A $9.8 million settlement between Westpac and ASIC has been described as insufficient for the bank's misconduct.

This deal, involving the largest one-time interest rate swap in Australian financial history, saw Westpac agree to a mere $1.8 million penalty and $8 million for ASIC’s litigation and investigation costs.

ASIC had accused Westpac of insider trading, unfair conduct, and not fulfilling its duties as a financial services provider under different sections of the law. 

The issue centred around “pre-hedging”, where Westpac traded to manage the risk of a future transaction. 

This was related to a deal in which a buyers’ consortium used a financial strategy called an interest rate swap to manage the risk of interest rates changing on the money they borrowed to buy a part of Ausgrid. 

They wanted to switch from variable to fixed interest rates to avoid the cost of rising rates. This transaction was the biggest of its kind in Australia at the time. 

The court fined Westpac $1.8 million, the highest penalty allowed in 2016 for such unfair conduct.

“It’s a risible amount compared to the nature of the conduct and the size of the organisation,” Federal Court Justice Michael Lee said while handing down the fine.
Under the settlement, while Westpac conceded to engaging in unconscionable conduct and failing to adequately disclose its pre-hedging strategy, allegations of insider trading were dropped.

The court found Westpac's pre-hedging actions particularly egregious, noting the bank had proceeded with trades that it knew could adversely impact the swap transaction's price to the detriment of its clients, AustralianSuper and IFM. 

This strategy, executed without client consent or proper disclosure, potentially increased costs for the clients by about $4.7 million for every basis point rise in the swap transaction price.

Justice Lee's scathing critique extended beyond the financial penalties, questioning the effectiveness of such measures as deterrents and their ability to inform the public about corporate misconduct. 

He expressed concern over the process of Westpac’s self-assessment, suggesting a lack of impartiality in the selection of an independent expert to review the bank's practices.

ASIC Deputy Chair Sarah Court has highlighted the case's significance in setting expectations around pre-hedging practices, especially regarding disclosure and consent. 

She noted that the regulator had a low maximum penalty available at the time of the conduct, and that current laws would permit far steeper fines.

The court has yet to decide on ordering Westpac to undertake a compliance program with an independent review of its pre-hedging practices.