Reserve Bank’s Lowe said accountability needed for the Westpac scandal

Reserve Bank governor said he was ‘appalled’ at Austrac allegations levelled against Westpac.

Westpac CEO Brian Hartzer speaking at the bank’s 2018 annual general meeting. Picture: Jane Dempster

Reserve Bank governor Philip Lowe Tuesday night weighed in on the Westpac scandal, declaring there needed to be accountability when high standards were not met. He also said there were lessons for everyone in the alleged failings of the banks which led to the ouster of chief executive Brian Hartzer and the early departure of chairman Lindsay Maxsted.

“I do want to say I find the allegations against Westpac appalling and completely unacceptable,” Dr Lowe said at the Australian Business Economists function in Sydney late Tuesday.

“We demand very high standards from our financial institutions and it’s right we demand high standards to be met, and when they’re not met there needs to be accountability.””It’s important we also understand how we know this happened and the investigation by APRA, ASIC and Austrac and the management of Westpac are hopefully going to throw the spotlight on how this happened because hopefully there are lessons for everyone here,” Dr Lowe said.

Westpac shares staged a partial recovery on Tuesday after investors applauded action on a regulatory scandal that sparked the exit of Mr Hartzer.

The stock rallied as high as $24.94 before closing 1.7 per cent higher at $24.86 on Tuesday, after a dramatic six days for the $88.7bn bank. The share price climb wasn’t enough, though, to offset a combined 8.8 per cent slump in the stock price since financial crimes regulator Austrac launched legal action against the bank last Wednesday.

Austrac had alleged 23 million breaches of the law including accusing Westpac of failing to do proper due diligence on 12 customers with links to child exploitation in The Philippines and South East Asia. Most of the alleged breaches related to Westpac not reporting international funds transfer instructions to Austrac in a timely way.

READ MORE: Westpac CEO Brian Hartzer quits | Golden handshake but Hartzer forgoes bonuses | Why Hartzer couldn’t hang on

Morgan Stanley banking analyst Richard Wiles said the leadership changes by Westpac would allow investors to focus on the bank’s response plan to Austrac’s action. But he cautioned Westpac was in for a tough period ahead.

“We believe Westpac faces a period of leadership uncertainty, which will make it more challenging to restore operating momentum,” he said.

Mr Hartzer steps down in December 2 and Mr Maxsted will bring forward his retirement to the first half of 2020. As part of a series of changes, Westpac non-executive director Ewen Crouch will not seek re-election at the bank’s annual general meeting on December 12.

Finance chief Peter King takes the reins from Mr Hartzer on an acting CEO basis.

Bell Potter banking analyst TS Lim said he wasn’t surprised at the exit of Mr Hartzer, and was confident his departure would provide Westpac with “some breathing space”.

“It was expected, it was becoming quite untenable. It’s probably going to take the heat out of the AGM coming up. I think they had no choice but to [remove the CEO],” he added.

“It will give the bank some breathing space. The responsibility will now fall to Peter King. I’ve got a lot of time for him, I think he was a good choice.”

Mr Lim said he thought the board had done as much as it could for the time being.

“You can’t shake up management too much or you risk destabilising the whole company. I would hope it (share price) will now stabilise. It’s fallen by more than what I think the fine could be.”

Morningstar analyst Nathan Zaia said it would have sent a poor message to the public if Mr Hartzer hadn’t stepped down.

“Whether the executive team knew or not, they probably should have known and acted sooner. And if Westpac didn’t take the action they took today and showed that people are being held to account it would have sent a message to the community that for Westpac this was no big deal. It would have sent a pretty poor message.”

A Westpac investor, who declined to be named, labelled the board and CEO changes as a “pretty big clean-out” ahead of the Westpac annual general meeting on December 12.

“In the end they had to act decisively. They clearly didn’t want to harm other stakeholders in the enterprise, including shareholders and customers,” he said.

“By staying they were putting pressure on the stock price.”

But the same investor said he felt that in some respects the reaction by politicians and some shareholders was “massively disproportionate” to the compliance failings identified by Austrac, some of which Westpac had self-reported and already rectified.

The Australian Council of Superannuation Investors welcomed the action.

“Long-term investors made it clear to Westpac that accountability was required,” ACSI CEO Louise Davidson said. “This includes a preparedness to take proportionate action to improve governance and for the impact of these events to be fully reflected in remuneration outcomes.”

Ms Davidson said the actions taken reflected the “seriousness of the incidents and the failure of the bank to meet community expectations.

“ACSI will continue to engage with Westpac on a range of issues to determine whether further action is needed,” she added.

“It is still unclear how these significant issues came to occur, and why a fulsome investigation was not initiated earlier.”