David Murray's AMP
The Commonwealth Bank announced full-year profits dropped 4.8% to $9.233bn in 2017/18. Photograph: Dean Lewins/AAP
Two of Australia’s biggest financial institutions have absorbed huge financial losses after a regulatory crackdown and intense scrutiny from the banking royal commission.
The insurer and wealth manager AMP said its half-year net profit plunged 74% – from $445m to $115m – after being forced to compensate customers affected by its fee-for-no-service scandal, while Commonwealth Bank reported a full-year cash profit of $9.23bn, down 4.8% on the corresponding 12-month period.
Greens want Australia's banks broken up over 'shocking degree of rot'
AMP’s wealth management business also suffered net cash outflows of $873m in the first half of this year, as customers responded to shocking revelations at the royal commission that executives had repeatedly lied to regulators.
AMP’s acting chief executive, Mike Wilkins, told the stock exchange on Wednesday the royal commission hearings had “challenged our reputation” but said AMP had “taken action to stabilise the business and move forward”.
Shareholders were also told the former Treasury secretary John Fraser had joined AMP’s board as a non-executive director – less than two weeks after resigning from Treasury.
The revelations that AMP executives had repeatedly lied to regulators in the past about charging customers fees for no service have been some of the most shocking of the royal commission so far. The scandal saw the previous AMP chief executive Craig Meller step aside along with chair Catherine Brenner.
It also prompted the Turnbull government, which fought tooth and nail to oppose the commission being established, to propose tougher new laws for bankers and financial executives who engage in corporate and financial misconduct, including new 10-year jail terms.
Commonwealth Bank’s results show its eight-year streak of growing profits has come to an end. It reminded shareholders that CBA had agreed, in June, to pay $700m to settle civil proceedings relating to breaches of anti-money laundering and counter-terrorism financing laws.
The civil penalty proceedings were brought by the Australian Transaction Reports and Analysis Centre (Austrac) in August 2017, relating to alleged contraventions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.
Austrac had announced in August 2017 that it was suing CBA for 53,700 alleged breaches of money laundering and counter-terrorism financing laws. The case related to CBA’s use of intelligent deposit machines, a type of ATM launched in 2012 that let customers anonymously deposit and transfer cash.
Industry super funds are thrashing those run by banks – and business is crying foul
CBA told shareholders the $700m was a non-tax deductible expense. Of that amount, $375m was recognised in the first half of the financial year, and $389m in additional provisions was recognised for the year ended 30 June.
“These provisions relate to financial crimes compliance, the Australian Securities and Investments Commission investigation, the shareholder class actions, the Austrac proceedings, the royal commission and the Apra prudential Inquiry,” the bank told shareholders.
The bank’s chief executive, Matt Comyn, said it had been a “difficult” 12 months for the business but fundamentals remained strong despite the challenges.
Comyn’s predecessor, Ian Narev, was stripped of $5.3m in bo
Under pressure wealth manager AMP is facing civil claims in the Federal Court that its advisers were shunting customers into life insurance policies against their best interests, in order to win lucrative commissions.
In claims that had not yet been aired by the royal commission into banking and financial services, AMP has been taken to court by the Australian Securities & Investments Commission over claims it failed to prevent its financial planners from churning customers into new life insurance policies.
ASIC has alleged financial planners engaged in “rewriting conduct” where they gave customers advice that saw them cancel their existing life insurance policy only to take out similar replacement policy through a new application, rather than a transfer.
By doing this, financial planners stood to receive larger bonuses than they would have under a simple transfer. At the same time, customers were exposed to “unnecessarily to underwriting and associated risks”, ASIC said.
AMP is alleged to have known, or ought to have known, about this behaviour by July 2013. However, ASIC said AMP did not take reasonable steps to deal with the conduct in the two years to the end of June 2015.
“ASIC alleges that this type of advice was inappropriate, and that the financial planners failed to act in the best interests of the clients and to prioritise the interests of the clients,” the regulator time.
The case will rely on the client files of a number of AMP customers, including that of banned planner Rommel Panganiban, who was suspended from the industry in 2016.
ASIC will also allege AMP breached parts of the Corporations Act that require efficient, honest and fair provision of financial services. The case will have a directions hearing on July 27.
AMP is still being investigated for the scandals revealed in the royal commission, including its conduct during the fees-for-no-service disaster and in relation to making false and misleading statements to ASIC over its conduct regarding the doctored Clayton Utz board report.
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David Murray's AMP drops 75%
1 week 3 days ago #4001
One of the worst financial results for the week was reported by giant insurance and fund manager AMP (ASX: AMP), after the company lost much of its board and management due to evidence at the financial services Royal Commission.
First half profit fell 74 per cent to $115 million due to impairments linked to its financial planning scandal, with the total bill set to hit up to $500 million.
Underlying profit was also down due to the financial planning troubles, falling to $495 million for the half from the $533 million recorded in the first six months of last year.
Compensation payments blunt profits
AMP has previously announced it will put aside $415 million to compensate customers found to have been affected by poor or non-existent advice going back 10 years – a provision that will cost AMP $290 million after accounting for tax.
It is a sorry set of figures but the real worry for AMP is that investor’s money has been flowing out of the company.
Money flowing out of AMP investments
AMP acting chief executive Mike Wilkins said customer withdrawals picked up following the royal commission hearings in April but had slowed down in recent weeks.
AMP’s wealth management business saw total net cash outflows of $873 million for the first half of 2018, compared to net inflows of $1.023 billion in the prior corresponding half.
Most of those outflows – $673 million – happened in the second quarter, which is traditionally AMP’s strongest quarter.
Board and management being restocked
It is a worrying picture as the fund manager begins to restock its board with the former head of Treasury John Fraser and continues to look for a permanent chief executive to carve out a future for what is still one of the most recognisable names in insurance and money management in Australia.
AMP investors will certainly be feeling the pain as well quite apart from the prolonged fall in the share price with dividends down to 4.5 cents to 10 cents per share.
AMP ASX share price drop
AMP share price.
The real long term problem for AMP is how it can modify its business model to not only regain the trust of investors in itself and its products but to compete and thrive in the new and very different environment that is certain to arrive following the Royal Commission.
Royal Commission shows importance of fees
If it achieves nothing else, the Royal Commission has shone a very bright spotlight on the fees charged by some super funds and all but the most uninvolved will now know that they need to take notice of this issue.
Interestingly, local exchange traded fund (ETF) company BetaShares this week produced some interesting research showing the extent to which fees can blunt investment returns, given the power of compounding returns over time.
Compounding returns make low fees vital
Using their example, an investor who puts $10,000 into Australian shares that grows by 5 per cent a year and leaves it for 40 years will grow that balance to $38,835 if the investor had paid the average Australian active investment management fee of 1.55 per cent a year.
That sounds great but consider what the result would have been if the same investor instead used a low cost ETF to invest in the Australian market.
Using the 0.07 per cent fee charged by their Australia 200 ETF (ASX: A200) – which is a very low fee – and assuming the same five per cent a year return, the investor would be left with an amazing nest egg after 40 years of $68,547, or a whopping 77 per cent more!
Can a passive approach be 77 per cent better?
At this stage the critics are likely to start howling that you can’t compare a “dumb’’ ASX 200 index fund to the combined strategic genius of active fund managers.
Well, they may have a point if you are somehow able to pick the best of the best active managers and also find one who stays at the top of this game for 40 years.
However, the figures simply don’t bear this out.
Most active fund managers underperform
Most active funds managers still tend to under-perform investment benchmarks over time.
The recent S&P Dow Jones SPIVA Survey, found around two-thirds of active Australian equity managers under-performed their benchmark index over the past five years to 30 June 2017.
Those results have not tended to change much over time, and it is a similar situation overseas, suggesting that active managers struggle, on average, to beat passive investment benchmarks.
That is not to say everyone should immediately only use passive investments and ETF’s – far from it – but it does show how the issue of fees is one that is vitally important to the financial interests of investors and should take centre stage following the Royal Commission.
Active approaches can be very rewarding and many active fund managers can significantly improve investor outcomes but all of them need to be happy to show how their fees have been earned over time by outperformance.
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