The Federal Court declared Westpac Banking Corporation to have engaged in unconscionable conduct in October 2016 when it executed a $12 billion interest rate swap transaction.
Westpac will pay the maximum penalty of $1.8 million in relation to the conduct, along with $8 million towards ASIC’s court costs and investigation costs.
Westpac’s unconscionable conduct arose when it hedged ahead of an interest rate swap transaction with a consortium made up of AustralianSuper and IFM entities. The interest rate swap was to manage the interest rate risk associated with the Consortium’s NSW Government purchase of a majority stake in the electricity provider, Ausgrid.
The Court held that Westpac’s conduct was unconscionable as follows:
- Westpac was aware of their customer’s concern about pre-hedging transactions which had the potential to adversely affect the price of the swap to their detriment. Each basis point increase in the swap transaction price would result in costs to the Consortium of approximately $4.7 million.
- Despite being aware of its customers’ concerns, Westpac acted on an internal plan to pre-hedge up to 50% of the interest rate risk by trading significant volumes of interest rate derivatives in the market before the swap transaction was executed.
- Westpac failed to obtain the customer’s consent or to give clear and full disclosure of the extent of its planned pre-compensation. and
- Once Westpac began trading in the pre-hedging market, the Consortium could not protect itself against the risk that Westpac’s transaction would increase the price of the swap transaction to the Consortium.
Westpac’s derivatives trading desk achieved a trading profit of approximately $20.7 million on the day the swap took place (of which $3.7 million went to the sales team as commission).
The Court also found that Westpac did not have adequate arrangements to manage the conflict of interest between it and the consortium and did not do all that was necessary to ensure that the swap transaction was provided to the Consortium efficiently, fairly and fairly.
The Court reserved its decision on whether it should make an order requiring Westpac to complete a compliance program with an independent review of its pre-compensation practices and controls, including conflict of interest management and of customer communications.