Westpac's Record $12 Billion Swap Deal Leads to Court Penalty

<p>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. </p><p>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.</p><p>Westpac Fined $1.8 Million
for Unconscionable Conduct in Interest Rate Swap</p><p>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. </p><p>The Deputy Chairwoman
of the Australian Securities and
Investments Commission (<a href="https://www.financemagnates.com/terms/a/asic/">ASIC</a>), 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.</p><p>"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.</p><blockquote><p lang="en" dir="ltr">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 <a href="https://t.co/7GOguu5QvZ">https://t.co/7GOguu5QvZ</a> <a href="https://t.co/z8kQI6gLIs">pic.twitter.com/z8kQI6gLIs</a></p>— ASIC Media (@asicmedia) <a href="https://twitter.com/asicmedia/status/1752526480633151672?ref_src=twsrc%5Etfw">January 31, 2024</a></blockquote><p>The Court's Findings and
Westpac's Response</p><p>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. </p><p>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.</p><p>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.</p><p>Westpac's History of
Regulatory Penalties in Australia</p><p>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 <a href="https://www.financemagnates.com/forex/asic-fights-for-the-little-guy-against-westpac-for-hardship-notice-delays/" target="_blank" rel="follow">hardship notices</a>. This oversight, spanning
seven years, impacted 229 customers, exacerbating their financial difficulties.</p><p>In 2022,
Westpac encountered a significant setback when a federal court mandated the
bank to pay a substantial penalty of AU$113 million (<a href="https://www.financemagnates.com/institutional-forex/westpac-faces-83-million-fine-for-several-lapses/" target="_blank" rel="follow">approximately $82.9
million</a>). This fine was imposed due to <a href="https://www.financemagnates.com/terms/c/compliance/">compliance</a> failures in multiple
divisions of the bank, indicating a broader issue within the organization.</p><p>Additionally,
in 2021, ASIC announced the initiation of <a href="https://www.financemagnates.com/institutional-forex/westpac-faces-6-civil-penalty-charges-from-asic/" target="_blank" rel="follow">six civil penalty proceedings</a> against
Westpac. These proceedings were due to widespread compliance failures that
affected thousands of customers. </p><p>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 <a href="https://www.financemagnates.com/institutional-forex/regulation/court-approves-austracs-au1-3-billion-fine-on-westpac/" target="_blank" rel="follow">of AU$1.3 billion</a>
(around $0.92 billion) for violating the Anti-Money Laundering
Counter-Terrorism Financing Act 2006.</p>

This article was written by Damian Chmiel at www.financemagnates.com.