* AMP to retain business if revised terms not met
* RBNZ requires sale to include protections for local clients
* Sale was at heavy discount to asset's book value (Adds Resolution Life comment, updates shares)
By Byron Kaye and Praveen Menon
SYDNEY/WELLINGTON, July 15 (Reuters) - Australian wealth manager AMP Ltd AMP.AX said it would likely pull the A$3.3 billion ($2.3 billion) sale of its life insurance unit after the intervention of New Zealand's central bank, raising concerns about its recovery strategy and sending its shares tumbling.
Abandoning the deal would represent a setback for the 170-year-old firm which had earmarked it as a way to simplify operations following a host of scandals at a public inquiry last year which brought on an exodus of funds under management. said the buyer, Britain's Resolution Life, had told it the Reserve Bank of New Zealand (RBNZ) wanted it to create separate financial assets to protect policy holders in New Zealand, something which would hurt both AMP and Resolution Life.
"The failure to meet this condition precedent is exceptionally disappointing as the sale of AMP Life is a foundational element of AMP's strategy," AMP said in a statement.
It added that it would cut its interim dividend, given uncertainty around the deal.
AMP shares were down 15% at A$1.82 in late trade, heading for their lowest close since the company listed two decades earlier. The broader market .AXJO was flat.
"As a regulator, they're becoming a lot tighter in their oversight of those companies with international links to their economy," said Sean Sequeira, chief investment officer at Australian Eagle Asset Management, which holds AMP shares.
Others described the probable cancellation as an accidental win for AMP given that analysts had seen the sale price as too cheap.
"If anything, incrementally from a long-term value perspective this is positive," said Simon Mawhinney, chief investment officer at Allan Gray Australia.
Resolution Life said it continued to view the purchase as "an excellent opportunity" and that it was talking to AMP about restructuring the deal "to accommodate the regulatory requirements".
MUSCLE FLEXING
The development extends a run of muscle-flexing by the RBNZ which has ordered New Zealand's major banks - most of them subsidiaries of Australia's big banks - to increase their reserve capital in recent months.
Last month, New Zealand's deputy prime minister called on the chairman of the local unit of Australia and New Zealand Banking Group Ltd (ANZ) ANZ.AX to step down after the local chief executive abruptly left over an expenses scandal.
"The reality is, the commercial terms of the contract can't be met satisfactorily between AMP Life NZ and Resolution Life," RBNZ Deputy Governor and General Manager of Financial Stability Geoff Bascand said in a statement emailed to Reuters.
"The contract between AMP Life NZ and Resolution Life was agreed without consideration of the Reserve Bank's requirements."
Analysts have noted a spillover of regulatory scrutiny from Australia, with lenders ANZ and Westpac Banking Corp WBC.AX recently being pulled up by New Zealand regulators for governance and disclosure breaches. Governor Adrian Orr "has said in recent communications that they are having a stronger focus on the financial system, and these actions reflect that", said Christina Leung, principal economist at the New Zealand Institute of Economic Research.
"RBNZ does seem to have a renewed focus on a stronger financial sector, and perhaps there have been some calls that are stronger than what there have been in the past," Leung added.
($1 = 1.4247 Australian dollars)
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Australia's AMP sells life insurance arm at discount, bleeds funds
NZ watchdog sues Westpac arm over failure to disclose credit card terms
(By Byron Kaye in Sydney and Praveen Menon in Wellington; Additional reporting by Paulina Duran in Sydney, Simon Jessop in London and Ambar Warrick and Aby Jose Koilparambil in Bengaluru; Editing by Jacqueline Wong and Christopher Cushing)