As expected, markets reacted more positively on Monday after the Friday Omicron falls.
The WHO said on Monday the Omicron coronavirus variant carried a very high risk of infection and multiple countries joined the list of those who have identified cases. And advised its 194 member nations that any surge in infections could have severe consequences, but said no deaths had been linked to the new variant.
The S&P 500 rebounded Monday, led by tech as investor risk appetite returned. Investors bought the dip, taking advantage of the sharp sell-off in tech stocks. But there was also a bit of news. Twitter founder and CEO Jack Dorsey said he would step down from the social media company.
The latest edition of our finance and property news digest with a distinctively Australian flavour.
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Growth through 2020 is now estimated at 1.5% with minus 1% in the first half ( minus 0.7% and minus 0.3% respectively in the March and June quarters) and 2.5% in the second half. This is recession territory.
Just last week they had set the forecast peak in the unemployment rate at around 5.8%- 6%, up from the current level of 5.3%.
But now the unemployment rate is now forecast to reach 7% by October 2020 (up from the previous estimate of 5.8%-6.0%) due to the larger negative shocks to the labour intensive sectors such as recreation; tourism; education; renovations and additions; and dwelling construction. This lift in the unemployment rate is despite reducing the participation rate from 66.1% to 65.4% as a discouraged worker effect – that is, as workers respond to a deteriorating labour market the participation rate is likely to decline.
They add: please note that these forecasts are not based on Australia following a European style full lock down. Not surprisingly, the forecasts are subject to downward revision in the event of such an occurrence.
This is consistent with our modelling – mortgage stress will rise in the months ahead as unemployment rises.
Now the question becomes, to what extent with the banks forego mortgage repayments, and not foreclose, and to what extent will the Government supports households directly? The mortgage debt mountain could bite deep and early.
Its also worth noting that we are already seeing a rise in financial stress among those renting – here the protections currently are very limited, and will need to be increased.
Our own modelling is based on the assumption the crisis will run for at least 6 months. Overnight a UK report suggested 18 months is more likely, given the lead time to a vaccine.
Westpac confirmed it has been hit with another class action relating to the AUSTRAC scandal. Via Financial Standard.
The
class action, brought by Johnson Winter & Slattery, has been filed
on behalf of certain shareholders who acquired interest in Westpac
securities or equity swap confirmations between 2013 and 2019.
“The
claim relates to market disclosure issues connected to Westpac’s
monitoring of financial crime over the relevant period and matter which
are the subject of the AUSTRAC proceedings,” Westpac told the ASX.
“The claim does not identify the amount of any damages sought.”
Westpac said it will be defending the claim, as it has said for the other class actions filed against it.
Prior to this proceeding being filed, Westpac said it expects around $80 million in additional expenses in FY20 as part of its response plan to the AUSTRAC scandal.
The bank is facing 23 million alleged breaches of anti-money laundering and counter-terrorism laws brought on by AUSTRAC.
The
regulator alleges, amongst other things, Westpac failed to
appropriately assess the online money laundering and terrorism financing
risks associated with the movement of money into and out of Australia
through correspondent banking relationships.
The bank is also facing class actions from US-based law firm Rosen Law on behalf of purchasers of Westpac shares between November 2015 and November 2019, as well as another Australia-based class action lodged by Phi Finney McDonald.
Westpac has announced the appointment of its new non-executive director and chairman-elect, who will play an integral role in the appointment of a permanent CEO following the resignation of Brian Hartzer. Via Australian Broker.
John McFarlane, scheduled to assume the
role in February subject to regulatory approvals, will succeed Lindsay
Maxsted and work closely with Peter King, current acting CEO.
McFarlane has more than 44 years’
experience in financial services, across retail and wholesale banking
and markets, as well as in life and general insurance.
“This experience, coupled with his strong
customer and employee focus, will be invaluable to Westpac as the
organisation executes its strategy and implements its Response Plan for the AUSTRAC Statement of Claim,” said Maxsted.
“As chairman-elect, McFarlane will be
responsible for appointing a permanent CEO, with an internal and
external search process currently underway. In the interim, he will work
closely with the acting CEO, Peter King and the board, to effect needed
change.”
Most recently, McFarlane was chairman at
Barclays in London over “the decade of challenge” following the global
financial crisis.
“During his four years as chairman, the
company was streamlined, repositioned and has sustainably returned to
profit,” Maxsted said.
“Prior to this, he delivered a successful turnaround program at UK insure,r Aviva, a company similar in scale to Westpac.”
McFarlane also possesses a “deep
understanding” of Australia’s banking sector, given his previous 10-year
tenure as CEO of ANZ from 1997 to 2007, as well as 10 years passed as
director of the Australian Bankers’ Association.
The newly named chairman has returned to live in Australia permanently and has dubbed the appointment “an honour”.
“People close to me know that on my return
to Australia, I hadn’t intended to take another major leadership role.
However, I’m passionate about the Australian banking sector, and I’m
excited by the challenge of returning Westpac to its place as a leading
global bank, following recent events,” McFarlane said.
“To some extent, the internal and external
challenges ahead for Westpac are not dissimilar to those in my last
five financial institutions, and I have therefore grown comfortable
about my capacity to work with the board and management to effect the
necessary change.
“Nevertheless, I’m sufficiently
battle-hardened to realise things can be tougher than you think and that
in banking, nothing is ever certain.”
McFarlane has communicated that the appointment of a “world-class” CEO can take time.
“In the interim, momentum is important. I
will work closely with Peter King and the board to continue to make any
changes necessary. People should expect to see positive change during
this period,” he said.
“My focus initially will naturally be on
resolving the company’s current issues but equally important, to
position it as quickly as possible for long-term success. Fortunately,
Westpac has wonderful core customer franchises, each with significant
opportunity.”
Westpac has announced that for one year, it will cover the mortgage repayments of home loan customers who lost their principal place of residence due to the bushfires raging across the country, paying up to $1,200 per month per customer. Via Australian Broker.
Westpac’s Bushfire Recovery Support
Package also includes interest free home loans to cover the gap between
insurance payouts and construction costs for consumers who need to
rebuild, as well as $3m in funds allocated to bushfire emergency cash
grants, of which eligible retail customers can claim up to $2,000.
At the time of writing, the bushfires have
claimed the lives of 28 people across the country, with over 3,000
homes destroyed or damaged in New South Wales alone.
“These initiatives are designed to provide
practical, on the ground support for our customers, our people and for
those who are caring for affected communities,” said Peter King,
Westpac’s acting CEO.
The relief package also makes grants of up
to $15,000 available to assist small businesses with the cost of
refurbishing premises that have been damaged or destroyed during the
bushfires.
Westpac has committed to “fast tracked”
credit approvals to provide short-term assistance to businesses impacted
by the fires, as well as offering 2.83% three-year variable rate,
low-interest rebuilding loans.
Further, no foreclosures will be made for
three years on any farming businesses in the affected areas, and all
volunteer firefighters across the nation are able to access the Disaster
Relief Package.
FBAA managing director Peter White has
encouraged brokers to be aware that it’s not only clients who have lost
their properties that are unable to meet their mortgage repayments;
while that subsection may be the most likely to automatically speak to
their lenders and insurers, there are many others whose properties were
not touched by fire but have been impacted in other ways.
“There will be those who have had to
evacuate, or who may operate a small business that has seen a dramatic
drop in revenue because an area has been blocked off. There will be
others who have had to sacrifice their earnings to help friends, family
or their community,” White said.
“Lenders are currently allowing people to
momentarily stop their repayments, and while each situation is
different, they are listening and helping and working with all
borrowers.”
According to White, brokers are ideally positioned to have the most impact on and support damaged communities.
“Chances are the bank won’t come knocking
on our clients’ doors because they don’t know who is being impacted and
who isn’t, but we can knock on those doors,” he said.
“Finance brokers are part of local
communities and we know many of our clients and their families
personally, so this is a great opportunity for us to serve our clients
and repay the trust they have in us.”
ASIC says that the Federal Court of Australia has today ordered Westpac Banking Corporation to pay a penalty of $9.15 million in respect of 22 contraventions of section 961K of the Corporations Act (the Act), and to pay ASIC’s costs of the proceeding.
The court case relates to poor financial
advice provided by a former Westpac financial planner, Mr Sudhir Sinha,
in breach of the best interests duty and related obligations under the
Act. Westpac is directly liable for these breaches, which attracts a
significant civil penalty, because the law imposes a specific liability
on licensees for the breaches of their financial advisers.
The decision comes as a result of civil penalty proceedings brought by ASIC against Westpac in June 2018 (18-175MR).
ASIC’s investigation revealed internal Westpac reviews, including an
internal bank investigation in 2010, had raised concerns about Mr
Sinha’s compliance history yet he continued to receive several ‘high
achievement’ ratings from Westpac. It was not until 2014 that Mr Sinha
was dismissed by Westpac and March 2015 that Westpac reported Mr Sinha’s
conduct to ASIC.
The trial took place before Justice Wigney
in April 2019, during which Westpac admitted that, as Mr Sinha’s
responsible licensee, it had contravened the Corporations Act. The exact
number of contraventions and penalty that should be imposed were
contested by ASIC and Westpac.
In its decision, the Court found Mr Sinha
failed to act in the best interests of his clients, provided
inappropriate financial advice, and failed to prioritise the interests
of his clients, in four sample client files identified by ASIC. Westpac
is directly responsible for the breaches of the best interests
obligations by Mr Sinha under section 961K of the Act.
‘Westpac, as Mr Sinha’s
responsible licensee, failed to properly monitor and supervise Mr Sinha
for a period of time. This meant his customers were not provided with
advice in their best interests. ASIC brought this case as a result of
Westpac’s suspected contraventions of the law and failures to observe
its duties. The court has found that Westpac contravened the law in this
regard’ ASIC Deputy Chair Daniel Crennan QC said.
In the judgment, Justice Wigney observed:
‘The
relationship between Westpac and Mr Sinha was structured so that Mr
Sinha was able to share in the commissions and fees earned or derived
when, as a result of his advice or recommendations, clients signed-up
for financial products in which Westpac or associated companies had an
interest. As will be seen, that rather cosy arrangement turned out to
be fruitful for both Mr Sinha and Westpac, but not always for their
clients.
…
Unfortunately
for four couples, it was subsequently discovered that the
recommendations that Mr Sinha made, and the circumstances in which he
made them, were deficient and defective, both as a matter of process and
in substance. That should not have been a complete surprise to Westpac
because Mr Sinha’s less than satisfactory conduct as a financial
adviser had previously come to the attention of certain senior officers
of Westpac as a result of various internal compliance reviews, audits or
investigations.’
His Honour further found that Westpac
ought reasonably to have known, from 1 July 2013, that there was a
significant risk that Mr Sinha would not comply with the best interests
obligations and that it failed to do all things necessary to ensure that
the financial services covered by its licence are provided efficiently,
honestly and fairly, and to comply with financial services laws. In
doing so Westpac also contravened sections 912A(1)(a) and (c) of the
Act.
Justice Wigney noted:
‘Westpac
also stood to gain from Mr Sinha’s actions. That perhaps explains why Mr
Sinha was permitted to continue as Westpac’s representative and partner
despite the serious compliance breaches which were exposed by the 2010
investigation. It is tolerably clear that, at least prior to the
commencement of the FoFA reforms, some officers or employees at Westpac
were either unable or unwilling to terminate the services of a
representative who achieved high achievement ratings and was plainly
proficient and successful at promoting the financial products of Westpac
and its associates. It may readily be inferred that Westpac’s
compliance systems and practices were less than rigorously applied, at
least in Mr Sinha’s case.’
The Australian Prudential Regulation Authority (APRA) has today formally commenced an investigation into possible breaches of the Banking Act 1959 by Westpac Banking Corporation (Westpac).
APRA will focus on the conduct that led to the matters alleged last month by AUSTRAC, as well as the bank’s actions to rectify and remediate the issues after they were identified. The investigation will examine whether Westpac, its directors and/or its senior managers breached the Banking Act – including the Banking Executive Accountability Regime (BEAR) – or contravened APRA’s prudential standards.
Given the magnitude and nature of the issues alleged by AUSTRAC, APRA is aiming to ensure that fundamental deficiencies in Westpac’s risk management framework are identified and addressed and that Westpac and those responsible are held accountable as appropriate.
In addition, APRA will:
impose an immediate increase in Westpac’s capital requirements of $500 million, to reflect the heightened operational risk profile of the bank. This brings the total operational risk capital add-ons that Westpac is required to hold to $1 billion, following the increase announced by APRA in July 2019; and
initiate an extensive review program focused on Westpac’s risk governance. The review program will include risk management, accountability, remuneration and culture. An element of the review will be an examination of the steps Westpac has been taking to strengthen risk governance in recent years, including through its self-assessment.
APRA Deputy Chair Mr John Lonsdale said: “AUSTRAC’s statement of
claim in relation to Westpac contains serious allegations that question the
prudential standing of Australia’s second largest bank.
“While Westpac is financially sound, there are potentially substantial gaps in
risk governance that need to be closed.
“Given the nature of the matters raised by AUSTRAC, the number of alleged
breaches and the period of time over which they occurred, this will necessarily
be an extensive and potentially lengthy investigation.”
The investigation affords APRA the opportunity to exercise legal powers that
have been expanded and strengthened since 2017’s CBA Prudential Inquiry,
including enhanced investigative powers and the implementation of the BEAR in
2018.
APRA will conduct its investigation simultaneously with an investigation by the
Australian Securities and Investments Commission (ASIC), as well as AUSTRAC’s
legal proceedings, with each agency cooperating where appropriate.
The scope of APRA’s investigation is below.
Attachment – Scope of
APRA’s investigation into Westpac
The prudential matters that are the subject of APRA’s investigation are:
Whether Westpac, its directors, and/or its senior managers have contravened the Banking Act 1959 and the prudential standards by engaging in, and in the way they responded to, the conduct set out in and otherwise related to the AUSTRAC proceedings.
In considering possible contraventions of the Act and the prudential standards, the investigation will examine whether:
(a) Westpac’s governance, control and risk management framework was adequate; and appropriately implemented;
(b) Westpac’s accountability and remuneration arrangements were adequate, and appropriately implemented to effectively manage non-financial risks;
(c) there has been a failure to comply with accountability obligations under the Banking Executive Accountability Regime;
(d) there has been a failure to comply with the requirements of the prudential standards including Prudential Standard CPS 510: Governance, Prudential Standard CPS 520: Fit and Proper, and Prudential Standard CPS 220: Risk Management; and
(e) there was a failure to promptly notify APRA of any significant breaches and/or a breach of accountability obligations.
Westpac’s chief executive Brian Hartzer will step down, with his resignation effective from December 2.
It comes after the bank was sued by the financial intelligence agency AUSTRAC for allegedly committing 23 million breaches of Australia’s anti-money laundering laws.
The bank’s chairman Lindsay Maxsted also confirmed he would bring forward his retirement to the first half of 2020.
The news that Australia’s anti money-laundering regulator has accused Westpac of breaching the law on 23 million occasions points to the prospect that powerful members of corporate Australia are still behaving badly. Via The Conversation.
Regulators are still struggling to find the right balance between
pursuing wrongdoers through the courts – an admittedly costly,
time-consuming and highly risky business – and finding other means to
punish and deter misconduct.
Australia’s anti money-laundering regulator, AUSTRAC, is seeking penalties against Westpac in the Federal Court.
Each of the bank’s alleged contraventions attracts a civil penalty of
up to A$21 million. In theory, that could equate to a fine in the
region of A$391 trillion.
In practice, it is likely to be a mere fraction of that sum.
Commonwealth Bank breached anti-money-laundering laws and faced a theoretical maximum fine of nearly A$1 trillion, but settled for A$700 million.
No doubt the reality that companies can minimise penalties is a factor in why breaches continue.
This impression is reinforced by revelations last week that financial services company AMP continued to charge fees to its dead clients despite the shellacking it received at the hands of the royal commission.
Last month a Federal Court judge refused to approve a A$75 million
fine agreed between the Australian Competition and Consumer Commission
and Volkswagen to settle litigation over the car company’s conduct in
cheating emissions tests for diesel vehicles. The judge was reported to
be “outraged” by the settlement, which meant Volkswagen did not admit liability for its misconduct.
The A$75 million is a drop in the ocean of the likely profits
obtained from this systemic wrongdoing and pales into insignificance
next to fines imposed in other countries.
Proposals for law reform
So business as usual, right?
Maybe not for long. The Australian Law Reform Commission has just released a discussion paper on corporate criminal responsibility.
It points out that effective punishment and deterrence of serious
criminal and civil misconduct by corporations in Australia is undermined
by a combination of factors.
These include a confusing and inconsistent web of laws governing the
circumstances in which conduct is “attributed” to the company. Similar
problems of inconsistency arguably also undermine other key areas, such
as efforts to give courts the power to impose hefty fines based on the profits obtained by the wrongdoing
The repeated attempts to come up with new and more effective
attribution rules arise because corporate wrongdoers are “artificial
people”. For centuries, courts and parliaments have struggled with how
to make them pay for what is done by their human managers, employees and
(both human and corporate) agents. All too often a company’s directors
disclaim all knowledge of the wrongdoing.
To fix this, the ALRC recommends having one single method to
attribute responsibility. It builds on the attribution rule first
developed in the Trade Practices Act 1974 (Cth) and now used, in various forms, across various statutes.
The ALRC proposes that the conduct and state of mind of any
“associates” (whether natural individuals or other corporations) acting
on behalf of the corporation should be attributable to the corporation.
This goes well beyond the traditional focus on directors and senior
managers and would provide some welcome consistency in the law.
Importantly, serious criminal and civil breaches that require proof
of a dishonest or highly culpable corporate “state of mind” can be
satisfied either by proving the state of mind of the “associate” or that
the company “authorised or permitted” the conduct.
A “due diligence” defence would protect the corporation from
liability where the misconduct was truly attributable to rogue “bad
apples” in an otherwise a well-run organisation. There would be no
protection in the case of widespread “system errors” and “administrative
failures” so pathetically admitted during the royal commission.
The ALRC also proposes that senior officers be liable for the conduct
of corporations where they are in “a position to influence the relevant
conduct and failed to take reasonable steps to prevent a contravention
or offence”.
This would place the onus on those in a position to change egregious
corporate practices to show they took reasonable steps to do so.
Removing the penalty ceiling
These recommendations, if adopted could prove a game-changer for
regulators asking themselves “why not litigate?” and corporations used
to managing the fall-out of their misconduct as simply a “cost of
business”.
The ALRC’s recommendations that the criminal and civil penalties
should be enough to ensure corporations don’t profit from wrongdoing
will be welcomed by many. Some academics have gone further and argued
that the law should be changed to make it clear that civil, not just
criminal penalties, should be set at a level that is effective to punish
serious wrongdoing.
The ALRC also raises the question whether current limits on penalties should be removed. The Westpac scenario might be just the kind of case to make that option attractive.
Authors: Elise Bant, Professor of Law, University of Melbourne; Jeannie Marie Paterson, Professor of Law, University of Melbourne
