Banking royal commission: AMP defends ‘vertically integrated’ model, confirms $778m compensation bill

AMP’s acting chief has defended its “vertically integrated” model after critical internal views were aired at royal commission.

AMP acting chief Mike Wilkins has defended the embattled wealth group’s vertically integrated model, as he disagreed with more critical views raised by its own customer advocate.

The Hayne royal commission today saw a document tendered that was authored by Melanie Howard-McDonald, an advocate for AMP (AMP) customers, in response to the prudential regulator’s scathing review of Commonwealth Bank’s culture and processes.

She submitted a memorandum to Mr Wilkins that analysed the CBA report from an AMP customer perspective and, among other things, found the company didn’t properly understand the vertically integrated model. That model refers to manufacturing and selling products, which can create conflicts of interest.

“As a business we talk often about the value of a vertically integrated business but in practice my feeling is that we have little organisational understanding of what this means in terms of customer and other stakeholder expectations,” Ms Howard-McDonald said in the document.

“Further, on a day to day basis, we operate as broadly four separate business lines who ‘happen to’ share the same name and spend a lot of time ‘doing business’ with each other, sometimes to the detriment of customer outcomes.

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“This manifests itself, at best, in the lack of cohesion for customers in their dealings with AMP and, at worst, when things go wrong, delays in putting the customer right.”

Senior counsel assisting Michael Hodge QC quizzed Mr Wilkins on the document and asked whether he agreed that vertical integration was problematic.

He responded: “No I don’t”. And then went on to say.

“That is her view seen through the lens of the customer advocate.”

Mr Wilkins was strident in his backing of vertical integration, despite a host of scandals that have engulfed AMP — partly as a result of its model — and as several big banks pull back from it.

“We believe in vertical integration. we think it is an appropriate structure that does have benefits for the consumer as well,” he said. Mr Wilkins also added benefits included that fixed costs could be better spread across many business units boosting affordability of advice and that customers had more assurance in the strength of larger organisations.

AMP’s financial advice unit has been embroiled — like several of its peers — in a scandal for providing large numbers of customers shoddy advice or charging them for services never received.

Mike Wilkins at the banking royal commission hearing in Melbourne yesterday. Picture: Supplied

Mr Wilkins yesterday gave a total estimate of $778 million to deal with, process and fund customer repayments, if AMP met its target of completing the remediation in three years. That number would top $1.18 billion if the time frame extended to nine years, a worst case scenario.

AMP released an ASX statement today to clarify Mr Wilkins’ statements to the commission.

It showed that in addition to the $290m post-tax additional provisions disclosed in July and an earlier provision, AMP had program running costs, inactive adviser estimates and future customer lost earnings to repay bringing the total post-tax figure to $545 million.

Pre-tax the total comes to $778 million.

The statement also said “based on current information,” on potential remediation for a new fee scandal in its superannuation business, AMP didn’t expect a “material” impact.

Mr Wilkins today added that AMP was “facing into that” advice remediation challenge and working toward upgrading its systems and process to ward against future scandals and failings.

But he also admitted too much of a short-term focus on financial performance but was less clear on how the AMP board managed the situation.

“The board has signed off on the strategy put forward by the business … whether we were as aware as, perhaps, we needed to be … is difficult to say,” Mr Wilkins said.

AMP has considered a formal conduct risk strategy but is yet to formalise it, ahead of new chief executive Francesco De Ferrari starting on December 1.

Mr Hodge was tough in his questioning of inherent conflicts of interest at the wealth group and dissected the flows of customer funds by advisers into AMP products.

A figure of $370 million in margin share — which is margin that AMP makes on advice products and shares with advisers — was cited as was the estimate that as much as 65 per cent of funds flowing in were going to AMP products.

Mr Wilkins countered that view by saying advisers had a “best interest duty”, AMP had extensive approved product lists and he noted that some of those funds were then directed on to non-AMP products.

“There would be some of that flowing out. Some would be staying with AMP for management,” he said.

Mr Wilkins also reiterated his view that AMP was no longer focused on the size of its adviser network, and said the group had exited almost 200 “higher risk” advice practices during 2018.

“One of the things that we are less fixated on today than in the past is the overall size of the — of the network. I’ve said publicly that the — the number of advisers is not a measure of success for us.

“What is a measure of success is the professionalism, the productivity and the compliance that, that we see through the network.”

At 12.15pm (AEDT), AMP shares were down 4.53 per cent at $2.33 after falling as much as 5.8 per cent to a four-week low of $2.29, near a record low of $2.28.