Westpac
Banking Corporation has been ordered by the Australian Federal Court to pay a
$1.8 million penalty for engaging in unconscionable conduct during a $12
billion interest rate swap transaction in October 2016.
This
transaction, the largest in Australian financial market history, involved a
Consortium comprising AustralianSuper and IFM entities and was related to their
acquisition of a majority stake in Ausgrid from the NSW Government.
Westpac Fined $1.8 Million
for Unconscionable Conduct in Interest Rate Swap
The Court
found that Westpac's actions in the pre-hedging process carried out before
executing the interest rate swap, were unconscionable. This decision has highlighted the significance of ethical conduct in financial transactions, especially in
high-stakes deals.
"The
parallels between pre-hedging and pre-close calls highlight a complex and
somewhat ambiguous area within the industry," Matt Smith, the CEO of SteelEye, commented for Finance Magnates. "These practices enable investors
with access to non-public information to strategically position trades,
anticipating specific market moves to hedge their risks, giving them an
advantage and adding a layer of opaqueness to the market."
The Deputy Chairwoman
of the Australian Securities and
Investments Commission (ASIC
ASIC
The Australian Securities and Investments Commission (ASIC) is the prime regulator in Australia for corporate, markets, financial services, and consumer credit. It is empowered under the financial service laws to facilitate, regulate, and enforce Australian financial laws. The Australian Commission was set up and is administered under the Australian Securities and Investment Commission Act of 2001. ASIC was initially the Australian Securities Commission based on the 1989 ASC Act. Initially, the
The Australian Securities and Investments Commission (ASIC) is the prime regulator in Australia for corporate, markets, financial services, and consumer credit. It is empowered under the financial service laws to facilitate, regulate, and enforce Australian financial laws. The Australian Commission was set up and is administered under the Australian Securities and Investment Commission Act of 2001. ASIC was initially the Australian Securities Commission based on the 1989 ASC Act. Initially, the
Read this Term), Sarah Court, emphasized the global importance of appropriate conduct
in pre-hedging, noting Westpac's behavior exposed its client to significant
risk and contrasted sharply with practices at other banks.
"We
share the Court's concern regarding the maximum penalty available in relation
to the conduct, and note that had Westpac engaged in similar conduct today the
maximum available penalty would have been significantly higher," Court
added.
As Smith from SteelEye added, this practice can lead to market shifts against clients and, in certain cases, raise concerns
resembling insider trading. "Currently, there's no global guidance on this,
emphasizing the existence of a grey area and underscoring the need for better
regulatory oversight to uphold market integrity and safeguard investor
interests.”
The Federal Court has declared Westpac Banking Corporation engaged in unconscionable conduct in October 2016 when executing a $12 billion interest rate swap transaction, the largest of its kind in Australian financial market history https://t.co/7GOguu5QvZ pic.twitter.com/z8kQI6gLIs
— ASIC Media (@asicmedia) January 31, 2024
The Court's Findings and
Westpac's Response
Westpac's
conduct included trading large volumes of interest rate derivatives before
executing the swap transaction, without obtaining client consent or providing
full disclosure. This trading, which aimed to hedge up to 50% of the interest
rate risk, adversely affected the Consortium, as each basis point increase in
the price of the swap transaction amounted to an additional $4.7 million cost.
Additionally,
the derivatives trading desk at Westpac profited approximately $20.7 million on
the day of the swap, with $3.7 million allocated as commission to the Sales
team.
The Court
has reserved its decision to mandate that Westpac implement a compliance program
with an independent review of its pre-hedging practices. This case brings
to light the changes in civil penalties since 2016, with penalties for similar
conduct significantly higher.
Westpac's History of
Regulatory Penalties in Australia
Westpac,
one of Australia's largest banks, has a history of facing penalties for various
regulatory lapses. In a recent instance, ASIC accused the bank of not adhering to the mandated
21-day response period for customer hardship notices. This oversight, spanning
seven years, impacted 229 customers, exacerbating their financial difficulties.
In 2022,
Westpac encountered a significant setback when a federal court mandated the
bank to pay a substantial penalty of AU$113 million (approximately $82.9
million). This fine was imposed due to compliance
Compliance
In finance, banking, investing, and insurance compliance refers to following the rules or orders set down by the government regulatory authority, either as providing a service or processing a transaction. Compliance concerning finance would also be a state of being following established guidelines or specifications. This designation can also encompass efforts to ensure that organizations are abiding by both industry regulations and government legislation. Understanding ComplianceCompliance is a
In finance, banking, investing, and insurance compliance refers to following the rules or orders set down by the government regulatory authority, either as providing a service or processing a transaction. Compliance concerning finance would also be a state of being following established guidelines or specifications. This designation can also encompass efforts to ensure that organizations are abiding by both industry regulations and government legislation. Understanding ComplianceCompliance is a
Read this Term failures in multiple
divisions of the bank, indicating a broader issue within the organization.
Additionally,
in 2021, ASIC announced the initiation of six civil penalty proceedings against
Westpac. These proceedings were due to widespread compliance failures that
affected thousands of customers.
Three years
prior, another major penalty was levied on Westpac. The Federal Court of
Australia ratified an agreement between the Australian Transaction Reports and
Analysis Centre as well as the bank. It was ordered to pay a penalty of AU$1.3 billion
(around $0.92 billion) for violating the Anti-Money Laundering
Counter-Terrorism Financing Act 2006.
Westpac
Banking Corporation has been ordered by the Australian Federal Court to pay a
$1.8 million penalty for engaging in unconscionable conduct during a $12
billion interest rate swap transaction in October 2016.
This
transaction, the largest in Australian financial market history, involved a
Consortium comprising AustralianSuper and IFM entities and was related to their
acquisition of a majority stake in Ausgrid from the NSW Government.
Westpac Fined $1.8 Million
for Unconscionable Conduct in Interest Rate Swap
The Court
found that Westpac's actions in the pre-hedging process carried out before
executing the interest rate swap, were unconscionable. This decision has highlighted the significance of ethical conduct in financial transactions, especially in
high-stakes deals.
"The
parallels between pre-hedging and pre-close calls highlight a complex and
somewhat ambiguous area within the industry," Matt Smith, the CEO of SteelEye, commented for Finance Magnates. "These practices enable investors
with access to non-public information to strategically position trades,
anticipating specific market moves to hedge their risks, giving them an
advantage and adding a layer of opaqueness to the market."
The Deputy Chairwoman
of the Australian Securities and
Investments Commission (ASIC
ASIC
The Australian Securities and Investments Commission (ASIC) is the prime regulator in Australia for corporate, markets, financial services, and consumer credit. It is empowered under the financial service laws to facilitate, regulate, and enforce Australian financial laws. The Australian Commission was set up and is administered under the Australian Securities and Investment Commission Act of 2001. ASIC was initially the Australian Securities Commission based on the 1989 ASC Act. Initially, the
The Australian Securities and Investments Commission (ASIC) is the prime regulator in Australia for corporate, markets, financial services, and consumer credit. It is empowered under the financial service laws to facilitate, regulate, and enforce Australian financial laws. The Australian Commission was set up and is administered under the Australian Securities and Investment Commission Act of 2001. ASIC was initially the Australian Securities Commission based on the 1989 ASC Act. Initially, the
Read this Term), Sarah Court, emphasized the global importance of appropriate conduct
in pre-hedging, noting Westpac's behavior exposed its client to significant
risk and contrasted sharply with practices at other banks.
"We
share the Court's concern regarding the maximum penalty available in relation
to the conduct, and note that had Westpac engaged in similar conduct today the
maximum available penalty would have been significantly higher," Court
added.
As Smith from SteelEye added, this practice can lead to market shifts against clients and, in certain cases, raise concerns
resembling insider trading. "Currently, there's no global guidance on this,
emphasizing the existence of a grey area and underscoring the need for better
regulatory oversight to uphold market integrity and safeguard investor
interests.”
The Federal Court has declared Westpac Banking Corporation engaged in unconscionable conduct in October 2016 when executing a $12 billion interest rate swap transaction, the largest of its kind in Australian financial market history https://t.co/7GOguu5QvZ pic.twitter.com/z8kQI6gLIs
— ASIC Media (@asicmedia) January 31, 2024
The Court's Findings and
Westpac's Response
Westpac's
conduct included trading large volumes of interest rate derivatives before
executing the swap transaction, without obtaining client consent or providing
full disclosure. This trading, which aimed to hedge up to 50% of the interest
rate risk, adversely affected the Consortium, as each basis point increase in
the price of the swap transaction amounted to an additional $4.7 million cost.
Additionally,
the derivatives trading desk at Westpac profited approximately $20.7 million on
the day of the swap, with $3.7 million allocated as commission to the Sales
team.
The Court
has reserved its decision to mandate that Westpac implement a compliance program
with an independent review of its pre-hedging practices. This case brings
to light the changes in civil penalties since 2016, with penalties for similar
conduct significantly higher.
Westpac's History of
Regulatory Penalties in Australia
Westpac,
one of Australia's largest banks, has a history of facing penalties for various
regulatory lapses. In a recent instance, ASIC accused the bank of not adhering to the mandated
21-day response period for customer hardship notices. This oversight, spanning
seven years, impacted 229 customers, exacerbating their financial difficulties.
In 2022,
Westpac encountered a significant setback when a federal court mandated the
bank to pay a substantial penalty of AU$113 million (approximately $82.9
million). This fine was imposed due to compliance
Compliance
In finance, banking, investing, and insurance compliance refers to following the rules or orders set down by the government regulatory authority, either as providing a service or processing a transaction. Compliance concerning finance would also be a state of being following established guidelines or specifications. This designation can also encompass efforts to ensure that organizations are abiding by both industry regulations and government legislation. Understanding ComplianceCompliance is a
In finance, banking, investing, and insurance compliance refers to following the rules or orders set down by the government regulatory authority, either as providing a service or processing a transaction. Compliance concerning finance would also be a state of being following established guidelines or specifications. This designation can also encompass efforts to ensure that organizations are abiding by both industry regulations and government legislation. Understanding ComplianceCompliance is a
Read this Term failures in multiple
divisions of the bank, indicating a broader issue within the organization.
Additionally,
in 2021, ASIC announced the initiation of six civil penalty proceedings against
Westpac. These proceedings were due to widespread compliance failures that
affected thousands of customers.
Three years
prior, another major penalty was levied on Westpac. The Federal Court of
Australia ratified an agreement between the Australian Transaction Reports and
Analysis Centre as well as the bank. It was ordered to pay a penalty of AU$1.3 billion
(around $0.92 billion) for violating the Anti-Money Laundering
Counter-Terrorism Financing Act 2006.
