'Why not litigate?' ASIC vows more civil, criminal cases against banks

The corporate regulator has put banks and other big financial institutions on notice that it plans to take more civil and criminal court actions, after the Hayne royal commission bluntly criticised it for being soft on misbehaviour.

However, the challenges of fighting the banks in court was underlined by a Federal Court decision on Friday to fine Westpac $3.3 million for unconscionable conduct, a fraction of the regulator's request for a $58 million penalty.

Justice Jonathan Beach said the fine was "seriously inadequate" and "paltry" and he would have set a penalty "at least one order of magnitude above $3.3 million" to act as a deterrent, but this was the most he could impose under the law.

Big financial institutions can expect more civil and criminal cases to be launched at them by ASIC.Credit: Paul Rovere

After a run of scandals in finance, the interim report from royal commissioner Kenneth Hayne in September took aim at the Australian Securities and Investments Commission (ASIC), saying it "rarely" went to court and was too accommodative when negotiating penalties with companies it polices.

In response, ASIC admitted it must change its focus to put greater emphasis on court action, saying it will "move more quickly to, and accordingly conduct more, civil and criminal court actions against larger financial institutions".

ASIC also said it would ramp up its supervision of financial businesses, and use the question "why not litigate?" as its starting point when dealing with misconduct.

"ASIC accepts that it must alter its enforcement priorities and practices within the financial sector – and particularly for larger financial institutions – to be more agile in initiating and prosecuting court action, and in many instances even commencing with it," the regulator's submission says.

Even so, the watchdog said becoming more aggressive in the courts would come at a cost, as it would require more funding.

The risks of high-stakes court cases were also underlined in Friday's $3.3 million penalty decision in the long-running legal stoush with Westpac, which ASIC alleged had tried to rig the bank bill swap rate (BBSW), a key benchmark interest rate.

After ruling in May that Westpac engaged in unconscionable conduct, but did not manipulate the market, Justice Beach on Friday said "Westpac's misconduct was serious and unacceptable."

The bank had not shown the "contrition" of other banks that settled with ASIC, Justice Beach said, and he would have set a higher penalty, but he was not "free to do so" under current laws. Westpac will also pay half ASIC's trial costs, which are likely to be in the millions of dollars.

When ANZ and National Australia Bank settled rate-rigging cases against them before going to trial, they each paid a total of $50 million, including a $10 million penalty and other contributions to ASIC's costs and a consumer protection funds. Commonwealth Bank paid $25 million to settle similar, though fewer, allegations against it from ASIC.

ASIC commissioner Cathie Armour said the rate-rigging cases had led to "successful" court outcomes, while also contributing to new offences for benchmark manipulation being enacted by the parliament, and a new method for setting the BBSW.

"ASIC brought this litigation to hold the major banks to account for their unacceptable conduct, and to test the scope of the law in combating benchmark manipulation," Ms Armour said.

In its submission to the royal commission, ASIC noted its budget rose to $432 million in 2017-18, from $402.4 million a year earlier. However, its budgeted resources had fallen to $380.4 million for 2018-19 and the 2020-21 forward estimate was for a further fall, to $349.5 million.

As well as being more likely to launch legal action, ASIC recently started "embedding" senior staff inside the banks to investigate potential misconduct, and its submission said it would also use "public denunciation" of banks.