Australian Court orders Westpac to pay $1.8M for unconscionable conduct for interest rate swap
The Federal Court has declared Westpac Banking Corporation engaged in unconscionable conduct in October 2016 when executing a $12 billion interest rate swap transaction.
Westpac will pay the maximum penalty of $1.8 million in relation to the conduct, together with $8 million for ASIC’s litigation and investigation costs.
Westpac’s unconscionable conduct arose when it engaged in pre-hedging ahead of an interest rate swap transaction with a Consortium comprising AustralianSuper and IFM entities. The interest rate swap related to managing interest rate risk associated with the Consortium’s purchase from the NSW Government of a majority stake in electricity provider, Ausgrid.
The Court declared Westpac’s conduct was unconscionable in that:
- Westpac was aware of its client’s concern about trading prior to the swap transaction (pre-hedging) that had the potential to adversely affect the price of the swap transaction to their detriment. Every basis point increase to the price of the swap transaction would involve a cost to the Consortium of about $4.7 million;
- Despite being aware of its client’s concerns, Westpac acted on an internal plan to pre-hedge up to 50% of the interest rate risk by trading in significant volumes of interest rate derivatives in the market before the swap transaction was executed;
- Westpac failed to obtain client consent or give clear and full disclosure about the extent of its planned pre-hedging; and
- Once Westpac commenced its on-market pre-hedging trading, the Consortium could not protect itself against the risk that Westpac’s trading 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 was executed (of which $3.7 million was allocated to the Sales team as commission).
The Court also declared that Westpac failed to have adequate arrangements to manage the conflict of interests between it and the Consortium and did not do all things necessary to ensure that the swap transaction was provided to the Consortium efficiently, honestly and fairly.
The Court reserved its decision on whether to make an order requiring Westpac to complete a compliance programme with an independent review of its pre-hedging practices and controls, including relating to conflicts of interest management and client communications.