Equity Financial Planners Pty Ltd v AMP Financial Planning Pty Ltd
[2023] FCA 741
•5 July 2023
FEDERAL COURT OF AUSTRALIA
Equity Financial Planners Pty Ltd v AMP Financial Planning Pty Ltd [2023] FCA 741
File number: VID 498 of 2020 Judgment of: MOSHINSKY J Date of judgment: 5 July 2023 Catchwords: CONTRACT – construction – where the applicant and group members were authorised representatives of the respondent (AMPFP) – where the contracts between the applicant/group members and AMPFP included a buyer of last resort (BOLR) policy that provided for AMPFP to buy back the register rights of the authorised representative at a multiple of 4.0x ongoing revenue – where AMPFP amended the BOLR policy to change the multiple from 4.0x to 2.5x (for ongoing revenue other than grandfathered commission revenue) and a lower multiple for grandfathered commission revenue – whether the changes to the BOLR policy were authorised by the amendment provision for legislation, economic or product changes – whether there was an “economic change” within the meaning of the policy – whether there was a “legislation change” within the meaning of the policy – whether any such changes rendered any part of the BOLR policy “inappropriate” – whether the changes to the policy were proportionate – whether AMPFP satisfied requirement of consultation with financial planners association – held: changes to the BOLR policy were ineffective
CONSUMER LAW – unconscionable conduct – where the applicant and group members were authorised representatives of AMPFP – where the contracts between the applicant/group members and AMPFP included a BOLR policy that provided for AMPFP to buy back the register rights of the authorised representative at a multiple of 4.0x ongoing revenue – where AMPFP amended the BOLR policy on 8 August 2019 to change the multiple from 4.0x to 2.5x (for ongoing revenue other than grandfathered commission revenue) and a lower multiple for grandfathered commission revenue – where a sample group member (WealthStone) had lodged a BOLR application before 8 August 2019 with an exercise date after 8 August 2019 – where AMPFP purported to apply the 8 August 2019 changes in calculating the BOLR benefit payable to WeathStone – where AMPFP included a release in draft buy-back agreement – where WealthStone requested removal of the release – where AMPFP refused to remove the release – whether AMPFP’s conduct in procuring the release was, in all the circumstances, unconscionable – held: AMPFP’s conduct in procuring the release was unconscionable
Legislation: Competition and Consumer Act 2010 (Cth), Sch 2, Australian Consumer Law, ss 2, 18, 21, 22, 23, 24, 25, 26, 27, 237
Corporations Act 2001 (Cth)
Federal Court of Australia Act 1976 (Cth)
National Consumer Credit Protection Act 2009 (Cth)
Treasury Laws Amendment (Ending Grandfathered Conflicted Remuneration) Act 2019 (Cth)
Cases cited: Australian Competition and Consumer Commission v Get Qualified Australia Pty Ltd (in liq)(No 2) [2017] FCA 709; [2017] ATPR ¶42‑548
Australian Competition and Consumer Commission v Lux Distributors Pty Ltd [2013] FCAFC 90; [2013] ATPR ¶42‑447
Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd [2021] FCAFC 40; 285 FCR 133
Australian Medic-Care Co Ltd v Hamilton Pharmaceutical Pty Ltd [2009] FCA 1220; 261 ALR 501
Castle Constructions Pty Ltd v Fekala Pty Ltd [2006] NSWCA 133; 65 NSWLR 648
Clark v Macourt [2013] HCA 56; 253 CLR 1
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104
Payzu Ltd v Saunders [1919] 2 KB 581
Robinson v Harman (1848) 1 Ex 850
Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Number of paragraphs: 722 Date of hearing: 10-14, 17-21 October, 2-4, 7-11, 25, 28, 29 November 2022 Counsel for the Applicant: Mr RG Craig KC with Mr K Loxley, Mr R Rozenberg and Ms J Nikolic Solicitor for the Applicant: Corrs Chambers Westgarth Counsel for the Respondent: Mr DJ Batt KC with Ms T Spencer Bruce and Mr A Terzic Solicitor for the Respondent: King & Wood Mallesons ORDERS
VID 498 of 2020 BETWEEN: EQUITY FINANCIAL PLANNERS PTY LTD
Applicant
AND: AMP FINANCIAL PLANNING PTY LTD
Respondent
ORDER MADE BY:
MOSHINSKY J
DATE OF ORDER:
5 JULY 2023
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
INTRODUCTION
[1]
PLEADINGS
[23]
THE HEARING AND EVIDENCE
[27]
FACTUAL FINDINGS
[48]
AMPFP and the AMPFP network
[48]
ampfpa
[53]
Some key concepts – institutional ownership and register rights
[62]
The key contractual documents
[66]
Authorised representative agreements
[66]
Master Terms
[70]
BOLR Policy
[78]
The period before May 2017
[101]
The period May 2017 to August 2018
[102]
The period September 2018 to January 2019
[127]
The period 1 February to mid-March 2019
[135]
The period mid-March to 25 July 2019
[161]
The meeting on 25 July 2019 between AMPFP and RemCo
[206]
The period 25 July to 8 August 2019
[236]
25 and 26 July 2019
[236]
The “Formal Consultation materials” provided on 26 July 2019
[237]
27 July 2019 to 7 August 2019
[252]
AMPFP Board papers and meeting (7 August 2019)
[269]
Further communication on 7 August 2019
[292]
Announcement of the 8 August 2019 Changes
[293]
Evidence as to whether RemCo was appropriate body for consultation
[297]
Evidence as to whether reasonable notice was given of the proposed changes
[300]
The period after 8 August 2019
[309]
Facts relating to Equity
[315]
The period before May 2019
[315]
The period from May 2019 to August 2020
[327]
The period after August 2020
[364]
Counterfactual evidence
[378]
Facts relating to WealthStone
[386]
The period before December 2018
[386]
The period from December 2018 onwards
[401]
The WealthStone Buy-Back Agreement
[429]
The period after February 2020
[437]
EXPERT AND TRANSACTION DATA EVIDENCE
[440]
Mr Scott’s evidence
[441]
Multiples for P2P transactions in the AMPFP network
[450]
Average multiple for on-sell and lease transactions
[455]
Average multiple for P2P transactions and on-sell transactions
[460]
Mr Siolis’s evidence
[464]
Mr Neill’s evidence
[475]
Ms Wright’s evidence
[495]
Professor Brimble’s evidence
[496]
Professor Frino’s evidence
[519]
Part 1 of the report
[528]
Part 2 of the report
[537]
Mr Tappe’s evidence
[546]
WHETHER THE 8 AUGUST 2019 CHANGES WERE EFFECTIVE (WITH IMMEDIATE EFFECT)
[547]
Onus of proof
[549]
Construction issues
[553]
The economic change issue
[563]
AMPFP’s first alternative “economic change” contention
[567]
AMPFP’s second alternative “economic change” contention
[585]
The legislation change issue
[598]
The consultation issue
[603]
The effect of any failure to consult
[607]
Whether AMPFP breached the obligation to consult
[616]
The good faith issue
[643]
Conclusion
[644]
WHETHER THE 8 AUGUST 2019 CHANGES WERE EFFECTIVE 13 MONTHS LATER
[645]
UNCONSCIONABLE CONDUCT
[648]
MISLEADING OR DECEPTIVE CONDUCT
[649]
EQUITY’S CLAIM
[654]
Whether Equity failed to mitigate its loss
[664]
The amount of Equity’s loss or damage
[671]
WEALTHSTONE’S CLAIM
[676]
Whether the condition precedent to the operation of the release has been satisfied
[683]
Whether the release is void under s 23 of the Australian Consumer Law
[689]
Whether AMPFP’s conduct in procuring the release was unconscionable
[701]
Conclusion
[719]
OTHER MATTERS
[720]
CONCLUSION
[721]
REASONS FOR JUDGMENT
MOSHINSKY J:
INTRODUCTION
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).
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).
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.
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.
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.
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.)
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”.)
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).
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.
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).
In the alternative, AMPFP contends that the 8 August 2019 Changes were effective 13 months later, that is, on 8 September 2020.
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.
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.
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.
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.
It follows from the above that the 8 August 2019 Changes (with immediate effect) were not authorised by the LEP Provision and were ineffective.
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.
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.
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.
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).
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.
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
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.
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.
In addition to the above pleadings, there is an amended reply. This was not amended during the hearing.
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
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).
Ms Braschey gave evidence in a clear, honest, helpful and straightforward manner. I accept her evidence.
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.
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.
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).
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).
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).
I will make observations about the expert witnesses who were cross-examined later in these reasons.
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).
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.
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.
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.
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.
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.
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.
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.
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).
As noted above, I will make observations about the expert witnesses who were cross-examined later in these reasons.
In addition to the documents annexed to affidavits, the parties tendered a number of other documents.
The expert evidence was presented as part of each party’s case, rather than concurrently.
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
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.
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.
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.
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.
The expression “AMPFP network” refers to the network of financial planning practices providing services under an authorisation from AMPFP.
ampfpa
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.
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.
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.
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)).
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).
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.
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.
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.
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
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.)
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.)
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.
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
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.
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.
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).
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
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.
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.
It is clear from the above that the expression “Practice Documents” included the BOLR Policy.
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.
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.
Clause 2 of the Master Terms dealt with matters relating to the authorisation of the Representative.
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.)
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
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.
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.
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).
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”.
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.
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).
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.
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”.
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%.
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.
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).
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”.
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.
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.
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.
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:
Ÿ 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.
Ÿ 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.
Ÿ 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.)
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.)
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.
Appendix 1 to the Akers July 2018 Memorandum sets out key terms of the 2017 BOLR Policy. The appendix stated:
Eligibility
All AMPFP practices with 4+ years tenure.
Notice period
12 months (reduced to 6 months for practices with 15+ years tenure).
Valuation
Bolr valuation is based on a flat multiple of 4x recurring income which applies to all ongoing fee and commission income irrespective of whether linked to an AMP or non-AMP product. One-off or upfront income is not included.
Bolr valuation is subject to discounting where:
1. The practice has not maintained adequate client data and contact details. 2. The practice has not maintained adequate client files and records. 3. The practice has compliance or remediation concerns. 4.
In the case of fee for service clients, where the practice does not have a service package in place with the client meeting AMP’s defined standards
Payment under Bolr is made in two instalments. In additional to the above discounts, an amount of 20% of the settlement price is deferred for 12 months and is “at risk”, and may be adjusted in the event that the quality of the client book has significantly decreased since the date of settlement.
Institutional client ownership
AMPFP’s Bolr policy is linked with its “institutional ownership” framework, where AMPFP retains ultimate ownership of client relationships introduced to practices while licensed by AMPFP. If the practice exits, the clients that have been serviced by the practice will remain with AMPFP and continue to be serviced by another AR licensed by AMP. Institutional ownership has historically been viewed as the “quid pro quo” for AMPFP’s above-market Bolr multiple.
Pre-Bolr exit responsibilities
During their notice period, practices are required to:
1. Notify clients of their departure 2. Ensure client files and records are up-to-date. 3. Obtain opt-ins in relation all existing servicing arrangements. 4.
Align their client servicing arrangements to meet AMP’s standard service packages (via a variation of the agreement, in cases where they don’t align).
Failure to undertake these activities may result in the relevant client policies not being valued under Bolr.
Undertaking As part of exercising Bolr, practice principals and equity-holders undertake not to approach former clients, and not to work in the finance industry for a period of 3 years from the exit date. This precludes them from continuing business under another non-AMP licensee during the undertaking period. (Emphasis added.)
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).
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.)
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.
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
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
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.
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.
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
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.)
“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.)
“AMP Direct” was subsequently re-named “AMP Assist”. The name “AMP Advice” remained the same.
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.
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.
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.)
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.
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.)
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.
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.
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.
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.
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.)
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.
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.
Section 23(1) of the Australian Consumer Law relevantly provides:
23 Unfair terms of consumer contracts and small business contracts
(1) A term of a consumer contract or small business contract is void if:
(a) the term is unfair; and
(b) the contract is a standard form contract.
…
(4) A contract is a small business contract if:
(a)the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
(b)at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
(c)either of the following applies:
(i)the upfront price payable under the contract does not exceed $300,000;
(ii)the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.
The Australian Consumer Law defines “services” broadly to include “any rights …, benefits, privileges or facilities that are, or are to be, provided, granted or conferred in trade or commerce” (s 2). The word “supply” is defined as including (in relation to services) “provide, grant or confer”.
The term “unfair” is defined in s 24. Examples of unfair terms are given in s 25.
Section 26 provides:
26Terms that define main subject matter of consumer contracts or small business contracts etc. are unaffected
(1)Section 23 does not apply to a term of a consumer contract or small business contract to the extent, but only to the extent, that the term:
(a)defines the main subject matter of the contract; or
(b)sets the upfront price payable under the contract; or
(c)is a term required, or expressly permitted, by a law of the Commonwealth, a State or a Territory.
(2) The upfront price payable under a contract is the consideration that:
(a)is provided, or is to be provided, for the supply, sale or grant under the contract; and
(b)is disclosed at or before the time the contract is entered into;
but does not include any other consideration that is contingent on the occurrence or non-occurrence of a particular event.
Section 27 provides:
27Standard form contracts
(1)If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise.
(2)In determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant, but must take into account the following:
(a)whether one of the parties has all or most of the bargaining power relating to the transaction;
(b)whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties;
(c)whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in section 26(1)) in the form in which they were presented;
(d)whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1);
(e)whether the terms of the contract (other than the terms referred to in section 26(1)) take into account the specific characteristics of another party or the particular transaction;
(f)any other matter prescribed by the regulations.
The applicant contends that the WealthStone Buy-Back Agreement is a small business contract, a term of the contract (the release) is unfair, and the agreement is a standard form contract. Accordingly, the applicant contends, the release is void pursuant to s 23(1).
I will start by considering whether the WealthStone Buy-Back Agreement is a “small business contract” as defined in s 23(4) and consider each element in turn.
(a)The applicant submits that the agreement is a contract for the supply of services, namely the payment of the BOLR Benefit by AMPFP to WealthStone. AMPFP disputes this. In my view, the agreement is a contract for the supply of services, but I would analyse this differently from the applicant’s submissions. I consider the supply of services to be the surrender of register rights by WealthStone to AMPFP. The word “services” is defined to includes “rights” and “benefits” that are, or are to be, provided, granted or conferred in trade or commerce. This is sufficiently broad to include the register rights, as described earlier in these reasons. The word “supply” is relevantly defined to include “provide, grant or confer”. Clause 2.1 of the WealthStone Buy-Back Agreement provides that the practice, as beneficial owner of the register rights, agrees to surrender the register rights to AMPFP in exchange for payment of the BOLR Benefit, free from any encumbrances, and with effect from the Completion. Clause 8 deals with risk, title and liabilities. The clause provides in part that, on and from the Completion Date, all Remuneration earned or receivable or otherwise payable belongs to AMPFP. Having regard to these clauses, in particular, in my view, the transaction involves WealthStone providing the register rights to AMPFP, as the ubiquitous language of “buy-back” indicates. While the language of “surrender” perhaps tends in the opposite direction, the contract refers to WealthStone as the beneficial owner of the register rights, indicating that it is giving up (providing) something.
(b)The next element of the definition of “small business contract” is that, at the time the contract was entered into, at least one party employed less than 20 people. This is satisfied in the case of WealthStone.
(c)The next element is set out in s 23(4)(c). In the present case, both of the alternatives are satisfied.
(i)In relation to s 23(4)(c)(i), I consider the “upfront price” for the purposes of this provision to be the BOLR Benefit ($176,121.41). Under s 26(2), the “upfront price” is the consideration that “(a) is provided, or is to be provided, for the supply, sale or grant under the contract; and (b) is disclosed at or before the time the contract is entered into; but does not include any other consideration that is contingent on the occurrence or non-occurrence of a particular event”. The BOLR Benefit satisfies the criteria referred to in paragraphs (a) and (b) of s 26(2). An issue arises whether the Deferred Payment falls within the words at the end of s 26(2) (“but does not include any other consideration that is contingent on the occurrence or non-occurrence of a particular event”) (the concluding words). (While this issue does not have any practical effect in WealthStone’s case, it may be relevant for the cases of other group members.) If the Deferred Payment falls within the concluding words, then it does not form part of the upfront price. In my view, the Deferred Payment does not fall within the concluding words. While the amount of the Deferred Payment can be adjusted, liability to pay the Deferred Payment is not contingent. Further, the Deferred Payment does not fall within the words “other consideration”. Accordingly, the upfront price is the BOLR Benefit. As the BOLR Benefit does not exceed $300,000, this alternative is satisfied.
(ii)In relation to s 23(4)(c)(ii), the agreement has a duration of more than 12 months, because the Deferred Payment Date is effectively 21 February 2021 (12 months after the Completion Date) and this is more than 12 months after the date of the agreement (4 February 2020). Further, the upfront price does not exceed $1 million.
Accordingly, the WealthStone Buy-Back Agreement is a small business contract.
I will consider next whether the agreement is a “standard form contract”. The Australian Consumer Law does not define “standard form contract”. As set out above, s 27(1) provides that if a party to a proceeding alleges that a contract is a standard from contract, it is presumed to be a standard form contract unless another party proves otherwise. In determining whether a contract is a standard form contract, a court may take into account such matters as it thinks relevant, but must take into account the matters set out in s 27(2). I will consider each of those in turn:
(a)Whether one of the parties has all or most of the bargaining power relating to the transaction – The transaction for present purposes is the buy-back of WealthStone’s register rights and the payment of a BOLR benefit to WealthStone that culminated in the WealthStone Buy-Back Agreement. The transaction was triggered by WealthStone submitting a BOLR application; this was a choice that WealthStone made. However, once the BOLR application had been lodged, AMPFP had a significantly greater degree of bargaining power than WealthStone relating to the transaction, because WealthStone could not withdraw its BOLR application unless AMPFP consented. Further, because of AMPFP’s delay in finalising the transaction, Mr Finch was under financial pressure. I infer that, because of the dealings between AMPFP personnel and Mr Finch, AMPFP was aware of Mr Finch’s need (in January and early February 2020) to finalise the transaction as soon as possible.
(b)Whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties – Discussion relating to the transaction started shortly after WealthStone submitted its BOLR application (in December 2018). Before that time, AMPFP had prepared a template buy-back agreement. (This is apparent from the template buy-back agreement that was provided by AMPFP to Equity in June 2019 – that document has the words “FINAL DRAFT – 2 May 2018” on the front page, indicating when it was prepared.) However, the draft buy-back agreement provided by AMPFP to WealthStone on 31 January 2020 had not been prepared before December 2018. While quite similar to the template referred to above, the draft buy-back agreement included details referable to the transaction with WealthStone, such as party details, dollar amounts, and adjustments to the template to reflect the arrangement regarding remediation costs.
(c)Whether another party was, in effect, required either to accept or reject the terms of the contract (other than the terms referred to in section 26(1)) in the form in which they were presented – WealthStone was able to negotiate some changes to the terms of the draft buy-back agreement, as evidenced by the changes to the lookback review clause (cl 3.4). Thus, WealthStone was not required either to accept or reject the terms as a whole. However, Wealth Stone was, in effect, required to accept the release clause or reject the terms of the contract. Mr Finch sought removal of the release and this was rejected by AMPFP (see [424] above). Mr Finch raised his concerns about the release with Mr Stone and was told “you can sign the deed of release and leave, or not” (see [427] above).
(d)Whether another party was given an effective opportunity to negotiate the terms of the contract that were not the terms referred to in section 26(1) – WealthStone was able to negotiate some changes to the terms of the draft buy-back agreement, as evidenced by the changes to the lookback review clause (cl 3.4). However, it was not given an effective opportunity to negotiate the release. As noted above, Mr Finch sought removal of the release and this was rejected by AMPFP. Mr Finch raised his concerns about the release with Mr Stone and was told “you can sign the deed of release and leave, or not”. Insofar as AMPFP relies on the communications between WealthStone and AMPFP in relation to the audit discount and the remediation costs, these communications largely concerned the upfront price, being a term referred to in s 26(1).
(e)Whether the terms of the contract (other than the terms referred to in section 26(1)) take into account the specific characteristics of another party or the particular transaction – The contract contains some terms that are specific to the transaction with WealthStone (eg, cl 3.4).
(f)Any other matter prescribed by the regulations – there are no such matters.
The Court is empowered to look at other relevant matters. However, I consider that the observations set out above sufficiently cover the relevant matters in this case. Although a number of the factors identified in s 27(2) are present, they are not all present, and some are only present in a qualified way. On balance, I consider that AMPFP has proved that the WealthStone Buy-Back Agreement is not a “standard form contract”. While the contract is largely based on a template agreement prepared before any discussion relating to the particular transaction occurred, the draft buy-back agreement that was provided by AMPFP on 31 January 2020 contained some specific details and provisions relating to the transaction with WealthStone, and there was an effective opportunity to negotiate some of the terms of the agreement (albeit there was not an effective opportunity to negotiate the release).
In light of that conclusion, it is unnecessary to consider whether the release was an unfair term.
For these reasons, I reject the applicant’s contention based on s 23 of the Australian Consumer Law.
Whether AMPFP’s conduct in procuring the release was unconscionable
Section 21 of the Australian Consumer Law relevantly provides:
21Unconscionable conduct in connection with goods or services
(1)A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person; or
(b) the acquisition or possible acquisition of goods or services from a person;
engage in conduct that is, in all the circumstances, unconscionable.
…
(3)For the purpose of determining whether a person has contravened subsection (1):
(a)the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and
(b)the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section.
(4)It is the intention of the Parliament that:
(a)this section is not limited by the unwritten law relating to unconscionable conduct; and
(b)this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and
(c)in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of:
(i)the terms of the contract; and
(ii)the manner in which and the extent to which the contract is carried out;
and is not limited to consideration of the circumstances relating to formation of the contract.
I have concluded, at [695(a)] above, that the WealthStone Buy-Back Agreement was a contract for the supply of services by WealthStone to AMPFP. It follows that it was a contract for the acquisition of services by AMPFP from WealthStone. Accordingly, AMPFP’s conduct in procuring the release was in connection with the acquisition of services. There is no issue that the conduct was in trade or commerce.
Section 22 of the Australian Consumer Law sets out matters the court may have regard to for the purposes of s 21. Section 22(2) provides in part:
(2)Without limiting the matters to which the court may have regard for the purpose of determining whether a person (the acquirer) has contravened section 21 in connection with the acquisition or possible acquisition of goods or services from a person (the supplier), the court may have regard to:
(a)the relative strengths of the bargaining positions of the acquirer and the supplier; and
(b)whether, as a result of conduct engaged in by the acquirer, the supplier was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the acquirer; and
…
(f)the extent to which the acquirer’s conduct towards the supplier was consistent with the acquirer’s conduct in similar transactions between the acquirer and other like suppliers; …
Sections 21 and 22 of the Australian Consumer Law, and corresponding provisions in other statutes, have been considered in a number of cases in recent years.
The following principles, drawn from the applicant’s submissions, are established. The scope of statutory unconscionability is not limited by the equitable doctrine of unconscionability: s 21(4)(a) (set out above). Rather, the Court is required to evaluate the relevant conduct against the standard of good conscience in the sense that it falls short of societal norms: Australian Competition and Consumer Commission v Get Qualified Australia Pty Ltd (in liq)(No 2) [2017] FCA 709; [2017] ATPR ¶42-548 (Get Qualified) at [60] per Beach J. This involves “[s]tanding back and looking at the whole episode” in all the circumstances: Get Qualified at [61] quoting Australian Competition and Consumer Commissionv Lux Distributors Pty Ltd [2013] FCAFC 90; [2013] ATPR ¶42-447 at [44].
The principles applicable to determining whether conduct contravenes s 21 were recently elucidated by the Full Court of this Court in Australian Competition and Consumer Commission v Quantum Housing Group Pty Ltd [2021] FCAFC 40; 285 FCR 133 (Quantum Housing) (Allsop CJ, Besanko and McKerracher JJ). Relevantly, the Full Court held that, while some form of exploitation of or predation on some vulnerability or disadvantage of people will often be a feature of unconscionable conduct under s 21, this is “not a necessary feature of the conception or a necessary essence in the embodied meaning of the statutory phrase”: Quantum Housing at [4].
As to the meaning of “unconscionable”, the Full Court stated at [87]-[88]:
87The word, “unconscionable”, was, however, chosen by Parliament. As the Full Court said in National Exchange 148 FCR 132 at [33], unconscionable conduct “on its ordinary and natural interpretation, means doing what should not be done in good conscience”. The words “unconscionable” and “conscionable” may not be frequently used in everyday parlance, but they have an ordinary meaning, derived from the inner human sense of doing right. At least some of the human values that inform an Australian business conscience were set out in Paciocco 236 FCR 199 at [296]. Some of these, and not limited to protection of the vulnerable from victimisation or predation, were adopted by Kiefel CJ and Bell J in Kobelt 267 CLR 1 at [14].
88As the Full Court said in Unique 266 FCR 631 at [155], an allegation of unconscionability is a serious allegation. It is sufficient to warrant censure for the purpose of deterrence by the imposition of a civil penalty. Being penal in character tends against too loose or diffuse a construction: Stevens v Kabushiki Kaisha Sony Computer Entertainment (2005) 224 CLR 193 at [45]; Paciocco 236 FCR 199 at [300]. That assists in recognising an element of seriousness of the finding and the quality of the departure from the relevant standards of conduct that is required. As the Full Court said in Unique at [155]:
… To behave unconscionably should be seen, as part of its essential conception, as serious, often involving dishonesty, predation, exploitation, sharp practice, unfairness of a significant order, a lack of good faith, or the exercise of economic power in a way [worthy] of criticism. None of these terms is definitional. The Shorter Oxford Dictionary on Historical Principles (1973) gives various definitions including “having no conscience, irreconcilable with what is right or reasonable”. The Macquarie Dictionary (1985) gives the definition “unreasonably excessive; not in accordance with what is just or reasonable”. (The search for an easy aphorism to substitute for the words chosen by Parliament (unconscionable conduct) should not, however, be encouraged: see Paciocco at [262]). These are descriptions and expressions of the kinds of behaviour that, viewed in all the circumstances, may lead to an articulated evaluation (and criticism) of unconscionability. It is a serious conclusion to be drawn about the conduct of a business person or enterprise. It is a conclusion that does the subject of the evaluation no credit. This is because he, she or it has, in a human sense, acted against conscience. The level of seriousness and the gravity of the matters alleged will depend on the circumstances. Courts are generally aware of the character of a finding of unconscionable conduct and take that into account in determining whether an applicant has discharged its civil burden on proof.
(Emphasis added by Full Court in Quantum Housing.)
The issue whether AMPFP’s conduct in procuring the release was unconscionable is to be assessed on the basis of what AMPFP knew at the time that the relevant conduct occurred, that is, in late January and early February 2020, when AMPFP put forward the draft buy-back agreement including a release and then refused WealthStone’s requests to have the release removed from the draft agreement. Thus, I do not take into account that (as I have concluded in these reasons) the 8 August 2019 Changes were ineffective.
I consider the following facts and matters to be relevant and significant.
First, the issue of the release needs to be seen in the context of the 8 August 2019 Changes, which had been announced several months before AMPFP sent WealthStone the draft buy-back agreement (on 31 January 2020). The 8 August 2019 Changes involved drastic changes to the multiple applicable to practices under the BOLR Policy, from 4.0x to 2.5x for ongoing revenue other than grandfathered commission revenue. The changes materially adversely affected practices, including WealthStone. As Mr Jordan, on behalf of ampfpa, wrote to Mr Akers on 28 July 2019: “Remco views the content within [the formal consultation materials] as the most serious sequence of changes that will impact our members (including their clients) in the history of our relationship with AMP”. Subject to certain exceptions, the changes applied to practices in the pipeline, that is, practices (such as WealthStone) that had submitted a BOLR application before 8 August 2019 with an exercise date after 8 August 2019, even though those practices could not withdraw their BOLR application (unless AMPFP consented). The application of the 8 August 2019 Changes to practices in the pipeline was, in my opinion, unfair and unreasonable.
Secondly, the question whether the 8 August 2019 Changes were authorised by the LEP Provision (and therefore whether the changes were effective) was contestable and (I infer) known by AMPFP to be contestable. By 31 January 2020, the time when it proffered the draft buy-back agreement to WealthStone, AMPFP knew that it was possible that a class action would be commenced against it, challenging the validity of the 8 August 2019 Changes. This is apparent, for example, from Mr Stone’s reference to “the class action” in the conversation between Mr Finch and Mr Stone in early February 2020 (see [427] above).
Thirdly, there was a significant imbalance in bargaining power as between AMPFP and WealthStone in connection with the buy-back agreement. AMPFP was a substantial company, the subsidiary of a listed company and member of a large corporate group. WealthStone was essentially a one-person company. While it was WealthStone’s choice to lodge a BOLR application, once it had done so, it could not withdraw the BOLR application unless AMPFP consented. Further, as stated above, because of AMPFP’s delay in finalising the transaction, Mr Finch was under financial pressure. I infer that, because of the dealings between AMPFP personnel and Mr Finch, AMPFP was aware of Mr Finch’s need (in January and early February 2020) to finalise the transaction as soon as possible.
Fourthly, Mr Finch specifically sought removal of the release clause, but this was rejected by AMPFP. The request to remove the release was raised by Mr Finch in the context of his concern about the BOLR multiple having been reduced by 1.5x. This occurred during the conversation between Mr Finch and Mr Stone set out at [427] above. The position adopted by AMPFP (both in the conversation and in the email set out at [424]) was that they would not agree to remove the release.
Fifthly, the release was not reasonably necessary to protect the legitimate interests of AMPFP. The legitimate interests of AMPFP in relation to the buy-back transaction did not include preventing WealthStone from bringing a legal proceeding against AMPFP challenging the effectiveness of the 8 August 2019 Changes. If the 8 August 2019 Changes were not authorised by the LEP Provision, then AMPFP had no legal entitlement to calculate the BOLR Benefit on the basis of the 8 August 2019 Changes. The effect of the release would therefore be to prevent WealthStone bringing a claim against AMPFP for the BOLR Benefit that it was legally entitled to receive.
Sixthly, the position adopted by AMPFP in respect of WealthStone was inconsistent with the position it adopted for some other practices in a comparable position. While the majority of buy-back agreements that AMPFP entered into in the period after 8 August 2019 contained a release (not necessarily in the same terms as cl 5 of the WealthStone Buy-Back Agreement), in a small number of cases AMPFP was prepared not to include a release. As well as being unfairly inconsistent treatment, this further demonstrates that the release was not reasonably necessary to protect the legitimate interests of AMPFP.
Having regard to the above facts and matters, I consider that AMPFP’s conduct in including the release in the draft buy-back agreement, and rejecting WealthStone’s requests that the release be removed from the draft agreement, was against good conscience. It was conduct that, in my opinion, fell well below accepted standards of commercial conduct. It is aptly described as exploitative behaviour; AMPFP exploited its superior bargaining position to obtain a benefit (release from a potential claim challenging the 8 August 2019 Changes) that it had no legitimate interest in obtaining in the buy-back transaction.
I therefore accept the applicant’s contention that AMPFP’s conduct in procuring the release was, in all the circumstances, unconscionable within the meaning of s 21 of the Australian Consumer Law.
In the points of claim, WealthStone seeks an order pursuant to s 237 declaring the release in the WealthStone Buy-Back Agreement void. Section 237(1) of the Australian Consumer Law relevantly provides that the court may, on the application of a person who has suffered, or is likely to suffer, loss or damage because of the conduct of another person that contravened Ch 2 of the Australian Consumer Law (which includes s 21), make such order or orders as the court thinks appropriate against the person who engaged in the conduct. Section 237(2) provides that the order must be an order that the court considers will: (a) compensate the person in whole or in part for the loss or damage; or (b) prevent or reduce the loss or damage suffered, or likely to be suffered, by the injured person. In the circumstances of this case, unless an order is made declaring the release void (or void to the necessary extent), WealthStone will suffer loss or damage by reason of the contravening conduct, in that it will not be able to recover damages for breach of contract. The order sought by WealthStone will prevent that loss or damage arising. I consider it appropriate in the circumstances to make an order declaring cl 5 of the WealthStone Buy-Back Agreement void to the extent that it precludes the claims made by WealthStone in this proceeding.
Conclusion
It follows from the above that, subject to one possible adjustment, WealthStone is entitled to damages for breach of contract in the agreed amount of $115,533.51. The possible adjustment is whether the figure should be the GST-inclusive figure put forward by the parties, or a figure that does not include GST. This should be addressed in the parties’ submissions on the orders to be made following these reasons.
OTHER MATTERS
Equity submits that AMPFP did not call several senior employees who were intimately involved in the development of the 8 August 2019 Changes, namely Mr Paff, Mr Cappe and Mr Fernie. Further, Equity notes that AMPFP did not call Mr De Ferrari nor any other senior executives of AMP Limited to give evidence. Equity submits that no explanation was given for the absence of these witnesses, despite the issue having been raised in Equity’s opening submissions, and that it can be inferred that any evidence these witnesses would have given would not have assisted AMPFP. In my view, in circumstances where Mr Akers and Mr Byrne were called by AMPFP, it was not necessary for AMPFP to call the other witnesses; their evidence would merely have been cumulative. Accordingly, I decline to draw an inference as contended for by Equity. I note for completeness that Equity does not rely in its closing written submissions on the absence of Mr George, whose absence was explained in the confidential affidavit of Ms Tatasciore.
CONCLUSION
For the above reasons, I have reached the conclusions summarised in the Introduction to these reasons.
I will give the parties a period of time to file and serve proposed orders to give effect to these reasons, together with a short outline of submissions in support of those orders. The submissions should address the possible adjustments noted above to the quantification of the damages payable to Equity and WealthStone. The proposed orders should re-cast the common questions to reflect the approach to the issues adopted in these reasons, and provide proposed answers to the common questions reflecting these reasons. I will deal with costs separately, after the substantive orders have been made.
I certify that the preceding seven hundred and twenty-two (722) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Moshinsky. Associate:
Dated: 5 July 2023
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