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Bank between judicial rock and regulatory hard place

Westpac can’t take a trick. It’s been trying to pay a $35 million penalty for consumer credit contraventions agreed with ASIC, but the Federal Court won’t let it.

In the shadow of the Banking Royal Commission, some banks have been ‘fessing up’, and most have been seeking to resolve regulatory concerns. The Federal Court’s decision on 13 November 2018 in Australian Securities & Investments Commission v Westpac Banking Corporation [2018] FCA 1733 :

  • demonstrates that resolution is not straightforward or without risk, and 
  • may constrain future regulatory settlements.

ASIC BBSR market manipulation prosecutions of the Big Four

Relevant background is ASIC’s civil penal proceedings against the Big Four for alleged bank bill swap rate (BBSR) market manipulation and unconscionable conduct in 2017 and 2018. Three of the Big Four settled with ASIC, with substantial agreed penalties and other relief uncontroversially approved by the Federal Court.

On 10 November 2017, Jagot J delivered judgment in Australian Securities and Investments Commission v National Australia Bank Limited [2017] FCA 1338, approving ASIC settlements with ANZ and NAB. The settlements provided for declarations of attempting to engage in unconscionable conduct in attempting to seek to change where the BBSR set on certain dates, and failing to do all things necessary to ensure that they provided financial services honestly and fairly. Each bank was ordered to pay a total of $50 million towards penalties, costs and a consumer protection fund.

On 21 June 2018, Beach J delivered judgment in Australian Securities and Investments Commission v Commonwealth Bank of Australia [2018] FCA 941, approving ASIC settlement with CBA. The settlement provided for declarations of unconscionable conduct and related contraventions, and that CBA pay a total of $25 million towards penalties, costs and a community fund.

Meanwhile, Westpac alone went to trial in the same proceedings on similar allegations. On 24 May 2018, Beach J delivered judgment in Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) [2018] FCA 751 , dismissing all market manipulation claims and most related allegations of contravention. Westpac was found to have engaged in unconscionable conduct on four dates in 2010, and to have had inadequate procedures and training and thereby contravened its financial services licensee obligations. ASIC sought penalties totalling $58 million based on a different analysis expanding the number of relevant acts or omissions and contraventions. On 9 November 2018 Beach J rejected ASIC’s claims, imposing penalties totalling $3.3 million, albeit holding in part:

‘If I had been permitted to do so I would have imposed a penalty of at least one order of magnitude above $3.3 million in order to discharge [the objectives of specific and general deterrence]. But I am not free do so. …Westpac's misconduct was serious and unacceptable…Westpac has not shown the contrition of the other banks. Moreover, imposing the maximum penalty is the only step available to me to achieve specific and general deterrence. The message that should be sent is that if you manipulate or attempt to manipulate key benchmark rates you are likely to have the maximum penalty imposed, whatever that is from time to time.'

ASIC bank credit contract prosecutions

In parallel with the BBSR litigation, bank consumer lending practices have also been the subject of regulatory litigation, and judgments involving ANZ and Westpac.

On 23 February 2018 Middleton J delivered judgment in Australian Securities and Investments Commission v Australia and New Zealand Banking Group Limited [2018] FCA 155, approving ANZ settlement with ASIC. ANZ was penalised $5 million for 12 contraventions of section 128 and 12 contraventions of section 130 of the National Consumer Credit Protection Act 2009 (NCCPA), based on failing to verify customers’ financial information before entering into credit contracts with them. As the 12 contraventions in each case arose out of the same conduct concerning 12 customers, the total maximum penalty was $20.4 million (12 x $1.7m). The Court accepted that a total penalty of $5 million was appropriate given ANZ’s cooperation, the totality of the conduct and its seriousness (relative to the most serious contravention which would attract the maximum penalty), and its deterrent effect. 

Westpac faced a similar civil penal prosecution, and also sought approval by the Federal Court of an outcome negotiated and agreed with ASIC. It acknowledged “contraventions” of section 128 of the NCCPA by using a calculated benchmark rather than actual customer living expenses when considering home loan approvals, and with ASIC sought approval to pay a $35 million penalty. However, contrary to most other cases, Perram J refused approval on 13 November 2018 in Australian Securities & Investments Commission v Westpac Banking Corporation [2018] FCA 1733

The Federal Court routinely approves civil penal settlements agreed with regulators including ASIC and the ACCC, recognising the public interest in resolution, experience and expertise of the regulators, and desirability of predictability of outcome (Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482). However, the most recent Westpac case is an important reminder that Courts will carefully evaluate proposed settlements and not “rubber stamp” them. The Court must be satisfied that there have in fact been contraventions of the law as agreed, and that sufficient evidence is provided to enable it to evaluate properly the appropriateness of the proposed penalty.
Clearly Westpac wanted commercial resolution, and wanted to agree to resolution with ASIC at a known price. It was apparently not prepared to articulate with precision what the contraventions were and how many of them there were, as it did not agree with ASIC how sections 128-130 of the NCCPA should apply. Hundreds of thousands of loans were made during the period of the offending conduct. Of those, it appeared that approximately 5,000 consumers/loans may have been adversely affected, but no evidence was provided as to the circumstances of those (or other) loans, or specificity provided as to the related number of contraventions. 

The result was that, contrary to the approach of ANZ in its earlier similar case (and the Court’s resulting approvals in that case and the BBSR litigation), Westpac and ASIC did not identify contraventions in the terms required by the NCCPA, or the specific contraventions to be the subject of Court declarations and penalties. The judge observed that:

“[11] … admirable ingenuity has been applied by the parties’ advisers to the task of drafting the consent orders so as to gloss over the very real differences which exist between them. However, because the parties do not actually agree on what s 128 requires they are unable to agree on how many of the Respondent’s loans were made in contravention of it. This also makes it very difficult to judge the appropriateness of the proposed penalty of $35 million”.

Westpac’s conundrum and broader implications

The Court refused approval to Westpac and ASIC, as it could not be satisfied as to contravention, or the number of contraventions, or the circumstances of the contraventions. The Court’s approach was legally correct, and who’s going to sympathise with a bank in the current environment, but one can also understand Westpac’s position. It was arguably taking a practical approach given the complexity and cost of examining all relevant circumstances, and was seeking certainty of outcome and risk mitigation, by advancing the less specific form of relief proposed in the credit contract prosecution. 

One important reason for that approach is that views commonly vary between regulators and prosecuted parties, and between trial and appellate courts, on how many acts, omissions or contraventions have occurred, and therefore what penalty or penalties should be imposed as a result. That is because facts and views vary as to:

  • what is one act or omission, and accordingly how much conduct is involved in one contravention (as occurred in ASIC’s BBSR claims against Westpac);
  • whether contraventions arise out of the same conduct or one course of conduct and should be subject to one penalty (the course of conduct principle);
  • whether multiple breaches should give rise to multiple penalties (common but not universal practice is to impose one penalty for all contraventions), and 
  • whether the total proposed penalty or penalties in aggregate are just and appropriate (the totality principle). 

The most recent Westpac judgment may therefore be a disincentive to it and others to resolve prosecutions with regulators, as committing in a negotiated settlement to a specific (particularly larger) number of acts, omissions or contraventions runs the risk of the Court accepting those agreed facts, but imposing higher penalties for each. Ironically, and contrary to the public policy drivers of agreeing civil penalties with regulators, Westpac has in practice been better served in the earlier BBSR litigation and judgment by fully contesting the matter and then having only a small total penalty imposed, based on the small number of contraventions ultimately found by the Court.

It remains to be seen how the Westpac case will be resolved, but it seems clear that it and others will in future be required to be more forthcoming with specific orders of and evidence in relation to contravention before the Federal Court will approve settlements reached with regulators. ASIC and other regulators may likewise be less able to settle pragmatically based on what appears overall to be an appropriate penalty, without requiring it to be tied to more specific agreement as to the relevant acts, omissions and contraventions.