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 ), 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 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 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.