 was that AMPFP should change its model to entirely remove institutional ownership and remove any premium payable under the buyer of last resort policy, wasn’t it?---Over an extended period of time, yes.

And so when you say, “Over an extended period of time”, are you referring to the time at which your view was formed or the time at which those steps should be undertaken?---Time at which those steps should be undertaken.

119    Under the heading “Risks and challenges with hypothesis”, the draft memorandum dated March 2018 stated in part:

Timing risks: BOLR and institutional ownership are fundamental elements of the AMPFP and Hillross value propositions and the implications of change are far reaching. Practices and the adviser associations are highly sensitive to changes to these terms and there is an expectation that any reduction to practice value would be countered by an equal and opposite improvement in value elsewhere.

Changes introduced under Derby were designed internally for approximately 7 months with the assistance of three phases of engagement with AT Kearney. There was then a series of negotiations with the ampfpa over a 10 month period (to April 2016) when the changes were launched. Those changes did not take effect for a further 13 months. Although these changes were material, they were also designed to not materially impact the overall valuation of the network (therefore there were both winners and losers as a result of the changes). Despite the AMPFPA agreement to changes, the transition paths and held value terms put in place, there was still a large volume of BOLR exits following the changes. In recent discussions with the AMPFPA they have also noted that they would have preferred to have gone slower with the BOLR changes and not to have agreed to launch when we did. With this context, the aforementioned transition plan would be considered aspirational and unlikely to be realised unless a more aggressive approach to adviser association consultation is taken.

(Emphasis added.)

During cross-examination, in relation to a later memorandum (dated December 2018) with similar text to that set out above, Mr Byrne said that on reflection he would characterise BOLR and institutional ownership as important, rather than fundamental, elements of the value proposition.

120    In April 2018, the second round of hearings of the Financial Services Royal Commission (which dealt with financial advice) commenced. Mr Byrne accepted during cross-examination that, during the course of the Royal Commission hearings in early 2018, AMP suffered significant brand and reputational damage.

121    At about this time, Mr Byrne, as part of an AMP working group, started working on the implications for the AMP Advice Licensees if grandfathered commission revenue were to end.

122    The evidence includes a draft memorandum dated May 2018 from Mr Byrne, Mr Fernie and Mr Cappe to the Advice Leadership Team of AMP on the subject “Commercial Buyback terms – review”. The document was labelled “DRAFT for discussion”. The “discussion questions” were identified as:

1.  Problem: Are the top three issues with AMP buy back models: (1) the liability risks and exposure of a ‘run’ on BOLR, (2) perception issues relating to institutional ownership for EBB and BOLR, and (3) the premium to market valuation offered under AMPFP BOLR and to a lesser extent Hillross EBB?

2.  End state: Does the removal of BOLR/EBB terms and institutional ownership make sense as a response to these problems in an end state?

3.  Transition: Is an initial phase of internal preparation in 2018/19 followed by an extended glide path reduction in values from 2020-2025 preferable to a more immediate change?

123    The section headed “BOLR and the Royal Commission into Financial Services” stated:

The Royal Commission into Banking and Financial Services has put AMP under intense media, customer and stakeholder scrutiny. A focus of that scrutiny has been AMPs charging of fees for no service when customers have been sold back to AMP and have remained in the ‘BOLR pool’. This issue was the result of system and process failures, but in some cases it was because of a business practice. Although this issue was resolved in November 2016, there is understandably a heightened awareness of all processes surrounding our buy back arrangements and an imperative to ensure customer servicing is maintained when practices exit the industry.

As a result of the negative stakeholder sentiment flowing from the Royal Commission, there has been a significant increase in practices asking about BOLR and also considerable media speculation on the potential for practice exits and AMPs liability. AMP is beginning to see a stepped increase in exit notices – with 5 received in the first week of May (last week), compared to an average of less than 1 week since the start of the year.

As a result of the Royal Commission, it is likely that practices within the network will have heightened sensitivity surrounding any changes to BOLR terms. This sensitivity is fuelled by speculation within the network surrounding; the future of grandfathered commissions, future changes to OFAs, the future of vertical integration, the future of licensee incentives, changes to AMP leadership, and the potential to make changes to BOLR terms outside the established notice period. In such an environment, it is likely that practices may submit their exit notices in an attempt to secure current terms, or act irrationally when changes are introduced.

124    I have referred to the Akers July 2018 Memorandum at [89] above. I now set out some additional extracts from that memorandum. In the section headed “Financial Impact”, the memorandum stated:

AMP’s total Bolr liability is $1.2Bn across ~800 practices (not including audit discounts). Since 2016, AMPFP has undertaken an average of 60 Bolr transactions a year, at average $1m each (ie. aggregate ~$60m transaction value pa). Prior to 2015, annual Bolr was ~$30-40m pa, with the recent uplift being linked to accelerating industry disruption. The strategic plan for Advice forecasts that Bolr volumes will remain at an elevated level over the next 5 years driven by adviser demographics and increasing industry professionalisation standards (est. $80m pa).

Since the Royal Commission hearings on financial advice, 22 Bolr notices for total $17m have been received, representing a moderate short-term increase in exits above normal levels (many of these practices were considered high propensity to exit even prior to the Royal Commission).

More recent propensity modelling (excluding Royal Commission fallout) suggests 2019 is likely to be the year we see the [largest] number of exits; linked to FASEA milestones.

125    After discussing “Risks and issues”, the memorandum contained a section headed “Changes to Bolr terms”. This stated in part:

AMPFP periodically reviews its Bolr terms to ensure they meet the needs of AMP, advisers and customers, and comply with the evolving regulatory landscape. Changes to Bolr terms can be made with 13 months notice to advisers, or with a shorter notice period by agreement with the AMPFPA (adviser representative association).

In 2013 and 2014, the Bolr terms were updated for compliance with FoFA, including the alignment of value for AMP and non-AMP products on the licensee APL. In 2016, AMP and the AMPFPA agreed to further revise Bolr terms to introduce standardised client service packages, deferred payment terms and more stringent audit requirements, and to remove “deemed” values for client policies not providing ongoing income to the adviser. To achieve agreement to these changes, AMP agreed to apply a flat 4x valuation multiple to fee-based revenue (some types of fee arrangements were previously valued at 1x) and also to attribute value to products not on the licensee APL. Changes to value were implemented over an extended valuation transition period (“glidepath”) so as to minimise practice disruption.

126    The final section of the memorandum, headed “Bolr terms – future changes” included:

As AMPFP continues to evolve its adviser proposition and respond to industry change, it is likely that Bolr will need to be modified so as to value advice businesses as a “going concern” rather than on the basis of their held client registers. For mature businesses, this is likely to be … based on a profitability multiple rather than a revenue multiple. Future changes to Bolr will also need to reconsider the relevance and value of institutional ownership terms. To minimise disruption that might trigger an acceleration of exits, changes are likely to be introduced over an extended transition glidepath.

The period September 2018 to January 2019

127    During this period, AMPFP developed a proposal, for presentation to ampfpa, to change the valuation methodology in the BOLR Policy for grandfathered commission revenue.

128    On 17 and 18 September 2018, a meeting of AMP’s Advice Leadership Team took place. Mr Byrne was tasked with formulating a BOLR strategy in light of the predicted recommendations of the Royal Commission, including the likely cessation of grandfathered commissions.

129    On 28 September 2018, the interim report of the Financial Services Royal Commission was released. This specifically discussed the removal of the grandfathering provisions from the conflicted remuneration legislation.

130    Mr Byrne gave evidence in his affidavit, which I accept, that at the forefront of his mind, whilst formulating the BOLR strategy, was not only the risk of a “BOLR run” (i.e. a large number of BOLR applications being submitted by practices), but also the challenges facing both the financial planning industry and practices given the market sentiment towards AMP at the time and broad distrust in the financial planning industry.

131    The evidence includes a draft memorandum dated October 2018 from Mr Byrne to Mr Paff and Luke Symons (Director of Channel Performance & Growth, AMP) titled “Buy back (BOLR) Strategy”. Part 2 of the draft memorandum addressed a number of immediate challenges confronting AMPFP that would require changes to buy-back terms. The draft made the following comments about grandfathered trail commissions:

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (‘Royal Commission’) has raised questions as to the appropriateness and future viability of grandfathered trailing commissions. Changes under FOFA provisions allowed pre-2013 commission arrangements to be grandfathered and continue to be paid until such time that the grandfathered arrangement ceased. It is believed that the recommendation from the Royal Commission will lead to legislative change prohibiting the continuation of grandfathered commissions. It is not yet known if or when any legislation will come in to effect. It is reasonable to expect that legislation will be put in place in the second half of 2019 and that a transition phase may result in commissions ending by the end of 2020 or earlier.

The draft memorandum then set out a number of options that could be considered by way of amendments to the BOLR Policy.

132    In the period October 2018 to January 2019, Mr Byrne continued to work on a proposed BOLR strategy. The evidence includes various iterations of the draft memorandum of October 2018 discussed above.

133    In about January 2019, AMPFP began to consider whether an “economic change” within the meaning of the LEP Provision had occurred with respect to grandfathered commission revenues, enabling changes to be made to the multiple in the BOLR Policy with respect to such revenues.

134    On 27 January 2019, an email exchange took place between Mr Scott and Julian Cappe and Ben Ebert (of AMP). The latest email in the chain, which was from Mr Scott, responded to a question that had been raised about the difference between “Bolr intangibles” and “Bolr inventory”. Mr Scott responded:

Inventory was where the registers were available for onsell under the old strategy.

Intangibles is where the registers are being held internally and not to be sold. As per retail strategy with AMP Assist to service the policies.

The period 1 February to mid-March 2019

135    In this period, AMPFP presented to ampfpa a proposal to change the valuation methodology in the BOLR Policy for grandfathered commission revenue.

136    On 4 February 2019, the final report of the Financial Services Royal Commission was published. Two key recommendations relevant to the financial planning industry were:

(a)    that grandfathering provisions for conflicted commissions should be repealed as soon as reasonably practicable; and

(b)    a requirement that all clients (pre- and post-FOFA clients) move to annual opt-in arrangements (as compared to this occurring every two years).

137    The Commonwealth Government announced that day that it intended to take action on all of the final report recommendations, including ending grandfathered commissions effective 1 January 2021.

138    On 4 and 5 February 2019, a meeting of the joint Boards of ampfpa and HAA took place.

139    At approximately 7.00 pm on 4 February 2019, Mr Akers attended a meeting at the AMP Building with Mr Paff, Mr Jordan and Mr Weeks to discuss the Royal Commission final report. At that meeting, they briefly discussed some of the recommendations made in the final report that would impact the advice practices of AMPFP.

140    On 5 February 2019, at approximately 8.00 am, Mr Akers again met with Mr Paff, Mr Jordan, and Mr Weeks at the ground floor of the AMP Building. On the same day, at approximately 11.00 am, Mr Akers attended part of the meeting of the joint Boards of ampfpa and HAA.

141    On 8 February 2019, Mr Paff sent an email to Mr Jordan and Mr Macdonald (of ampfpa) (copied to Mr Akers and Mr Byrne) with the subject “ampfpa BOLR consultation - CONFIDENTIAL”. The email stated:

As we have discussed this week, Monday’s Royal Commission report has provided us with greater clarity.

Further to our discussions this week, I am writing to you as members of the ampfpa board to outline proposed urgent changes to the AMPFP BOLR terms.

As per the requirements set out in the BOLR Policy, AMP Financial Planning (AMPFP) is consulting the AMP Financial Planners Association (ampfpa) prior to making these changes and seeking your feedback.

The purpose of the attached memo is to outline; the changes proposed to the BOLR terms, explain the rationale and impact to AMPFP practices and outline the proposed timeline for announcement.

Could I ask you to please share this memo with the other members of the ampfpa board.

With the Royal Commission final report now released, AMPFP is expecting to announce these changes by Friday the 15th of February.

Given this timeline, any feedback that the ampfpa wishes AMPFP to consider will need to be provided in writing to myself no later than 4pm (AEST) Wednesday the 13th of February 2019.

If you would like to discuss or meet to understand these change please let me know.

Please be aware that the information in this Memorandum is confidential and market sensitive. You have been provided with this information on a confidential basis for the purposes of consultation with AMPFP. It must not be disclosed to anyone outside of the ampfpa board.

142    Attached to the email was a memorandum from Mr Paff to the ampfpa Board dated 8 February 2019 with the subject “Proposed changes to AMPFP Buyer of Last Resort terms”. The memorandum stated that AMPFP was proposing “urgent changes” to the terms of the BOLR Policy. In the section headed “Rationale for change”, the memorandum referred to the likely changes to the treatment of grandfathered trailing commissions and relied on the LEP Provision as justifying the proposed changes to the terms of the BOLR Policy. In particular, it was stated that AMPFP had formed the view that an “economic change” had occurred within the meaning of the provision. The proposed changes to the BOLR Policy were:

•    From the date of announcement (proposed to be 15th February 2019), the BOLR valuation multiple for all grandfathered commission policies will be reduced from 4 to 2.3 times.

•    A transition period will run from 1 March 2019 to 1 December 2020 whereby the BOLR multiple for all impacted grandfathered commission policies will incrementally reduce by 0.1 times per month to 0 times (glide path).

•    The BOLR multiple for all impacted grandfathered commission policies will be 0 times from 1 January 2021 onwards.

143    A few days later, Mr Jordan’s practice lodged a BOLR application. The exercise date was after 8 August 2019.

144    On 14 February 2019, Johnson Winter & Slattery, a firm of solicitors acting for ampfpa, wrote to David Cullen, General Counsel for AMP Limited, in relation to the changes outlined in the 8 February 2019 memorandum from Mr Paff (referred to as the “Paff Memo” in the letter). The letter stated in part:

If the “changes” foreshadowed by the Paff Memo are sought to be implemented, AMPFPA members will have been sorely misled and deceived. Many AMPFPA members have been induced to incur significant debt in order to buy a register for their practice in the AMP network, in most cases borrowing from AMP’s banking division (or other banks under tripartite agreements with AMP) and offering up not only the register but also their family homes as security. AMP (via AMPFP) set the asking price in the same way as the BOLR payment calculation, and in many cases further confirmed that value by its banking arm applying its credit criteria to that asking price, thus representing to the member that the member could proceed with confidence on the basis of that value to put their family home at risk and spend significant amounts of time and money on maintaining and developing the practice.

145    The letter challenged the proposition, expressed in the 8 February 2019 memorandum, that an “economic change” within the meaning of the LEP Provision had occurred. The letter also challenged the asserted urgency of the changes. The letter sought an urgent assurance that AMPFP would not purport to implement the changes, and reserved the right to take action (including legal action) if that assurance was not forthcoming.

146    On 15 and 18 February 2019, there was further correspondence between AMPFP and ampfpa (or their lawyers) in relation to the proposed changes to the multiple in the BOLR Policy for grandfathered commissions.

147    On 18 February 2019, at approximately 2.00 pm, a meeting took place attended by Mr Akers, Mr Paff, Mr Macdonald, Mr Jordan, Mr Weeks and Mr Kelsey (a Director of ampfpa) to discuss the proposed changes to the BOLR Policy in relation to grandfathered commission revenue. The meeting occurred on a without prejudice basis, but evidence has been given about the meeting by Mr Jordan and Mr Akers in this proceeding. During the meeting, Mr Akers and Mr Paff agreed to give ampfpa until 4.00 pm on 20 February 2019 to provide AMPFP with further information regarding the proposed changes.

148    On 20 February 2019, ampfpa provided a “Discussion Paper” to AMPFP. (The heading includes the date “190220”. It is common ground that this number represents the date in reverse order, i.e. 2019 02 20, and that the date of the document is 20 February 2019.) Although the document is labelled “Without Prejudice”, neither party contended that it was subject to without prejudice privilege in this proceeding. The paper referred to Mr Paff’s memorandum (of 8 February 2019) and stated that it provided “little detail, proposed a glide path without any financial certainty (likely to be worthless to most practices as written), limited information on implementation”. The memorandum set out a “Problem Statement” regarding the present situation as ampfpa saw it. The memorandum then set out a “Proposal/Initial thinking”.

149    On 22 February 2019, the Commonwealth Government released the exposure draft of the Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Bill 2019 (Cth) for public consultation. The exposure draft removed grandfathering arrangements for conflicted remuneration in relation to financial advice provided to retail clients, and other banned remuneration, from 1 January 2021. From that time, it was highly likely that grandfathered commission revenue would cease within two years.

150    In February 2019, Mr Paff resigned from his role as Managing Director of AMPFP and took up another role in the AMP Group. Mr Paff and Mr Akers had agreed that he would stay with AMPFP until the end of March 2019. Mr Paff’s last day as Managing Director of AMPFP was 31 March 2019. Following Mr Paff’s departure from the role:

(a)    on 10 April 2019, Mr George (previously, General Manager of Financial Planning in Queensland for AMPFP) was appointed as the Acting Managing Director of AMPFP; and

(b)    Mr Akers assumed greater responsibility in relation to the tasks previously undertaken by Mr Paff, particularly in relation to the ongoing communications with ampfpa.

151    AMPFP did not attempt to implement and did not announce changes to the treatment of grandfathered commissions in the BOLR Policy at any stage in February 2019.

152    On 6 March 2019, Mr Byrne sent an email to a number of people within AMP, including Mr Akers, with the subject “Holding statement on OFAs – not a memo”. The email refers to OSA (ongoing service arrangement) and OFA (ongoing fee arrangement) revenue. The email stated in part:

I understand that one of the ‘hot topics’ after we announce changes to gf commissions will be the concern that further changes are likely to be made on the valuation of OSA/OFA revenue.

Practices are likely to be very sensitive to the extent to which AMP may make changes to buy back terms that would reduce [or] remove the value associated with OFA revenue. When grandfathered commission revenue is removed from valuations, it is estimated that ~60% of the remaining value will be made up of ongoing advice fees.

153    The email discussed a number of complications relating to OSA/OFA revenue, including that there were a number of reasons why “it would be beneficial for AMP to change valuations for OFAs in the future”. The email discussed “messaging” and recommended a number of messages that were considered to be “a compromise between committing to nothing and reducing valuable optionality for AMP”. The suggested messages included:

AMPFP needs to give practices 13 months notice of a change to BOLR unless economic, legislation or product changes make the terms inappropriate. We do not believe there has been an economic event, legislative event or product event that has made the current OSA terms inappropriate. The fact that AMPFP pays a premium on OSAs relative to the market, is not in itself an economic event and does not give us the right to change the terms.

154    Mr Akers gave evidence during cross-examination, which I accept, that, at this stage, AMPFP had not conducted an exercise to determine whether or not an “economic change” within the meaning of the LEP Provision in relation to OFA revenue had occurred.

155    The evidence includes a memorandum dated 12 March 2019 from Mr Akers to the CEO of AMP Limited (Francesco De Ferrari) on the subject “Changes to valuation for grandfathered commissions”. The first section, headed “Background – why we are proposing to act”, stated:

Over the next few years advisers will experience an unprecedented level of economic disruption as a result of industry change. Direct impacts on adviser revenue will include:

•    Removal of grandfathered commission before 1 January 2021 (~25% of practice income)

•    The expected loss of ongoing fee revenue across passively-serviced clients who are unlikely to pay for annual advice (ave. 5-10% of practice income)

•    Potential changes to licensee terms and incentive programs

•    Potential challenges to risk and bank loan commissions within 1-3 years

These changes will result in significant cashflow and capital loss for most self-employed practices. A large number will be unprofitable or much less profitable or facing debt serviceability issues. Many will struggle to restore their profit margins, while also adjusting to new pressures on service, compliance and educational standards. Propensity modelling indicates that >700 practices may seek to exit within 1-3 years at an aggregate transaction value of $900m (incl. 175 already exiting). Since the Hayne Report was published, 45 practices ($70m value) have submitted their exit notice.

To mitigate against the capital risk of an uncontrolled “BOLR run” and ensure a viable future advice network, the Advice business is developing a consolidated program of work as shown below. There are considerable inter-dependencies across activities. This paper focuses primarily on the revaluation of grandfathered commissions under licensee buyout terms.

156    Section 2 of the memorandum set out some key details relating to grandfathered commissions.

157    Section 3 was headed “Details and timing of proposal”. This section related to AMPFP, Charter and Hillross. The memorandum stated that “[w]e propose to communicate the following changes to the network on Tuesday 19 March”. In relation to the AMPFP network, the proposed changes to the BOLR Policy were:

•    Valuation of grandfathered commissions will immediately reduce from 4x to 2.2x, then reduce by 0.1x / mth to nil value by December 2020 (‘Glide Path’) - effective immediately.

•    If the end date of revenue changes, the glidepath will adjust to reflect the remaining period where revenue will be paid (eg. the glidepath will shift to 0.6x if 6 months remaining).

It appears from the above that, as at 12 March 2019, proposed changes to the multiple for grandfathered commission revenue under the BOLR Policy were still being considered.

158    The memorandum also discussed: alternatives to the current proposal; the existing buy-back pipeline (that is, the pipeline of practices that had submitted a BOLR application); the impact of the proposed changes on advisers; the economic impact to AMP; key risks and consequences; and the reshaping of AMP’s self-employed advice network.

159    Section 8, headed “Key Risks” and Consequences”, stated:

Our action will materially erode practice valuations and have a high impact on trust in AMP and our relationship with adviser associations and practices. Specific risks and consequences include

•    Relationship/trust impact: AMP licensees have historically played a benefactor role enabling licensed practices to accrue significant wealth and withstand prior economic disruptions through capital and cashflow support. It is likely that many practices expect that AMP will protect practice capital under the current circumstances, eg. through a partial buyback offer. Under the current circumstances and following the Royal Commission, AMP it is no longer reasonable or economically feasible for AMP to play this role and absorb the majority of the financial impact. Many practices will be disappointed and angry that AMP is not protecting their downside capital risk.

•    Mental health: the changes will cause many practices to fail and may impact on the health and well-being of practice principals. AMP field staff will receive wellbeing and sensitivity training.

•    Legal action: by advice practices (individually or class action) or adviser associations. AMP has received legal advice on our proposed change.

•    Exits: risk of higher-than-expected practice exits, which may exceed our capacity to execute, and may accelerate client losses.

•    Product outflow: risk that a breakdown in trust leads to accelerated platform outflows.

•    Media: risk of negative media about AMP’s treatment of advisers, and the initial shareholder focus of our proposed changes to grandfathered commissions.

•    Impact on high-value practices: exit of future leaders may impact on future vitality of network. It is critical that AMP support identified high-value practices through the transition.

It is noteworthy that the risks and consequences outlined above related to proposed changes to the BOLR multiple for grandfathered commissions; the changes to the BOLR multiple ultimately proposed and implemented in July/August 2019 related to all ongoing revenue, not only grandfathered commissions.

160    In mid-March 2019, Mr Akers formed the view, after consulting with Mr Wade, Mr De Ferrari and other members of the AMP’s Advice Leadership Team, that it was preferable not to proceed at that time with the proposed changes to the BOLR Policy that had been raised with ampfpa in February 2019. Instead, changes to the BOLR Policy would be considered in the context of a broader strategic review of AMP’s advice business. Accordingly, in mid-March 2019, AMPFP decided not to proceed at that time with the changes to the BOLR Policy that had been raised with ampfpa in February 2019. It is unclear whether the decision not to proceed was expressly communicated to ampfpa.

The period mid-March to 25 July 2019

161    In this period, AMPFP considered and developed more wide-ranging proposed changes to the valuation methodology under the BOLR Policy, namely changes that went beyond grandfathered commission revenue.

162    On 20 March 2019, a meeting took place between Mr Akers (of AMPFP) and Mr Weeks and Mr Macdonald (of ampfpa). There was no discussion of the changes to the BOLR multiple in relation to grandfathered commissions that had been proposed by AMPFP to ampfpa in February 2019.

163    The evidence includes an internal AMP memorandum dated 4 April 2019 from Mr Scott and Ben Ebert to the Buyback Oversight Committee. This was a subcommittee of the Advice Financial Risk & Capital Committee and was a forum for senior leaders within the Aligned Advice Licensees to meet to work through issues that affected buy-back arrangements generally across AMPFP, Charter and Hillross. The memorandum included a statement that there were over 40 transactions in the pipeline due for April and May, and that they should be able to deliver 30 of these in that timeframe. It is then stated that “BOLR transaction registers mainly go to AMP Advice/AMP Assist and we are aiming to complete 3 of these per week”. During cross-examination, Mr Scott confirmed that the BOLR transaction registers mainly went to AMP Advice and AMP Assist at that time.

164    The evidence includes an email exchange on 10 April 2019 between Mr Cappe, Mr Fernie and Mr Byrne (all within AMP) with the subject “Revalue – Bold option”. The initial email was sent by Mr Cappe. The responding email was sent by Mr Fernie and includes his comments inserted in red-coloured text in the earlier email.

165    The initial email (from Mr Cappe) commenced by stating: “[w]hen taking Luke through the B2B paper this morning, he again raised the challenge of how we could be more aggressive on Revaluation if we were optimising for shareholder value”. The reference to “Luke” is to Luke Symons.

166    The initial email includes the following statement in bold: “What is the boldest action we could take on Revaluation?” Under that heading, Mr Cappe wrote: “Aggressive changes to Bolr valuation (AMPFP and EBB)”. After this, Mr Fernie inserted in red-coloured text:

•    Immediate removal of G/F commissions (as per current strategy)

•    Change OFA multiple to 2x under economic trigger – assuming that we have the fact base to support this based on changes to internal market.

The reference to “economic trigger” is, I infer, a reference to the economic change aspect of the LEP Provision in the BOLR Policy. The reference to the “internal market” is, I infer, to the market for the sale and purchase of practices within the AMPFP network (the internal market).

167    Mr Fernie also inserted the following statement in red-coloured text (and bold):

DB’s suggestion was maybe go to 3x for OSA but with higher deferred component. Might reduce impairment and perception of change

The reference to “DB” is to Damian Byrne.

168    The initial email (from Mr Cappe) also set out benefits and key risks. The following key risks were identified:

•    Planner trust/sentiment – very high impact

•    Planner mental health – very high impact

•    Very high legal / class action risk

•    Risk of negative media

•    This could slow reshape, as marginal practices no longer have an attractive exit option.

•    High write-offs in practice finance as a very large number of practices no longer have capital to meet their debt

•    Retention risk in AMPFP/Hillross – Institutional ownership is no longer linked to a market premium. Risk of high-value practices challenging insto. [i.e. institutional] ownership and leaving with their clients.

•    Higher risk of AMP subject to a takeover – if we take the view that our Bolr liability is currently a “poison-pill” that Macquarie etc is reluctant to digest.

(Emphasis added.)

As highlighted in the above extract, one of the risks identified by Mr Cappe was a retention risk in circumstances where “[i]nstitutional ownership is no longer linked to a market premium”. The risk identified was that practices would challenge institutional ownership terms and leave the network in circumstances where there was no longer a premium to market.

169    At about this time, in mid-April 2019, Mr Byrne started giving consideration to whether there had been an “economic change” for the purposes of the LEP Provision that would justify a change to the BOLR multiple for OFA revenue (as distinct from grandfathered commission revenue).

170    The evidence includes a memorandum dated 23 April 2019 from Alex Wade (CEO, Australian Wealth Management, AMP) and Mr Akers to the AMP Limited Board on the subject “Reshape of aligned advice”. The section of the memorandum heading “Background” included:

The Advice business is facing a period of extraordinary disruption as a result of ongoing industry reform, which has accelerated following the 2018 Royal Commission. Key challenges include:

•    Revenue disruption: removal of grandfathered commission (~25% of practice income, with some practices much higher), expected loss of fees linked to low-touch “offer of advice” service (~10% of practice income), and also potential challenges to risk and loan commissions within 1-3 years;

•    Increased costs: Significantly higher cost to provide advice, and constraints on business capacity due to tightened policy and record keeping requirements; technology benefits are slow to materialise (both in AMP and across the industry);

•    Increase compliance and governance: higher level of regulatory scrutiny, significantly increasing controls and the risk of advice; new FASEA education and professionalism requirements; industry-wide look back on ‘fees for no service’.

171    In the section of the memorandum headed “Removal of Grandfathered Commissions”, it was noted that the Coalition (then in government) and the Australian Labor Party (ALP) (then in opposition) had proposed different end dates for legislated removal of grandfathered commissions, namely 31 December 2020 (Coalition) and 31 December 2019 (ALP). A federal election was due to be held on 18 May 2019, not long after the date of the memorandum.

172    In the section of the memorandum headed “Proposed management action” four distinct actions were proposed. These were:

(a)    revaluation of buy-back terms;

(b)    reshape the network;

(c)    retain high-value practices; and

(d)    redesign licensee offer and terms.

Mr Akers gave evidence in his second affidavit, and I accept, that these were four key responses to mitigate capital risk and to transition to a leaner and higher quality advice network. Mr Akers gave evidence, and I accept, that: this proposal was noted by the Board of AMP Limited; it became known internally as the “4 Rs”; and each component was individually designed, formed part of an overall strategy, and needed to be executed together in order to achieve the overall objectives of the AMP Advice Business.

173    In relation to revaluation of buy-back terms, the proposal was to use the “economic trigger” (a reference, I infer, to the LEP Provision) to immediately revalue grandfathered commissions. Later in this part of the memorandum, it was stated in part:

The Advice business is also reviewing the option to revalue ongoing advice fees for actively advised clients to align with realistic resell multiples, in order to significantly reduce AMP’s impairment risk. The trigger for this change is under review.

(Emphasis added.)

174    In May 2019, at Mr Akers’s direction, members of an AMP working group were working on formulating a number of proposed changes to the BOLR Policy, including a reduction in the valuation multiple applied to all recurring revenue. As part of this, in May 2019, AMP engaged external management consultants, Bain & Company, to assist and support the working group in relation to the development of proposed BOLR changes, as well as AMP’s strategy for redesigning the business model of the Aligned Advice Business more generally.

175    In May 2019, a key workstream for Mr Byrne, Mr Scott and Mr Cappe was considering whether the economic trigger in the BOLR Policy was available; that is, they were working to gather data and information to determine whether there had been an “economic change” that would allow changes to be made to the BOLR multiple (for all revenue) without the need to give 13 months’ notice.

176    On 13 May 2019, Mr Byrne sent Mr Cappe a draft PowerPoint presentation relating to “Revaluation of buyback programs”. The presentation included, in the second slide, three options for changing the multiple for OFA revenue in the BOLR Policy. Option 1 was a ~3x multiple; option 2 was a ~2.5x multiple; and option 3 was a multiple of less than 2x. The draft slide stated that an economic change had occurred making the BOLR multiple inappropriate, relying on qualitative matters (based on the Financial Services Royal Commission recommendations) and quantitative matters (based on recent transactions, including Charter and Hillross transactions).

177    Also on 13 May 2019, there was an email exchange between Mr Cappe and Mr Byrne in relation to the draft PowerPoint presentation. Mr Cappe expressed the view that Charter and Hillross transactions were not directly relevant to the revaluation of OFA revenue under the BOLR Policy (which concerned only the AMPFP network).

178    The evidence includes a PowerPoint presentation titled “Revaluation of G/F commissions and OFAs under buyback programs (draft)” (AMP.5800.0048.5362). Based on the date of the “host” email, it appears that the presentation was prepared on about 13 May 2019 (rather than the date appearing in the Revised CB index). The third slide is headed “Basis for applying BOLR change in response to economic change (AMPFP)”. After summarising the LEP Provision, the slide stated:

Proposed Framework for change:

1.    An economic change has occurred.

2.    The change significantly affects the income or value of the business of AMPFP.

3.    The change is of a general and systemic nature.

4.    AMPFP’s proposed approach, based on revaluation is reasonable, under the circumstances of the economic change

5.    (ie. a disinterested person looking at the fact base would find AMP’s approach to be reasonable)

6.    AMPFP is acting in good faith.

179    The subsequent slides canvassed options to revalue grandfathered commission revenue and OFA revenue (in relation to AMPFP, Charter and Hillross).

180    On 18 May 2019, a federal election was held. The Coalition was re-elected to government. It was therefore highly likely that the legislated date for cessation of grandfathered commissions would be 31 December 2020 (or 1 January 2021).

181    On the afternoon of 28 May 2019, a meeting took place between Mr Akers and Mr Jordan at AMPFP’s offices in Docklands, Melbourne. Mr Akers initiated the meeting as he was going to be in Melbourne that day. (Mr Akers was based in Sydney and Mr Jordan was based in Melbourne.) In the course of the meeting, Mr Akers said words to the effect that “we need to get Remco together, because AMPFP wants to make changes to BOLR but we want to go through a robust, well-governed process”. Mr Jordan asked Mr Akers when AMPFP was planning on making the changes, and he said that AMPFP wanted to make the changes “soon”. Mr Akers referred to proposed changes to the valuation methodology in the BOLR Policy, but did not otherwise give Mr Jordan any detail about the nature of the proposed changes to be discussed.

182    On 20 May 2019 at approximately 1.45 pm, a joint AMPFP and ampfpa webinar took place. It was attended by members of ampfpa and the HAA. The format of the webinar was a question-and-answer panel whereby Mr Weeks asked Mr Jordan and Mr Akers various questions about topics relevant to the financial practices in the Aligned Advice Business. During the webinar, the following exchange occurred:

183    During cross-examination, Mr Akers gave evidence, which I accept, that as at the end of May 2019, capital outlay requirements were being estimated within AMP on the basis of a planning assumption that there would be a revaluation of the BOLR multiple to 2.5x ongoing revenue.

184    During June and July 2019, there were many internal AMP meetings to develop and finalise proposed changes to the BOLR. This included developing the papers that were ultimately provided to ampfpa RemCo on 26 July 2019 (see below). Significant time and resources were spent by Mr Akers’s team preparing the proposed BOLR changes, modelling the data supporting the proposed BOLR changes and preparing for the consultation with ampfpa in relation to the BOLR changes. Legal advice was obtained from both internal and external lawyers as part of this process (and had also been obtained in the preceding months). Mr Akers considered that legal advice. The content of that legal advice is not in evidence, as it is subject to legal professional privilege.

185    Mr Macdonald gave evidence in his first affidavit that by 4 June 2019 he was aware of reports that AMPFP had major changes planned that would be adverse to planners. He stated that he was not aware of any specific changes. I accept that evidence.

186    The evidence includes a memorandum dated 7 June 2019 from Adam Ortmann (Director, Practice Finance, AMP) to the Credit Risk Committee of AMP. The paper related to the proposed introduction of new credit criteria to the AMP Bank Limited (AMP Bank) commercial credit policy and commercial credit procedures, in light of “structural changes” due to be announced in late June 2019 by the Australian Wealth Management division of AMP. (The majority of practices in the AMPFP network borrowed from the AMP Bank. The amount that a practice could borrow from the AMP Bank was a function of the multiple of recurring revenue under the BOLR Policy.) In the background section of the paper it was stated:

Australian Wealth Management (AWM) have tacitly finalised a strategy for their Wealth products and their Adviser network. Namely:

•    Grandfathered Commissions (GF) for all AMP products will cease to be paid by Wealth by 31 August;

•    Recurring revenue of a Practice, for the purposes of valuing the Licensee Buy Back (BOLR, EBO etc), will be valued at [2.5]x, down from up to 4x; &

•    The Practices within the respective AMP Licensees will be ‘reshaped’ over the next 12-18m such that only those that are profitable and scalable with a history of compliance will be part of the Advice network; the number of individual Advice Practices (by number, not size) will likely halve.

The above proposal, which is subject to change, is planned to be announced post AMP Limited Board approval in late June.

It appears from this memorandum that, by 7 June 2019, a proposal had been developed within AMP to change the valuation methodology in the BOLR Policy in relation to all ongoing revenue (not just grandfathered commission revenue). The proposed multiple was 2.5x, but that figure appeared in square brackets, indicating it had not been finalised. The balance of the memorandum canvassed responses that could be taken in relation to different cohorts of practices that had borrowed from the AMP Bank.

187    On 18 June 2019, Mr Macdonald (on behalf of ampfpa) sent a letter to Mr Akers expressing concern about changes being made to the advice business without consultation with ampfpa or ampfpa’s involvement.

188    On 20 June 2019, Mr Akers sent an email to Mr Macdonald (copied to Mr Wade and Mr De Ferrari of AMP and Mr Jordan of ampfpa) in response to Mr Macdonald’s letter of 18 June 2019. The email stated that Mr Akers was looking to schedule “a deeper briefing with RemCo in the coming weeks”.

189    On 21 June 2019, Mr Macdonald (on behalf of ampfpa) sent emails to Mr Akers reiterating concerns about lack of consultation and to the effect that ampfpa did not consider the communications in February 2019 to constitute consultation.

190    From 20 June 2019 to 9 July 2019, Mr Jordan was in the United States. During his absence, Mr Weeks was the acting Chair of ampfpa’s board and of RemCo.

191    While Mr Jordan was in the United States, a telephone conversation took place between Mr Jordan and Mr Akers. The call took place at approximately midnight on 25 June 2019 in New York, which was mid-afternoon in Sydney on 26 June. The conversation included an exchange to the following effect:

During the conversation, Mr Akers said words to the effect that he could not commence the consultation process yet, as he was still waiting for sign off internally. Mr Akers did not give Mr Jordan any details of the proposed changes.

192    On 12 July 2019, Mr Byrne provided Mr Akers, Mr George and others (all within AMP) with a PowerPoint presentation dated July 2019 titled “Consultation approach”. The presentation concerned the proposed approach to consultation in connection with proposed changes to the buy-back policies in relation to the AMPFP, Charter and Hillross networks. The first slide indicated a proposed consultation period of 2-3 weeks. The fourth slide set out consultation principles and working principles:

•    Consultation principles:

•    There is a formal consultation process that we are following prior to making changes to BOLR or Settlement and Recognition terms

•    Consultation is not the same as negotiation and we are unlikely to reach agreement on everything

•    AMP is committed to a consultation process that includes:

•    Providing proposed changes in writing

•    Explaining the rationale and impact of proposed changes

•    Setting a timeline for the process, and when feedback is required

•    Considering and responding to feedback provided

•    It is critical that confidentiality is maintained. Leaked information has the potential to disrupt the process and may create greater urgency, thereby reducing the proposed consultation timeline

•    Working principles (agreed between AMPFP and ampfpa previously):

•    Open, transparent, and genuine

•    Seek to understand each other’s perspective

•    We encourage expression (thoughts, feelings and actions)

•    We recognise and respect all views and opinions

•    We look for common ground

•    We acknowledge past challenges and learn from our history

•    We use it to share and embrace the future

•    We work collaboratively to build a supportive and caring community

193    The sixth slide referred to “[l]essons learnt from previous consultation” and stated that “[o]ur recent track record with ampfpa RemCo consultation has not been very successful”. The slide set out details in respect of three previous matters: the Derby project changes to the BOLR Policy; proposed changes (in 2018) to the settlement and recognition terms; and the proposed changes (in 2019) to the valuation methodology for grandfathered commissions. The next slide set out “what we may want to do differently this time”.

194    On 18 July 2019, Mr Akers and Mr Jordan had a telephone conversation. During that discussion, Mr Akers said words to the following effect:

It would be good to get together after the board meeting [on 23 July 2019] to speak about moving forward engagement with Remco. While I’m still waiting on the green light from Francesco [De Ferrari] to be able to share the proposed changes with you, I am hoping to have that soon. I suspect we will also need you to sign a confidentiality agreement before we can talk through the details.

195    On 22 July 2019, Mr Akers sent an email to Mr Jordan (copied to Mr George) stating that he had “largely got approval to proceed with Consultation” and that there was “just one last person to confirm” and he expected to receive that confirmation that morning. The email stated:

Brian [George] will work with the legal team to get you a suitable NDA [non-disclosure agreement] document to sign. This is intended for REMCO members. Will this create any Governance issues for the wider Association Board or members? I understand RemCo is the authorised body to perform the Consultation with so hopefully should be OK to have it for a subset.

(Emphasis added.)

Mr Jordan did not respond to that email indicating that there would be governance issues.

196    Mr Akers required final approval from Mr De Ferrari and the relevant people on the Group Leadership Team, including Mr Cullen and Helen Livesey (then, Group Executive, People & Corporate Affairs, AMP), before he could present proposed changes to the BOLR Policy to ampfpa for their feedback.

197    On 23 July 2019, Mr George sent an email to Mr Jordan (copied to Mr Akers) stating that Mr Akers was “still seeking final signoff to enter consultation” and attaching a draft non-disclosure agreement.

198    Later on 23 July 2019, Mr Akers received final approval to commence consultation with ampfpa in relation to the proposed BOLR changes. Mr Akers then phoned Mr Jordan. They had a discussion to the following effect:

199    Mr Jordan gave evidence in his first affidavit that, to his knowledge, AMPFP had never requested a member of ampfpa’s Board to sign a non-disclosure agreement in relation to matters between AMPFP and amfpa, and that, prior to these exchanges, he had never signed a non-disclosure agreement or received a request to sign such an agreement from AMPFP. I accept that evidence.

200    Mr Akers gave evidence in his affidavits that the information to be disclosed to RemCo at the 25 July 2019 meeting included information that was confidential and market sensitive. I accept that evidence.

201    On 23 July 2019, Mr Jordan sent an email to Mr George (copied to Mr Akers) setting out the current members of RemCo, namely Mr Jordan, Mr Macdonald, Mr Kelsey, Mr Jones and Mr Weeks.

202    Mr Macdonald gave evidence in his second affidavit that, on the morning of 24 July 2019, he had a telephone conversation with Mr George in relation to the draft non-disclosure agreement and that, during the conversation he (Mr Macdonald) said words to the following effect:

I’m not an ampfpa board member, and the document doesn’t reflect that. I’m also concerned that RemCo will need to be able to talk to the whole ampfpa board about what is addressed at the meeting. RemCo isn’t delegated to make decisions on behalf of the ampfpa board.

(Emphasis added.)

203    Mr Macdonald’s affidavit evidence is that, after he raised those matters, Mr George responded with words to the effect of:

OK, I understand your concerns. Let’s just have this meeting and then we can sort those issues out.

204    During cross-examination, it was put to Mr Macdonald that at no time in the lead-up to the 25 July 2019 meeting did he suggest to Mr Akers or anyone else from AMPFP that RemCo was not the correct body for the interactions that were being proposed. Mr Macdonald agreed with that proposition, but in his subsequent answers he referred to having raised the matter with Mr George. Mr Macdonald also gave evidence during re-examination about the conversation with Mr George referred to above. In the absence of any contrary evidence (as Mr George was not called), I find that Mr Macdonald did have a conversation with Mr George as set out in [202]-[203] above.

205    On 25 July 2019 (at 8.53 am), Mr Akers sent an email to Mr Wade with the subject “Some topics for you to cover with the Board”. This was a reference to the AMP Limited Board, which was meeting that day. The email comprised a list of matters, including:

•    Commencing consultation with AMP FPA today for key Master Term changes

•    Revalue BOLR from 4 to 2.5 for all revenue types

•    Glidepath for grandfathered commissions to zero by end 2020

(Emphasis in original.)

The meeting on 25 July 2019 between AMPFP and RemCo

206    On Thursday, 25 July 2019, a meeting took place between AMPFP and RemCo during which AMPFP informed RemCo of proposed changes to the BOLR Policy. The meeting took place at the offices of AMP at Alfred Street, Sydney. The meeting was with members of RemCo rather than the Board of ampfpa. Those present at the meeting were: Mr Akers, Mr George and Mr Byrne (on behalf of AMPFP) and Mr Jordan, Mr Weeks, Mr Jones and Mr Macdonald (on behalf of RemCo). Mr Kelsey was not present as he was overseas.

207    Each of Mr Macdonald, Mr Jordan, Mr Jones, Mr Byrne and Mr Akers gave evidence about the 25 July 2019 meeting. There are some differences in matters of detail between their accounts of the meeting (eg, the time it lasted, things that were said at the meeting, etc.). Ultimately, little, if anything, turns on these differences. In the following paragraphs, I have made findings about some of these matters of detail by seeking to reconcile the various accounts (where possible) and, where that is not possible, determining which account is more likely to be correct.

208    Other than proposed non-disclosure agreements, no documents had been provided to the RemCo members in advance of the meeting. Mr Jordan gave evidence in his first affidavit that, ordinarily for meetings between AMPFP and ampfpa, AMPFP would provide ampfpa with a set of pre-reading materials. I accept that evidence.

209    The meeting commenced at approximately 9.00 am and concluded at approximately 12.00 pm. Approximately the first hour of the meeting was occupied with negotiating the terms of the non-disclosure agreement that AMPFP required each of the RemCo members to sign (drafts of which had been previously provided), and with the Remco members then signing the non-disclosure agreements. The second part of the meeting involved the AMPFP representatives going through a PowerPoint presentation. The representatives from AMPFP were seated on one side of the table, and the representatives from RemCo were seated on the opposite side of the table. The PowerPoint presentation was shown on a screen at the end of the room.

210    At the beginning of the meeting, each of Mr Akers and Mr George said that they “could not talk about the proposed changes until the nondisclosure agreements are signed” (or words to that effect). During the process of negotiating the terms of the non-disclosure agreement, a lawyer for AMP came in and out of the meeting to make amendments to the draft agreement. Following the period of negotiation, each of the RemCo members signed the non-disclosure agreement. The RemCo members had discussed beforehand that it was better to sign the non-disclosure agreements and hear what AMPFP had to say in the meeting, than not to sign them and be in the dark about what AMPFP had planned. The agreements as signed did not enable the RemCo members to disclose the details of AMPFP’s proposed changes to the BOLR Policy to ampfpa members. Subsequent to the meeting, Michelle Grant (Mr Macdonald’s PA) and Mr Kelsey also signed the non-disclosure agreement.

211    There is a conflict in the evidence as to whether, in the course of the meeting, the RemCo members expressed a concern about not being able to disclose the content of the meeting to the ampfpa Board. Mr Macdonald gave evidence in his first affidavit that they did. Mr Byrne gave evidence in his affidavit that he did not recall anyone voicing such a concern. Mr Akers also gave evidence in his first affidavit that no issue was raised about the meeting being with RemCo rather than the ampfpa Board. Mr Akers maintained that position during cross-examination. On balance, I find that the concern was not raised at the meeting.

212    The evidence includes a copy of the PowerPoint presentation that was presented during the second part of the meeting (AMP.5800.0020.9035) (the July 2019 PowerPoint Presentation). The PowerPoint presentation contained a large number of slides. The AMPFP representatives at the meeting talked to approximately 15 of the slides, and skipped over the balance. Mr Akers opened and framed the discussion, and Mr Byrne spoke to the specific details regarding the BOLR changes and the information in the slide deck. During Mr Byrne’s presentation, Mr Akers added comments to contribute to the sections of the slide deck that were presented by Mr Byrne. Whilst Mr George also presented, Mr Byrne and Mr Akers spoke the most during the meeting.

213    Although Mr Akers gave evidence in his first affidavit that a hard copy of the slide deck was provided during the meeting (and collected at the end), most witnesses gave evidence that they could not recall a hard copy being provided or that a hard copy was not provided. On balance, I find that a hard copy of the slides was not provided during the meeting.

214    There is a conflict in the evidence as to whether the AMPFP representatives said that the RemCo members were not allowed to take notes. In his first affidavit, Mr Macdonald stated that someone from AMPFP said words to the effect, “you are not allowed to take notes”. This is disputed in Mr Byrne’s affidavit and Mr Akers’s first affidavit. On balance, I find that this was not said. It may be that Mr Macdonald has misremembered a statement by Mr Akers (referred to below) that they were not taking minutes.

215    During the meeting, Mr Akers repeatedly asked “what are your thoughts?” or similar questions seeking feedback from the RemCo members. While the Remco attendees provided short comments on the material that was being presented throughout the presentation, those comments were brief and were in the nature of reactions. There was brief discussion between Mr Akers and Mr Jordan in relation to some of the slides.

216    At one stage during the meeting, the following exchange occurred:

217    Mr George spoke to the slide headed “Disclaimer” (p 0001), which stated that “the information in this document is confidential and market sensitive”. In doing so, Mr George said words to the effect of “we have an upcoming market announcement about our strategy which involves the changes that we want to go through, hence the urgency”.

218    The slide headed “Background – Problem statement” (p 0004) stated:

Problem 1 – Industry change has led to a significant and increasing disconnect between the valuation of client books sold to AMP under BOLR terms and the willingness of practices to buy back client books at comparable values. This has made the BOLR valuation terms inappropriate and resulted in financial loss to AMPFP that is not sustainable.

Problem 2 – The industry changes will significantly reshape the AMPFP network resulting in significant exits from non sustainable practices

Problem 3 – Retaining quality self employed practices that are sustainable will be a challenge for AMP in the short term

Problem 4 – AMP board, executive and shareholders are demanding a shift in licensee business model economics if they are continue investment into the future. AMPFP will need to redesign its partnership offer (service model and economic relationship) to remain sustainable and relevant to practices of the future

219    The slide headed “Consultation approach: principles” (p 0005) included the statement that “[c]onsultation is not the same as negotiation and we are unlikely to reach agreement on everything”. When this slide was shown, an exchange to the following effect took place:

Although Mr Akers referred to a note being taken of any actionable items, no notes of the meeting are in evidence and I infer that no notes were taken.

220    The slide headed “Consultation approach: timeline” (p 0006) set out a number of steps between the date of the meeting (25 July 2019) and the date specified as the end of formal consultation (6 August 2019), with the announcement of the new terms by AMP to take place on 8 August 2019. The period allowed for consultation was therefore 12 days (or eight business days). When this slide was shown, an exchange to the following effect took place:

221    The July 2019 PowerPoint Presentation was structured in such a way that two sections were expressed to be “for consultation”, while other sections were expressed to be “not for consultation”. The first section labelled “for consultation” related to the proposed changes to the valuation methodology under the BOLR Policy and comprised seven slides.

222    The first slide in that section, headed “1. RESET buy-back terms – Rationale for change” (p 0011) stated:

The AMPFP Buyer of last resort policy provides that “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 the ampfpa”

1.    An economic change has occurred relevant to the valuation of client books

•    During 2018 and 2019, AMPFP has observed a quantifiable and sustained decrease in the value of register rights across all revenue streams in the market for the acquisition of register rights (refer to next slide).

2.    AMPFP believes that the quantifiable and sustained decrease in the value of register rights is an economic change that has occurred within the meaning of this clause, as evidenced by the following factors;

•    an economic change has occurred, relevant to the valuation of acquiring advice businesses (demonstrated by internal and external valuations of advice businesses in the acquisition market)

•    the economic change significantly affects the income or value of the business of AMPFP and/or its authorised representatives

•    as this has occurred across a number of transactions of AMPFP and the industry more generally, the change is of a general and systemic nature

•    the economic change renders the Buyer of last resort policy inappropriate because the policy currently operates to require AMPFP to acquire ongoing revenues at a value significantly higher than what AMP can reasonably expect to receive back when they on-sell them.

3.    As a result, AMPFP is proposing to amend;

•    The Buyer of last resort multiple used to value all ongoing grandfathered commission revenue

•    The Buyer of last resort multiple used to value all non-grandfathered ongoing revenue

(Emphasis added.)

This was the slide to which most discussion was directed. When this slide was presented, an exchange to the following effect took place:

223    The next slide, headed “1. RESET buy-back terms – Decrease in value of register rights” (p 0012), stated in part:

During 2018 and 2019, AMPFP has observed a quantifiable and sustained decrease in the value of register rights across all revenue streams in the market for the acquisition of register rights

Grandfathered Commission Revenue multiple:

The Royal Commission made a recommendation to cease the payment of grandfathered commission as soon as practicable and it is expected that the government will adopt these recommendations and legislate the removal of grandfathered commissions by 1 January 2021. As Grandfathered commission revenue is likely to cease on or before 1 January 2021, the market valuation of these policies has dropped to reflect the future value expected to be generated.

Ongoing Revenue multiple

Since June 2018, it has become evident that AMPFP’s internal market is no longer applying a multiple of 4x for client books. The following trends have now been identified:

•    Some practices are no longer purchasing client registers. There is a very significant decrease in the proportion of client register sales being made to practices.

•    Transactions that proceed are using a reduced multiple

Additionally, since October 2018, there have been no AMPFP sale transactions that have proceeded at a valuation of 4x, indicating that there is no longer a viable resell market at that valuation. Since the release of the Hayne report in February 2019, the volume of transactions and the average multiple of those transactions has dropped significantly.

224    The slide headed “1. RESET buy-back terms – Ongoing revenue multiple” (p 0013) set out a proposed change to the multiple for ongoing revenue other than grandfathered commissions. The proposed change was from the current multiple (4.0x) to 2.0x or 2.5x. Under the heading “Why [2.0]x or [2.5]x?” the slide stated:

•    An economic change has resulted in a change to client register valuations:

•    There has been an increase in practice exits

•    Transactions that do proceed are at a reduced multiple

•    Since October 2018, no transaction from AMPFP to practices has proceeded on a multiple of 4x

•    Market change is also impacting lease arrangements (resulting in a financial loss to AMPFP)

•    External market shows average revenue multiple of 1.5x to 2.5x (excluding GF revenues)

•    It would be reasonable for AMPFP to reset to a new valuation level such that;

•    AMPFP and practices would be broadly able to rely on the BOLR methodology for both purchase and sale transactions (ie to be able to buy and sell at the same multiple)

•    AMPFP could continue to perform its role across in purchasing and reselling businesses without the expectation of incurring losses on each transaction, AMPFP would need to reset to a multiple more closely aligned to the external market

(Emphasis added.)

Mr Jordan gave evidence in his first affidavit that he was “pretty shocked by this” slide. Mr Akers gave evidence in his first affidavit that, at times during the meeting, he observed that the RemCo members appeared to express shock. I find that the members of RemCo were shocked by the proposed changes. An exchange to the following effect occurred:

225    There is a conflict in the evidence as to whether Mr Jordan expressed a preference for a 2.5x multiple rather than a 2.0x multiple. Mr Byrne gave affidavit evidence that he did. During cross-examination, Mr Macdonald accepted that Mr Jordan did express a preference for a 2.5x multiple. Mr Jordan, in his second affidavit, disputed that he expressed a preference for 2.5x; he stated that he did not make any comments regarding whether the multiple should be 2.0x or 2.5x because he was of the view that AMPFP could not make a change of this kind without consulting and providing proper notice. Mr Jordan maintained that position during cross-examination. On balance, I find that Mr Jordan did not express a preference for a 2.5x multiple. The proposal to change to a multiple in the range 2.0x to 2.5x was such a shock that it is unlikely that he engaged with the proposed range in such a way to convey a preference for 2.5x.

226    At no time during the meeting did the RemCo members ask AMPFP to consider setting a multiple higher than 2.5x. However, during the course of the meeting, Mr Macdonald said words to the following effect:

I don’t understand why you are talking about the BOLR multiple being out of step with the market. We all know that BOLR is and always has been at a premium to market. If you say it is out of step with market, then why aren’t you moving the multiple to 3.5 times, to align with the Hilross EBB?

227    The slide headed “1. RESET buy-back terms – Grandfathered commissions multiple” (p 0014) stated that AMPFP was proposing to make the following changes to the BOLR multiple for grandfathered commission revenues “on the basis of the economic change provisions” in the BOLR Policy. The proposed change was from the current multiple (4.0x) to a multiple of 1.42x, with a glide path from 1 September 2019. The slide stated that the 1.42x multiple would change to 1.33x on 1 September 2019 and then reduce by 0.0833x per month until January 2021 when it would be valued at 0x. Under the heading “Why is [1.42]x and the glide path appropriate?” the slide stated:

•    The glide path will align BOLR value with economic value of the remaining cash flows of GF revenues.

•    Royal Commission recommendation to cease grandfathered commissions as soon as practicable

•    Government is expected to legislate the removal of grandfathered commissions with effect from 1 January 2021

•    External market data suggests some product manufacturers have already commenced ceasing grandfathered commissions payments and this is likely to increase

•    Some institutions are already valuing grandfathered commissions policies as being worthless (0x): e.g. Steve Prendeville, managing director of consultancy firm Forte Asset Solutions “I’m currently placing zero value on grandfathered revenue,”

228    The slide headed “1. RESET buy-back terms – Practice impact” (p 0017) addressed the impact of the proposed changes on practices in the AMPFP network.

229    The July 2019 PowerPoint Presentation included a section, labelled “not for consultation”, that concerned “Proposed changes to AMPFP Commercial Terms – BOLR exemption and 13 Month notice”.

230    That section included a slide headed “Exemption to changes: Current thinking” (p 0019) that stated that “[i]mmediate changes to BOLR will apply to practices in the pipeline”, that is, practices that had submitted a BOLR application before 8 August 2019. The slide set out a number of exemptions that were under consideration. One of these was referred to as “held value”. (Held value was an incentive program provided to certain practices in the network following changes made to the BOLR Policy on 27 April 2016, to assist practices that were adversely impacted by the changes to the BOLR Policy at that time. The intention of the held value incentive was to provide practices with a window of opportunity (being, between 1 January 2021 and 30 June 2021) to submit a BOLR application under the pre-2017 BOLR valuation terms, provided that the practices met minimum growth and quality requirements that were measured from May 2016 to December 2020.) The slide stated that practices meeting the “eligible retiree” criteria for held value that were in the pipeline would be paid based on their held value amount. Another exemption under consideration was that practices with an agreed exercise date prior to 8 August 2019 that had been delayed and had not agreed to or requested a later exercise date. When this slide was shown, an exchange to the following effect took place:

231    The same section of the presentation (labelled “not for consultation”) also included a number of changes that were proposed to take effect in 13 months’ time. A later section of the presentation, labelled “for consultation”, concerned proposed changes to the settlement and recognition terms under the BOLR Policy (proposed to take effect from 8 August 2019). Those changes are not the focus of this proceeding.

232    Towards the end of the meeting, those present consulted their diaries and scheduled dates for further meetings, namely 31 July and 2 August 2019.

233    An exchange to the following effect occurred near the end of the meeting:

234    There is a conflict in the evidence as to whether the AMPFP representatives said they would provide a copy of the slide deck (i.e. the PowerPoint presentation). Mr Jordan gave evidence in his first affidavit that this was said. He maintained that evidence during cross-examination. Mr Byrne gave evidence in his affidavit that: he does not believe the AMPFP representatives said they would send the slide pack, particularly as provision of this document was not part of the consultation plan he had prepared; this was because AMP wanted to be precise about the consultation materials and the slide presentation contained a great deal of context and background; Mr Byrne said words to the effect that they would “finalise the consultation material and provide it as soon as possible”; by that he meant the terms sheet and consultation letter he had been preparing. Mr Akers gave evidence in his first affidavit that Mr Jordan requested a copy of the slide deck and that he (Mr Akers) responded to the effect “I want to update the consultation materials before sending them across, to incorporate my reflections from the meeting”. On balance, I find that the AMPFP representatives did not say they would provide the slide deck; rather, they said that they would provide the consultation materials (as subsequently provided – see below) (which Mr Jordan took to be a reference to the PowerPoint presentation).

235    During cross-examination, Mr Akers was asked questions about whether there was a willingness within AMPFP to vary the proposed OFA multiple of 2.5x. He was taken to comments made by Mr Byrne in an email dated 15 July 2019 to the effect that there should be no willingness to vary the 2.5x multiple. The following exchange then occurred:

… And that was also your position, wasn’t it?---I had a high conviction that 2.5 times was the right answer.

That was your position as well, wasn’t it, Mr Akers?---That 2.5 times was the right multiple, yes, it was.

… And, on that basis, you had no willingness to vary that multiple, did you?---Next to none.

…

You had next to no willingness to vary the multiple of 2.5 times because that was what Mr De Ferrari had told you, wasn’t it, Mr Akers?---No. So when going into consultation, the requirement is to go in with a firm view, not a soft or fluffy view, to the association. So we’ve tabled a set of changes with a very firm view. You will see in the documents that we actually put a range of two to 2.5 times into the documents at the commencement of consultation, and obviously consultation is to table our views, to take feedback, to consider that feedback. It does not require us to negotiate, and it does not require us to make changes irrespective of the feedback that we receive from the AMPFPA.

You went into that meeting with next to no willingness to vary the multiple from two and a half times, didn’t you?---That’s correct.

The period 25 July to 8 August 2019

25 and 26 July 2019

236    Mr Jordan gave evidence in his first affidavit that, on 26 July 2019, he phoned Mr Akers to follow-up getting a copy of the PowerPoint presentation from the 25 July 2019 meeting and that an exchange took place in which Mr Akers said “[w]e just need to touch up a few things and we will send it over. You will receive it by COB”. There is no dispute that a conversation took place on that day. There is a conflict in this evidence as to whether Mr Akers was referring to the PowerPoint presentation or the consultation materials (as subsequently provided – see below). I consider it likely that Mr Akers’s statements related to the consultation materials rather than the PowerPoint presentation (although Mr Jordan took them as referring to the PowerPoint presentation).

The “Formal Consultation materials” provided on 26 July 2019

237    On 26 July 2019 (at 5.18 pm), Mr Akers sent an email to Mr Jordan (copied to Mr Macdonald, Mr George and Mr Byrne) attaching “Formal Consultation materials”. In the email, Mr Akers stated that he looked forward to meeting with Mr Jordan on 31 July in Melbourne “to step through your feedback”. The documents provided under cover of that email were:

(a)    a draft terms sheet titled “AMP Financial Planning Buyer of last resort policy changes” with the date 8 August 2019 – this comprised 8 pages, including an appendix (the Draft Terms Sheet); and

(b)    a memorandum dated 26 July 2019 from Mr Akers to the ampfpa Board – this was 8 pages, including an appendix (the Akers July 2019 Memorandum).

238    Although the latter document was addressed to the ampfpa Board, the paper was only emailed to members of RemCo. They considered that they were not permitted to disclose it to the Board of ampfpa given the non-disclosure agreements they had signed. Therefore, the Draft Terms Sheet and the Akers July 2019 Memorandum were not provided by the RemCo members to the ampfpa Board (before 8 August 2019).

239    These were the only documents provided by AMPFP to RemCo in connection with the proposed changes to the BOLR Policy discussed at the meeting on 25 July 2019. The PowerPoint presentation from the meeting was not provided.

240    The Draft Terms Sheet is a draft of a document that AMPFP proposed to release subsequently to announce the changes to the BOLR Policy. The document’s first paragraph stated:

AMPFP has reviewed its current Buyer of last resort policy and the following changes are being implemented. AMP Financial Planning (AMPFP) has consulted the AMP Financial Planners Association (ampfpa) with these changes.

241    The document had a section headed “Changes which take effect immediately on 8 August 2019”, followed by a section headed “Future changes which take effect on 8 September 2020 – 13 months’ notice”. The section headed “Changes which take effect immediately on 8 August 2019” stated:

Buyer of last resort multiple

Effective from 8 August 2019 the Buyer of last resort multiple used to value all ongoing revenue will be [2.0-2.5] times the ongoing revenue paid to the practice in the preceding 12 months to exercise date, subject to the ongoing terms of the policy.

These value changes apply to all Buyer of last resort transactions with an exercise date (or the date which the practices AR Agreement is terminated, whichever is later) on or after 8 August 2019.

Grandfathered commission revenue multiple

Effective from 8 August 2019, the Buyer of last resort multiple for all grandfathered commission revenue will be reduced from 4 times ongoing revenue to 1.42 times ongoing revenue paid to the practice in the preceding 12 months.

A transition period will then run from 1 September 2019 to 1 December 2020 whereby the Buyer of last resort multiple for all grandfathered commission revenue will incrementally reduce by 0.0833 times ongoing revenue per month (glide path). The glide path will apply until grandfathered commission revenue ceases or AMPFP considers the grandfathered commission revenue to be temporary and is expected to cease within 12 months of the exercise date.

The Buyer of last resort multiple for all grandfathered commission revenue will be 0 times from 1 January 2021 onwards.

The changes do not differentiate between AMP products or non-AMP product generated grandfathered commission revenue.

Grandfathered commissions associated with all wealth management products including Superannuation, Retirement/Pensions, Life products and Investment products will be impacted by the change. The legal structure of these products is irrelevant to inclusion (ie Master-trust, Wrap, Life products, Superannuation interest, etc). For more information on grandfathered commissions, please refer to appendix A.

The Buyer of last resort multiple for grandfathered commissions that applies will be the multiple in force on the Buyer of last resort exercise date or the date the AR Agreement is terminated, whichever is the later. For more information on the glide path value for each month, please refer to Appendix A of this notice.

Important

As per the current Buyer of Last Resort terms, revenue that has ceased or that is expected to cease within 12 months of the exercise date (or date the AR Agreement is surrendered) is excluded from the valuation. AMPFP will exclude from the calculation of register value those revenues that AMPFP considers to be temporary and are expected to cease within 12 months of the exercise date (or date the AR Agreement is surrendered). For example, if grandfathered commissions are expected by AMPFP to be legislated to cease on 1 January 2021 then all valuations from 1 January 2020 will exclude grandfathered commissions.

(Words emphasised in bold in above extract were highlighted in yellow in original.)

242    The Akers July 2019 Memorandum stated in the “Purpose” section:

As you are aware, AMPFP commenced consultation with AMP Financial Planners Association (ampfpa) on changes to the Buyer of last resort terms in February of this year. Since then, we have continued our consultation with ampfpa and have been working with ampfpa to evolve the proposed changes to the Buyer of last resort policy and to fully understand the impacts of the changes to the Buyer of last resort policy to the network.

AMPFP has observed a quantifiable and sustained decrease in the market value of register rights and it has become inappropriate for AMPFP to continue to value ongoing revenue income at a multiple of 4 times for Buyer of last resort payments, as this would require AMPFP to pay significantly more for the register rights than it could recover when it sells those rights. This decrease in value is an economic change for AMPFP, and accordingly AMPFP has decided to rely on the economic change provisions in the Buyer of last resort policy to amend the valuation multiple used in the Buyer of last resort policy.

AMPFP has taken the feedback provided by ampfpa since February into account and has developed an updated proposal in respect of changes to the Buyer of last resort terms and to Settlement and recognition terms policy. The purpose of this memo is to outline the changes, explain the rationale for them and their impact to AMPFP practices and outline the timeline for the changes.

As per the requirements set out in the Buyer of last resort policy and in the Settlement and recognition terms, AMP Financial Planning (AMPFP) is consulting with the ampfpa prior to making these changes and seeking your feedback.

AMPFP proposes to announce these changes as a matter of urgency on 8 August 2019.

Given this timeline, any feedback that the ampfpa wishes AMPFP to consider must be provided to AMPFP no later than noon on Tuesday 6 August 2019. Please provide any feedback on the proposal to me via email.

AMPFP will consider any written feedback provided by the ampfpa prior to making and announcing any change.

(Emphasis in first paragraph added.)

243    Insofar as the first paragraph of the above extract suggests that consultation had taken place on a continuing basis between February 2019 and July 2019, it does not reflect the facts. There was a period of engagement between AMPFP and ampfpa in February (and perhaps March) in relation to proposed changes to the multiple applicable to grandfathered commission revenue. The proposed changes were strongly opposed by ampfpa and AMPFP did not pursue the changes in February or March 2019. It was artificial to suggest that there had been a continuing process of consultation between February and July 2019.

244    The next section of the Akers July 2019 Memorandum, headed “Rationale for immediate changes to Buyer of last resort valuations”, stated in part:

During 2018 and 2019, AMPFP has observed a quantifiable and sustained decrease in the value of register rights across all revenue streams in the market for the acquisition of register rights (refer to Appendix A).

The AMPFP Buyer of last resort policy provides that ‘AMPFP has the right to make changes to this policy should legislation, economic or product changes render any part of this policy inappropriate following consultation with the ampfpa’.

AMPFP believes that the quantifiable and sustained decrease in the value of register rights is an economic change that has occurred within the meaning of this clause, as evidenced by the following factors;

•    an economic change has occurred, relevant to the valuation of acquiring advice businesses (demonstrated by internal and external valuations of advice businesses in the acquisition market)

•    the economic change significantly affects the income or value of the business of AMPFP and/or its authorised representatives

•    as this has occurred across a number of transactions of AMPFP and the industry more generally, the change is of a general and systemic nature

•    the economic change renders the Buyer of last resort policy inappropriate because the policy currently operates to require AMPFP to acquire ongoing revenues at a value significantly higher than what AMP can reasonably expect to receive back when they on-sell them.

As a result, effective from 8 August 2019, AMPFP is proposing to amend;

•    the Buyer of last resort multiple used to value all ongoing grandfathered commission revenue from 4.0x to 1.42x the ongoing revenue paid to the practice in the preceding 12 months to exercise date. Refer to the Buyer of last resort terms sheet for more information on the definition of grandfathered commissions.

•    the Buyer of last resort multiple used to value all ongoing grandfathered commission revenue will then incrementally reduce by 0.0833 per month from 1.33x from 1 September 2019 (glide path). The glide path will apply until grandfathered commission revenue ceases or AMPFP considers the grandfathered commission revenue to be temporary and is expected to cease within 12 months of the exercise date. The glide path multiple will be 0 times from 1 January 2021 (or such earlier date) onwards so that no value will be attributed to ongoing grandfathered commission revenue from that date.

•    the Buyer of last resort multiple used to value all non-grandfathered ongoing revenue from 4.0x to [2.0-2.5x] the ongoing revenue paid to the practice in the preceding 12 months to exercise date.

•    these value changes apply to all Buyer of last resort transactions with an exercise date (or the date which the practices’ AR Agreement is terminated, if later) on or after 8 August 2019 including practices currently serving their notice period.

…

AMPFP will consider whether dispensation of the changes will apply to practices where special circumstances specific to the practice may apply. This may include consideration for recent start up practices or practices on lease arrangements. Principles for applying dispensation and a defined process for managing such cases would also be under consideration. A key consideration of applying any such dispensation will be to ensure it can be achieved in a compliant way.

Please refer to the attached terms sheet for more detail on this proposed immediate change to the Buyer of last resort policy. AMPFP requests ampfpa views on the proposal by no later than noon on Tuesday 6 August 2019.

(Words emphasised in bold in the eleventh paragraph of the above extract were highlighted in yellow in original.)

245    The Akers July 2019 Memorandum included a section headed “Proposed timeline for consultation and announcement of changes”, which stated in part:

•    8 February 2019

•    Consultation with the ampfpa commences

•    Thursday 25 July 2019

•    Consultation period with the ampfpa continues

•    Tuesday 6 August 2019

•    Feedback on the proposal to be provided by no later than noon (AEST)

•    Thursday 8 August 2019

•    AMPFP to complete review of all feedback provided by ampfpa

•    AMPFP to decide whether to proceed with the proposal and, if so, what (if any) amendments should be made to the proposal

•    If AMPFP decides to proceed with the proposal (in the form set out in this note or in an amended form):

•    AMPFP announces changes to Buyer of last resort policy

•    Changes to Buyer of last resort policy apply.

246    The next section of the memorandum addressed the impact of the proposed changes on practices. It included the following table:

247    The following is an explanation of the table based on Mr Byrne’s affidavit evidence:

(a)    the column on the left labelled “Impact” refers to the total valuation impact of the BOLR changes to different sets of AMPFP practices. For example, “<50%” refers to AMPFP practices that would experience a reduction in the value of their register rights of less than 50% as a result of the BOLR changes;

(b)    the second and fourth columns, labelled “% of practices (by#)”, refer to the number of AMPFP practices that would experience the valuation reduction specified in the “Impact” column, expressed as a percentage of the total number of AMPFP practices;

(c)    the third and fifth columns, labelled “% of practices (by $ value)”, represent the proportion of practices that would experience the valuation reduction specified in the “Impact” column, expressed as a percentage of the total value of the register rights of all AMPFP practices.

248    During cross-examination in relation to the above table (albeit in a different document), Mr Byrne accepted that the effect of the table was that, if the multiple were changed to 2.5x (and the glide path were adopted for grandfathered commission revenue), 73% of practices by number would experience a reduction in the value of their register rights of more than 50%. (The 73% figure is produced by adding 36%, 24% and 13%, which appear in the second column.)

249    Appendix A to the Akers July 2019 Memorandum provided information said to justify the proposition that there had been a quantifiable and sustained decrease in the value of register rights. It stated:

Grandfathered Commission Revenue multiple:

The Royal Commission made a recommendation to cease the payment of grandfathered commission as soon as practicable and it is expected that the government will adopt these recommendations and legislate the removal of grandfathered commissions by 1 January 2021. As Grandfathered commission revenue is likely to cease on or before 1 January 2021, the market valuation of these policies has dropped to reflect the future value expected to be generated.

Ongoing Commission Revenue multiple

Since June 2018, it has become evident that AMPFR’s internal market is no longer applying a multiple of 4x for client books. The following trends have now been identified:

•    Some practices are no longer purchasing client registers. There is a very significant decrease in the proportion of client register sales being made to practices.

•    Transactions that proceed are using a reduced multiple

Additionally, since October 2018, there have been no AMPFP sale transactions that have proceeded at a valuation of 4x, indicating that there is no longer a viable resell market at that valuation. Since the release of the Hayne report in February 2019, the volume of transactions has dropped significantly and there is still a much-subdued market for the purchase of client books.

External market

Market feedback is that the valuation of financial advice businesses has declined from its historic range. Sample market commentary as follows:

•    Paul Tynan, chief executive of Connect Financial Services Brokers, says that the opt-in recommendation has driven the price of advice firms down “more than anything else. It’s pushed the valuations down because you’ve got to engage the client every year instead of just issuing an invoice,” Advisers will be increasingly unable to service the bottom half of their revenue books – the threat of which is limiting the asking price for sellers. Values have come down considerably in the last year and are being sold at revenue multiples “nowhere the threes”.

https://www.professionalplanner.com.au/2019/05/opt-in-osas-drag-on-practice- values/

•    Radar Results: The valuation gap between high-quality financial advice businesses and conventional practices is growing, with the sector quickly turning into a buyers’ market. Buyers now have a larger selection of sellers from which to choose and therefore, can negotiate lower price multiples and obtain better payment terms. Conventional practices (as opposed to high quality practices) are currently selling for between 1.5 and 2 times recurring revenue (excluding grandfathered clients).

•    Citi Research suggest that there are recent quotes in the 1.5x to 2.5x range as per their paper titled The future of institutionalised Advice’ dated 21 May 2019. It cites increased pressures to justify the premium on the value paid for client registers given the current economic environment.

250    Mr Byrne accepted during cross-examination that the material provided by AMPFP to RemCo did not include practice level data as to the impact of the proposed changes. He also accepted during cross-examination that the data that was provided to RemCo did not separately identify the effect on the practices in the pipeline. Mr Akers accepted during cross-examination that the material provided to RemCo did not include data underlying the asserted economic change.

251    During cross-examination, Mr Byrne gave the following evidence about the effect of the proposed changes on practices in the pipeline (i.e. practices that had submitted a BOLR application):

Those participants in the pipeline that had lodged their BOLR application - - -?---Yes.

- - - they weren’t actually allowed to leave the pipeline unless AMPFP consented, were they?---That’s my understanding, yes, for withdrawing their notice.

Yes. So what had happened is they had lodged their application under the extant BOLR policy understanding that they would be paid four times recurring revenue, including grandfathered commission, if they received an exercise date before 31 December 2019, but the effect of the 8 August 2019 changes was to substantially remove that entitlement but, nonetheless, lock them into the obligation to complete the BOLR policy, wasn’t it?---Yes. The terms of the BOLR policy are that the terms in place at the exercise date are the ones that are to be used.

Yes. And for those practices that would be unable to pay out their practice loans under the revised value, the terms of the BOLR policy meant they would receive nothing at all, didn’t they?---Any payment was to go towards the payment to cover the practice finance loan; is that what you are talking about?

Well, as the custodian of the BOLR policy, what you were aware of is that, before any entitlement to receive a BOLR payment could be received, a practice had to pay out its practice finance loan, didn’t it?---Yes.

Yes. And so the effect of making the 8 August changes on those practices in the pipeline is that they may be unable to pay out their practice loan because of the revised valuation that had been applied?---Yes.

And they may be unable, therefore, to receive any BOLR benefit as a consequence?---Yes.

And they were unable to withdraw from the process?---Without the permission of AMP Finance, yes.

27 July 2019 to 7 August 2019

252    During the weekend of 27 to 28 July 2019, RemCo considered the Formal Consultation materials. During the period 27 July 2019 to 7 August 2019, RemCo obtained legal advice and public relations advice in relation to the proposed changes. The RemCo members also sought valuation advice from an industry expert, Steve Prendeville. (The non-disclosure agreements did not preclude RemCo providing some material to lawyers and advisers.)

253    On Sunday, 28 July 2019 (at 6.41 pm) Mr Jordan sent an email to Mr Akers with the subject “Proposed changes to AMPFP Buyer of last resort”. The email stated:

I refer to your memorandum relating to proposed changes to AMPFP Buyer of last resort terms and AMPFP Settlement and recognition terms which REMCO received after the close of business on Friday the 26th of July 2019 and after our meeting with you last Thursday.

Your ‘Purpose’ in those documents states [As you are aware, AMPFP commenced consultation with AMP Financial Planners Association (ampfpa) on changes to Buyer of last resort terms in February of this year. Since, then we have continued our consultation with ampfpa and have been working with ampfpa to evolve the proposed changes to the Buyer of last resort policy to fully understand the impacts of the changes to the Buyer of last resort policy to the network.] This statement is factually incorrect and a complete misrepresentation of ampfpa’s interactions and communications with you. We previously informed you, including by a letter sent by our lawyers, that the changes you wanted to make to BOLR were not capable of being made simply by consulting with us. We reiterated this position last Thursday and told you that we did not view our meeting as consultation for the purpose of amending the terms of the BOLR or any other purpose other than engaging with you to hear what you have to say to see whether there are any changes you propose that could be made by way of consultation.

At our meeting with you last Thursday, you had requested that we provide you feedback on the policy changes prior to noon on the 06th of August 2019. Now that we’ve received the documents and have had an opportunity to review them over the weekend, Remco views the content within them as the most serious sequence of changes that will impact our members (including their clients) in the history of our relationship with AMP. We will, therefore, need to engage with our professional advisers within the confines of the NDA. We are unaware of their availability at this stage, but we will most likely have to cancel the meetings next week which were scheduled last Friday before we had received the documents. Also, the overall timeframe currently proposed is unreasonable given the proposed changes and the impact they could have on our members. You have had since at least May 2019, and probably longer, to put the proposals together, so it is not unreasonable that we need more than a number of days to consider them when you have taken a number of months.

I also want to remind you about the set of guiding principles that we previously agreed several years ago would govern how we engage with each other. We are of the view that the documents received after the close of business on Friday the 26th of July 2019 do not adhere to or respect these principles. We request that you refresh yourself with these principles and comply with them in our future interactions.

(Emphasis added.)

254    Later on 28 July 2019, Mr Akers phoned Mr Jordan. Mr Akers indicated that he was “calling to request that ampfpa set up another meeting and provide feedback”. Mr Jordan reiterated the content of his earlier email and stated that ampfpa “first needed to consult with our professional advisers”.

255    On Monday, 29 July 2019, Mr Jordan sent an email to Mr Akers advising that ampfpa would need to cancel the meeting scheduled for 31 July 2019 in Melbourne.

256    On Tuesday, 30 July 2019, Mr Akers sent an email to Mr Jordan. It stated:

Thanks for your email and for your time last Thursday [25 July 2019]. We found the meeting helpful and adjusted some aspects of the consultation material after we met to take into account your comments - which is why the materials were sent to you on Friday rather than Thursday.

In relation to the matters raised in your email below, and as set out in the consultation materials:

•    The Buyer of last resort policy provides that ‘AMPFP has the right to make changes to this policy should legislation, economic or product changes render any part of this policy inappropriate following consultation with the ampfpa’. It also has the right to make changes to the policy by giving 13 months notice.

•    AMPFP believes that the quantifiable and sustained decrease in the value of register rights is an economic change that has occurred within the meaning of this clause. Where it believes that there has been no such economic change, it will provide advice practices with 13 months notice of the change.

•    As a result, effective from 8 August 2019, AMPFP is proposing to amend the Buyer of last resort policy and the Settlement and recognition terms in the manner set out in the consultation documents with a number of amendments commencing immediately and others commencing in 13 months, with some having a delayed implementation.

•    As per the requirements set out in the Buyer of last resort policy and in the Settlement and recognition terms, AMPFP is consulting with the ampfpa prior to making the immediate changes.

•    We consider that the time period for consultation is reasonable in the circumstances given the confidential and price sensitive nature of the information and changes and the need for many of them to be implemented before the information enters the market in any way. Furthermore,

•    The ampfpa is very familiar with the Buyer of last resort policy and the issues which need to be addressed urgently.

•    The large proportion of these changes (particularly the more significant ones) have been discussed in some form over the past 12 months including glidepaths for grandfathered commissions, changes to BOLR valuation multiples, etc

•    As mentioned in the consultation materials, we do believe that we have been in an ongoing dialogue about the substance of the changes for some time, although formal documentation was provided on Friday after our lengthy meeting on Thursday. As a result, AMPFP intends to announce these changes as a matter of urgency on 8 August 2019, and I know you appreciate the importance of this date for AMP, AMPFP and our Business Partners.

•    While we would ideally like to receive and consider any further comments from you before we finalise and announce the changes, we want to highlight that in the event that you do not respond to the consultation materials that we have sent to you, we intend to continue with the proposal.

•    Finally, AMPFP is committed to financial advice and to working with advisers and the ampfpa to improve the industry in the future. We see these changes as a necessary part of heading to that future, while also recognising the gravity of the situation and the significance of the proposed changes.

We note that you have cancelled the ampfpa REMCO meeting which was scheduled for Wednesday the 31st of July in Melbourne. We are still available for this meeting and it is my preference to reconvene it, however, we are also available at any time this week and next Monday and Tuesday to further consult with you on the proposal. Meeting up is important and I do want to hear your perspectives prior to finalising our views, and especially to get your insights into how to best communicate the changes.

I look forward to talking with you to better understand your position.

(Emphasis added.)

257    On Thursday, 1 August 2019 (at 9.08 am), Mr Jordan sent an email to Mr Akers:

I am genuinely perplexed as to how you could form the view that our communications in February 2019 amounted to consultation for the purposes of amending the BOLR policy. Our position on the proposed changes in February 2019 (as set out in two letters that our lawyers sent at that time – attached for your reference) was that the changes could not be made on the basis of consultation.

In your memo for the ampfpa board dated 26th of July 2019, you state ‘AMPFP has taken the feedback provided by ampfpa since February into account and has developed an updated proposal in respect to changes to the Buyer of last resort terms and to Settlement and recognition terms policy[’]. We are only aware of the two letters sent in February 2019 by our lawyers.

Your email below also says that you have a right to make changes on 13 months’ notice. This is misconceived. Your “right” to make changes on 13 months’ notice is a mandatory precondition if the change is to the valuation methodology for registers and to any other change having a materially adverse financial or other significant effect on a practice. Your proposed changes fit squarely within this category. Therefore, for the changes to be effective, AMPFP must give 13 months’ notice to all of the practices that have entered into agreements with AMPFP on these terms before AMPFP can make those changes.

I reiterate ampfpa’s willing to consult with AMPFP in relation to Buyer of last resort where it involves matters and proposed changes that can be made on the basis of consultation. As mentioned in my email to you on Sunday the 28th of July, the ampfpa are in the process of engaging with our professional advisers. We will let you know when we have received their advice.

(Emphasis added.)

258    On 1 August 2019 (at 5.05 pm), Mr Akers sent an email to Mr Jordan seeking confirmation that he wanted to cancel the meeting they had scheduled for 2 August 2019. Mr Jordan replied (at 6.34 pm) that they (RemCo) were still waiting on their professional advisers and would need to cancel the meeting on 2 August 2019.

259    On 1 August 2019 (at 9.51 pm), Mr Akers sent a further email to Mr Jordan (copied to Mr Macdonald, Mr George and Mr Byrne):

I wanted to follow up the email that I sent you earlier in the week regarding our consultation with the ampfpa on the Buyer of last resort Policy, to confirm a few items.

You have confirmed that the ampfpa no longer want to meet tomorrow with AMPFP. I would like to know what times next week (or over the weekend if suitable) we should set aside to receive any additional feedback, if any.

I also wanted to let you know that based on further consideration of the feedback that you provided last Thursday [i.e. 25 July 2019], AMPFP have made the following adjustments to the proposal:

1.    AMPFP confirms that the Buyer of last resort multiple used to value all ongoing revenue will be 2.5 times. We are no longer considering a revaluation to 2.0x as part of the proposed amendments.

2.    AMPFP confirms that we are no longer proposing to turn off DMA [Development and Marketing Allowance] or BGA [Business Growth Allowance] to practices in the current BOLR pipeline and any changes will be consistent with the proposal for the wider network.