ASIC Enforcement Wrap: January 2024 | Disproportionate penalty imposed on Westpac shows necessity of 2019 reforms strengthening civil penalties

First ASIC wrap of the year has now added a new spotlight section to explain the most significant outcome/trend of the month! Also find the relevant media release or article linked in each subject. Overall a quietish start to 2024 with court closures and holidays but expect things to ramp up in February.

Key January Takeaways:

• Federal Court declares Westpac’s conduct prior to executing a $12 billion interest rate swap transaction in October 2016, the largest in Australian history, to be unconscionable expressing exasperation at the limited penalties of $1.8 million it was legally able to impose.
• Liquidators disciplinary committee imposes peer review conditions on Steven Naidenov’s registration as a liquidator, highlighting extra care needed when externally administering group companies with intermingled affairs and finances.
• Members Equity Bank Limited pleads guilty to charges of, inter alia, making false and misleading representations after admitting to having sent over 500 letters to home loan customers informing them of an incorrect minimum repayment amount.
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Spotlight – The Westpac Swap

As noted above, the Federal Court has declared that Westpac Banking Corporation engaged in unconscionable conduct in October 2016 in relation to the largest interest rate swap transaction in Australian history. Westpac agreed to pay $9.8 million to ASIC in a settlement, comprising the maximum $1.8 million penalty and $8 million to cover ASIC’s litigation and investigation costs.

The 2016 transaction involved a consortium of investors, being industry super groups, who sought to privatise Ausgrid for $16 billion.

The investors sought to enter into interest rate swap transaction to hedge interest rate risk, so they could swap the obligation in the original loan used to fund the privatisation to pay variable rates with a fixed interest rate.

When Westpac was selected as the counterparty to the interest rate swap transaction, it acted on an internal plan to pre-hedge about half of the interest rate risk. These pre-hedging activities significantly increased the price of the swap transaction, to the detriment of the investors. Despite this, Westpac failed to obtain the investors’ consent, nor did it give clear and full disclosure about the scale of its planned pre-hedging.

Westpac’s derivatives trading desk achieved a trading profit of approximately $20.7 million on the day the swap was executed, and the sales team was allocated $3.7 million as commission.

Federal Court Judge Michael Lee expressed frustration at the low maximum penalty applying under the law in place at the time of the transaction. Despite the $1.8m penalty and $8m paid for ASIC’s costs, Westpac retained a significant profit.

Even ASIC’s litigation and investigation costs dwarfed the penalty.

The silver lining for ASIC enforcement is that the maximum civil penalty has significantly increased since 2019, and some offences which previously did not attract a penalty now do (such as section 912A breaches of the general obligations of an AFS licensee). The same breach occurring today has a maximum penalty of the greater of:

• $15.65 million;
• Three times the benefit obtained and detriment avoided; or
• 10% of annual turnover, capped at $782.5 million.

A final thing to note is that ASIC also alleged that Westpac conducted insider trading in this proceeding, but this claim was withdrawn after the settlement.

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January in Summary – Enforcement Actions and Outcomes

Civil Action:

Civil Penalties Ordered

The Federal Court has ordered civil penalties in the following case:

• The Federal Court ordered that four current and former directors of Endeavour Securities (Australia) Ltd pay a total of $390,000 in penalties for breaches of their duties as officers of a responsible entity of a registered managed investment scheme. The Court found that the Respondents did not take all reasonable steps to ensure that Endeavour complied with its compliance plan, failed to exercise reasonable care and diligence, and did not act in the best interests of members of the managed investment scheme. Three of the directors did not contest ASIC’s case and accepted ASIC’s submissions on penalty. The remaining director contested ASIC’s case and lost, and as a result was liable to pay a larger penalty, the costs of contested hearings, and subject to a longer ban from managing corporations.

Civil Proceedings Commenced

• ASIC filed a contempt application in the Federal Court against Joshua David Fuoco, for contravention of orders not to carry on, or be involved in, a financial services business.

Other Decisions

• The Federal Court declared that 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 history. It was found that prior to the swap transaction, Westpac made its own pre-hedging trades which would affect the price of the swap transaction to the detriment of its client, without obtaining its client’s consent or giving clear and full disclosure. Westpac has agreed to pay $9.8 million to ASIC in a settlement, comprising the maximum $1.8 million penalty and $8 million to cover ASIC’s litigation and investigation cost.

Criminal:

Guilty Pleas/Convictions – 3 Defendants made guilty pleas, namely:

• Members Equity Bank Limited in respect of 4 charges, including making false and misleading representations and failing to provide required written notices regarding home loans;
• Jane Flegg in respect of 3 charges, including authorising the giving of false or misleading information to the ASX;
• Cameron Waugh in respect of 1 charge, of applying for shares while in possession of inside information.

Administrative Action:

• ‍Financial Services Bannings – The Australian Financial Services licence of Indie Advice Pty Ltd was cancelled due to Indie Advice having ceased providing financial services.
• ‍Director Disqualification – 2 directors, namely Jamie Farrelly, Garry Kelly were disqualified as directors, for their involvement in the failure of 4 companies which owed a combined total of $9,435,642 to unsecured creditors, including $3,084,593 to the ATO.
• ‍Infringement Notices – 4 infringement notices were issued to Penta Capital Pty Ltd, involving the payment of $53,280, for alleged misleading statements on its website
• ‍Liquidator Disciplinary – A liquidator disciplinary committee decided that conditions be imposed on Mr Steven Naidenov’s registration as a liquidator, requiring that he arrange for a peer review of six external administrations at his own costs. ASIC alleged that Mr Naidenov used money from an external administration bank account to pay the expenses of other related companies. The Committee noted that Mr Naidenov failed to act with the required degree of due care and diligence, but did not consider that Mr Naidenov was not fit and proper to be a registered liquidator.

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If any of the above is relevant to you or you want to know more, please feel free to get in touch.

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The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only.  You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.