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Hits keep on coming as AMP cops downgrade

Emma Rapaport  |  03 May 2018Text size  Decrease  Increase  |  
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Morningstar equity analysts have lowered AMP’s stewardship rating, as damaging Royal Commission revelations prove disastrous.

In response to the latest findings, Morningstar equity analysts to downgrade the stewardship rating of AMP Limited (ASX: AMP) to "poor", from "standard".

The downgrade reflects AMP’s poor corporate governance and risk management, some of which has been identified as potentially unlawful, according to Morningstar equity analyst, Chanaka Gunasekera.

“AMP’s heritage brand has been trashed and its long-term strategy is now uncertain,” he says.

“A wide range of remedial actions have been announced and have been or will be implemented. Execution is always key to long-term success, and so far, we think the jury is out on whether new management can deliver.”

Gunasekera added: “AMP will be in a period of transition in the next few years as it employs a new leadership team, incurs higher compliance costs, and suffers from material reputational damage.”

AMP breached provisions of the Corporations Act by misleading the regulator on 20 occasions about its deliberate practice of charging fees to customers who were no longer receiving financial advice, counsel assisting the inquiry, Rowena Orr, QC told the Royal Commission in her closing address.

The inquiry also heard evidence of AMP’s attempt to influence a report by lawyers Clayton Utz, which they indicated to ASIC was external and independent. Orr said the firm's characterisation was “inaccurate, if not misleading".

The evidence has cost chief executive Craig Meller and chair Catherine Brenner their jobs, with both tendering their resignations. Board member Mike Wilkins has been appointed acting chief executive and executive chair, and an independent review into governance and culture has been initiated.

While Wilkins has relevant financial services experience to run AMP, Morningstar's Gunasekera notes his time as chair of AMP’s Audit and Risk Committee could see him shoulder some of the blame for the company’s poor corporate governance and risk management.  “We expect Wilkins to be only a short-term appointment,” Gunasekera says.

With more leadership changes expected, and AMP's strategy to focus on investments and grow its wealth management business “in tatters”, he views the company's strategy as "unclear".

Another reason for the negative stewardship rating is management’s history of poor capital allocation. In particular, the acquisition of AXA Asia Pacific Holdings Limited (AXA) in 2011, which resulted in AMP becoming more exposed to wealth protection – especially within the troubled life insurance sector – was detrimental for shareholders.

"Insurance has been plagued by higher-than-expected claims and other problems.

"This has forced AMP to re-insure a large portion of its insurance book, resulting in much lower profits. The increased number of AMP shares issued as part of the AXA acquisition has resulted in lower earnings per share," says Gunasekera.

The AMP board will meet with shareholders on May 10, where questions over culture and governance are expected to be a key focus.

Three laws firms have announced shareholder class action investigations, and the Australian Council of Superannuation Investors has instructed its 32 member funds to vote against the re-election of AMP’s directors. A fourth class action investigation was announced by law firm Phi Finney McDonald and funder IMF Bentham on Tuesday.

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Emma Rapaport is a reporter for Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

 

is an editor for Morningstar.com.au

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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