The AMP Limited (ASX: AMP) share price will be one to watch today, after the Federal Court has ordered AMP to pay a $5.175 million penalty for failing to prevent its financial planners from churning insurance products.
The Australian Securities and Investments Commission (ASIC) took AMP to court alleging its planners advised clients to cancel insurance policies and take out similar policies via a new application rather than transfer. This exposed clients to significant risks and resulted in planners receiving higher commissions than they would have received if the policies were transferred.
Conduct ‘morally indefensible’
The Federal Court noted that the penalty “reflects a lamentable failure of corporate will to take the necessary steps to prevent greedy and unlawful conduct taking place”. The Court found that AMP had failed to take reasonable steps to ensure its planners complied with their obligations under the Corporations Act, including their duty to act in the best interests of their clients. The conduct of one of AMP’s financial planners in “rewriting” insurance policies was called “morally indefensible” by the Court.
ASIC argued that once AMP became aware of rewriting conduct that breached the Corporations Act by one of its planners, it was required to determine the extent of breaches by other planners. The Court accepted this argument, finding that AMP failed to do so and that “the lack of an effective response is an illustration of how badly things have gone wrong within the organisation.”
Multiple breaches of Corporations Act
The Court identified 6 breaches of section 961L of the Corporations Act by AMP. Section 961L requires financial services licensees to take reasonable steps to ensure their representatives comply with their obligations to act in the best interests of the client, provide advice that is appropriate to the client, warn the client where advice is incomplete or inaccurate, and give priority to the client’s interests in the face of a conflict of interest.
ASIC deputy chair Daniel Crennan QC said, “we now have a decision from the court which agrees with ASIC’s case that AMP failed to monitor and supervise its financial planners properly and in accordance with its legal obligations.”
The Court specified that, “a forward looking compliance plan that seeks to prohibit rewriting rewriting conduct through improved communication, training, and supervision by AMP of its financial planners,” would be required. Orders requiring AMP to conduct a review and provide remediation to customers subject to insurance policy churning are expected.
Changes to address churning
AMP claims internal changes have been made since 2015, when the conduct the subject of the Federal Court’s decision occurred. A spokesperson explained that improved monitoring and supervision had been introduced in the interim, alongside stronger measures to protect clients. The practice of churning was investigated during the Royal Commission, with AMP among a number of companies required to explain their practices for selling life insurance.
The AMP share price has been in decline ever since the Royal Commission, and will be worth watching today as the market digests this latest penalty.
Currently trading at $1.76, AMP shares were trading above $5 prior to the Royal Commission, which cost the wealth management company its chief executive and chairman.
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