Judge critical of ‘insignificant’ $1.8m fine against Westpac for unlawful trading

A Federal Court judge says the maximum $1.8m fine he has imposed against Westpac for an unlawful multibillion-dollar trading transaction would disappoint the public.

A Federal Court judge has attacked a “risible” $1.8m penalty against Westpac for an unlawful multibillion-dollar interest rate swap transaction, saying the public would be shocked by the insignificance of the penalty.

Judge Michael Lee, in handing down orders imposing the maximum penalty allowed under law on Westpac, said banks that engaged in such unconscionable conduct should have to “advertise” their misdeeds on their app so customers would be aware of their behaviour.

ASIC alleged Westpac engaged in unconscionable conduct as part of a $12bn interest rate swap transaction with a consortium of AustralianSuper and a group of IFM entities in 2016.

The transaction associated with the privatisation of a majority stake in electricity provider Ausgrid by the NSW government remains the largest interest rate swap transaction executed in one tranche in Australian financial market history.

The regulator alleges the bank withheld key information from the market that it would be executing the transaction.

Westpac has admitted to unconscionable conduct and not clearly and fully disclosing its pre-hedging strategy.

Justice Lee said that, while there was nothing he could do about “the manifest and striking disparity” between the penalty and the nature of the conduct, it was a matter of concern. He noted that the law had now changed, ­allowing for stiffer penalties.

“The fact that there is a penalty of $1.8m in the circumstances is something which I think would rightly shock the conscience of people,” Justice Lee said. “It is a risible amount compared to the nature of the conduct and the size of the organisation.”

Under the terms of a settlement approved by the court, Westpac also will pay $8m towards ASIC’s investigation and litigation costs.

Federal Court judge Justice Michael Lee. Picture: Aaron Francis

Justice Lee foreshadowed further action against banks that would require them to advertise their misdeeds to a broader audience beyond what was written in a court judgment.

Westpac also agreed that it would review its systems, controls and policies and procedures.

“When the Australian public decides who they engage with in commercial transactions, they do not breathlessly sit down and read Federal Court judgments,” Justice Lee said. “I presume a lot of people will be interested in whether or not someone with whom they choose to have a commercial relationship is someone who is breaking the law or not. And that’s the whole purpose of an app providing for advertising so people become aware when they make their own decisions that there has been this sort of conduct.”

Westpac was aware of its client’s concern about trading prior to the swap transaction on October 20, 2016, that had the potential to adversely affect the price of the transaction to their detriment. Every basis point increase to the price of the swap transaction would involve a cost to the consortium of about $4.7m.

Despite being aware of its client’s concerns, Westpac acted on an internal plan to pre-hedge up to 50 per cent of the interest rate risk by trading in significant volumes of interest rate derivatives in the market before the swap transaction was executed.

Justice Lee said that by the end of the trading day on October 20, 2016, Westpac’s derivative trading desk had made a profit of $20.3m, of which $3.7m was allocated to its sales team. “The penalty is about half of the commission paid to the sales team,” he said.

In a statement outside the court, Westpac said it acknowledged the agreement with ASIC to settle the civil proceedings commenced in May 2021.

“The proceedings relate to historical interest rate hedging activity as part of the 2016 Ausgrid privatisation transaction,” a Westpac spokesman said. “We have already taken action to strengthen processes and policies in relation to pre-hedging activity.”