Australian Securities and Investments Commission v Westpac Banking Corporation (No 3)

[2018] FCA 1701

FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Westpac Banking Corporation (No 3) [2018] FCA 1701

File number(s):

VID 282 of 2016

Judge(s):

BEACH J

Date of judgment:

9 November 2018

Catchwords:

CORPORATIONS – Pecuniary penalty – declarations of contraventions – compliance program – bank bill market – trading in prime bank bills – Bank Bill Swap Reference rate (BBSW) – bank accepted bill futures – interest rate swaps – cross-currency swaps – market manipulation – artificial price in traded BBSW referenced products – financial market – false or misleading appearance in a market – false or misleading appearance with respect to price for trading – unconscionable conduct – financial instruments referencing BBSW – non-disclosure of rate set trading practice to counterparties – statutory unconscionability – contraventions of the then s 12CC of Australian Securities and Investments Commission Act 2001 (Cth) – penalty imposed – declarations and other orders made

Legislation:

Australian Securities and Investments Commission Act 2001 (Cth) ss 12CA, 12CB, 12CC, 12GBA, 12GLA

Corporations Act 2001 (Cth) ss 912A(1)(a), (c), (ca) and (f), 1041A, 1041B, 1101B(1), (4)

Crimes Act 1914 (Cth) s 4AA(1)

Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Cth)

Cases cited:

ACCC v Dataline.net.au Pty Ltd (2006) 236 ALR 665; [2006] FCA 1427

ACCC v Get Qualified Australia Pty Ltd (No 2) [2017] FCA 709

Ainsworth v Criminal Justice Commission (1992) 175 CLR 564

Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2018) 351 ALR 190

Australian Competition and Consumer Commission (ACCC) v ACN 117 372 915 Pty Ltd (in liq) (Formerly Advanced Medical Institute Pty Ltd) (2015) 331 ALR 76

Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2017] FCAFC 159

Australian Competition and Consumer Commission v Get Qualified Australia Pty Ltd (No 3) [2017] FCA 1018

Australian Competition and Consumer Commission v Hillside (Australia New Media) Pty Ltd trading as Bet365 (No 2) [2016] FCA 698

Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 3) (2005) 215 ALR 301

Australian Competition & Consumer Commission v Renegade Gas Pty Ltd (trading as Supagas NSW) [2014] ATPR 42-485; [2014] FCA 1135

Australian Competition and Consumer Commission v Virgin Mobile Australia Pty Ltd (No 2) [2002] FCA 1548

Australian Competition & Consumer Commission v Z-Tek Computer Pty Ltd (1997) 78 FCR 197

Australian Securities and Investments Commissions v Commonwealth Bank of Australia (2018) 128 ACSR 289; [2018] FCA 941

Australian Securities and Investments Commission v National Australia Bank Ltd (2017) 123 ACSR 341

Australian Securities and Investments Commission v Superannuation Warehouse Australia Pty Ltd (2015) 109 ACSR 199; [2015] FCA 1167

Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 127 ACSR 110; [2018] FCA 751

Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482 at [55]

Construction, Forestry, Mining and Energy Union v Cahill (2010) 269 ALR 1

Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421

Markarian v The Queen (2005) 228 CLR 357

NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285

Trade Practices Commission v CSR Ltd [1991] ATPR 41-076

Date of hearing:

8 November 2018

Registry:

Victoria

Division:

General Division

National Practice Area:

Commercial and Corporations

Sub-area:

Economic Regulator, Competition and Access

Category:

Catchwords

Number of paragraphs:

229

Counsel for the Plaintiff:

Mr PD Crutchfield QC, Mr MI Borsky QC, Ms C Van Proctor and Mr CJ Tran

Solicitor for the Plaintiff:

Johnson Winter & Slattery

Counsel for the Defendant:

Mr MJ Darke SC, Mr JRV Williams and Mr J Burnett

Solicitor for the Defendant:

Allens

ORDERS

VID 282 of 2016

BETWEEN:

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Plaintiff

AND:

WESTPAC BANKING CORPORATION (ACN 007 457 141)

Defendant

JUDGE:	BEACH J
DATE OF ORDER:	9 NOVEMBER 2018

In these Orders, the definitions set out in the Key Terms Glossary annexed to the Reasons for Judgment delivered by Beach J on 24 May 2018 apply.

THE COURT DECLARES THAT:

Unconscionable conduct

1.On each of the dates set out in Annexure A, the Defendant (Westpac), in trade or commerce, engaged in conduct in connection with the possible acquisition or supply, or acquisition or supply, of financial services, which was unconscionable in all the circumstances, by trading in Prime Bank Bills in the Bank Bill Market during the BBSW Rate Set Window with the dominant purpose of affecting the yield of Prime Bank Bills so as to affect the level at which the BBSW was set in a way that was: 

(a)favourable to Group Treasury’s BBSW Rate Set Exposure;

(b)unfavourable to counterparties to BBSW Referenced Products with Westpac who were not listed public companies and who had a BBSW Rate Set Exposure opposite to Group Treasury’s BBSW Rate Set Exposure,

in contravention of s 12CC of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) (as then in force).

Financial Services Licensee Obligations

2.Westpac contravened s 912A(1) of the Corporations Act 2001 (Cth) (Corporations Act) by:

(a)as a result of its conduct the subject of the declaration in paragraph 1 above, failing to do all things necessary to ensure that the financial services covered by its Australian Financial Services Licence were provided efficiently, honestly and fairly, and thereby contravened s 912A(1)(a) of the Corporations Act;

(b)as a result of its conduct the subject of the declaration in paragraph 1 above, failing to comply with financial services laws, and thereby contravened s 912A(1)(c) of the Corporations Act;

(c)failing to take reasonable steps to ensure its representatives did not engage in trading in Prime Bank Bills in the Bank Bill Market with the sole or dominant purpose of manipulating BBSW, and thereby contravened s 912A(1)(ca) of the Corporations Act; and

(d)failing to do all things necessary to ensure its representatives were adequately trained not to engage in trading in Prime Bank Bills in the Bank Bill Market with the sole or dominant purpose of manipulating BBSW, and thereby contravened s 912A(1)(f) of the Corporations Act.

AND THE COURT ORDERS THAT:

3.Pursuant to s 12GBA(1)(a) of the ASIC Act and in respect of the contraventions the subject of paragraph 1 of these Orders (other than the conduct taking place on 6 April 2010), Westpac pay a pecuniary penalty in the sum of $3.3 million to the Commonwealth of Australia within 28 days of these Orders.

4.Subject to further order, pursuant to s 12GLA(2)(b) of the ASIC Act and/or s 1101B(1) of the Corporations Act, Westpac shall, within 6 months of the date of these Orders, ensure that it has appropriate systems, policies and procedures in relation to trading in Prime Bank Bills in the Bank Bill Market concerning:

(a)adequate training of relevant staff to ensure they are instructed not to engage in trading with the sole or dominant purpose of influencing the level at which the BBSW is set; 

(b)maintenance of an appropriate information barrier between the Group Treasury and Financial Markets divisions of Westpac; and 

(c)explicit policies and procedures in relation to trading Prime Bank Bills in the Bank Bill Market. 

5.Westpac shall, within 9 months of the date of these Orders, provide ASIC with a written report of a suitably qualified independent expert confirming Westpac’s compliance with paragraph 4 of these Orders. 

6.The identity of the independent expert for the purposes of paragraph 5 of these Orders and the terms of his or her retainer is to be agreed between ASIC and Westpac or, failing agreement, by the Court.  The expert is to commence their work not sooner than six months from the date of these Orders. The costs of the independent expert are to be met by Westpac. 

7.The parties have liberty to apply concerning paragraphs 4 to 6 of these Orders. 

8.Westpac pay ASIC’s costs of and incidental to the hearing as to penalty and other relief as agreed or assessed. 

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Annexure A

The dates referred to in paragraph 1 of these Orders are: 

Date	Relevant tenor
6 April 2010	1 Month BBSW
6 April 2010	3 Month BBSW
20 May 2010	1 Month BBSW
1 December 2010	3 Month BBSW
6 December 2010	3 Month BBSW

REASONS FOR JUDGMENT

BEACH J:

1. On 24 May 2018 I gave judgment on liability in this proceeding (Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 127 ACSR 110; [2018] FCA 751). I found that on four days being 6 April, 20 May, 1 and 6 December 2010 Westpac engaged in manipulative trading in the Bank Bill Market and thereby engaged in unconscionable conduct contrary to s 12CC of the Australian Securities and Investments Commission Act 2001 (Cth) as in force at the time. I also found that by reason of its inadequate procedures and training, and the trading on the four contravention dates, Westpac contravened its financial services licensee obligations under s 912A of the Corporations Act 2001 (Cth).

2. ASIC now seeks: 

   (a)declarations of contravention that Westpac engaged in unconscionable conduct in contravention of s 12CC of the ASIC Act and declarations of contravention of s 912A of the Corporations Act;

   (b)the imposition of pecuniary penalties under s 12GBA(1) of the ASIC Act in an amount of $58 million; and

   (c)orders requiring Westpac to implement a compliance program pursuant to s 1101B of the Corporations Act and s 12GLA of the ASIC Act.

3. Contrastingly, Westpac proposes: 

   (a)more succinctly framed declarations as to the contraventions of s 12CC and s 912A(1);

   (b)that it pay a pecuniary penalty of $3 million in respect of 3 of the 4 contraventions of s 12CC; the contravention on 6 April 2010 does not attract a penalty as it preceded the introduction of legislative changes that imposed pecuniary penalties for unconscionable conduct; and

   (c)a more narrowly framed order under s 12GLA(2)(b) of the ASIC Act and s 1101B of the Corporations Act that Westpac within 6 months ensure that it has appropriate systems, policies and procedures in place in relation to trading in the Bank Bill Market and within 9 months provides a report of an independent expert confirming compliance with such an order.

4. These reasons address the competing contentions and my solution.  They are to be read with my principal reasons delivered on 24 May 2018. 

5. In summary, the principal difference between the parties concerns the quantum of the pecuniary penalty.  ASIC seeks a $58 million penalty with respect to 58 contraventions that it says can be identified; the $58 million is a discount on the arithmetical maximum of $63.8 million; I would also note that $59 million was originally sought in relation to 59 contraventions.  Westpac pleads for a $3 million penalty with respect to 3 of the 4 contraventions that it says I have found.  The $3 million is a discount on what it says to be the $3.3 million maximum.  The difference between the parties is not insubstantial.  The difference reflects the competing positions taken by the parties as to the legal question of what the maximum penalty is in the circumstances of the present case. 

6. Now as to the maximum penalty, I have to apply the law as it was at the time, not what it should have been.  The maximum penalty is that which the legislature chose to stipulate as being appropriate at the time of the contraventions.  For the reasons that I later set out, the maximum penalty is $3.3 million. 

7. Let me make four other preliminary observations before getting into the detail. 

8. First, my task does not involve the luxury of applying any asymmetric rectitudinous philosophy to the penalty phase.  Hard facts had to be and have been found.  And the task is to set a penalty appropriate to the facts as so found informed by the legal question of the maximum penalty that the statute will permit to achieve specific and general deterrence. 

9. Second, the solution to this legal problem of identifying the maximum penalty applicable to Westpac’s offending has not been greatly assisted by ASIC’s approach before me, which has had all the irreconcilable atonality of a Schoenberg composition when compared with the case that it pleaded and substantiated at trial. 

10. Third, parity of penalty treatment is relevant in the present case.  I have given consideration to the penalties imposed upon the ANZ, CBA and NAB for like conduct.  But in order to compare like with like, one must properly identify the component one is required to compare.  Take the ANZ resolution as an example.  There were three components to the $50 million that it was required to pay:  first, $10 million as a pecuniary penalty; second, $20 million as in substance a voluntary contribution to a financial consumer protection fund albeit that it may now be enforceable; third, $20 million for costs.  Now in determining the question of parity in the present context, the direct comparator is the $10 million pecuniary penalty imposed on the ANZ with what I consider to be appropriate to impose upon Westpac.  The other two components making up the ANZ $50 million amount have little direct significance.  The $20 million contribution to a fund made by the ANZ is not something that I can impose upon Westpac.  Indeed, ASIC made no submission that I can or should impose such an obligation.  But I can, of course, in setting a penalty against Westpac take into account that it has not agreed to make such a contribution, which I do.  As to the other component, being $20 million for costs imposed upon the ANZ, I have separately dealt with the costs liability of Westpac.  It is to pay 50% of the trial costs and all the penalty hearing costs on a party / party basis.  But these are yet to be quantified.  Clearly, any legal costs comparator is not the relevant metric and in any event relevant differences justify the different exposure.  The short point is that for the purpose of applying the parity principle, the direct comparator that I need to consider is the $10 million pecuniary penalty imposed upon the ANZ rather than the $50 million total amount.  Like points can be made concerning the resolutions of ASIC’s other proceedings against the CBA and NAB. 

11. Fourth, before descending into the detail and as this is likely to be the last occasion on which any of the bank bill swap rate cases will need to be dealt with at the trial level, let me express the Court’s appreciation to ASIC across all four cases for its first class diligence, efficiency and expertise in both the preparation and presentation of these cases.  The technical synthesis of the operation and dynamics of trading in the Bank Bill Market and any effect on the Bank Bill Swap Reference Rate (BBSW) including flow on effects to the pricing of derivative instruments had some tricky aspects to it.  The Court is grateful to ASIC across all four cases for its depth of analysis and assistance, as too to Westpac in the present case. 

12. Let me now briefly set out some salient background.  Any defined terms in my principal reasons delivered on 24 May 2018 including the annexed glossary have similar meanings in the present reasons unless I indicate otherwise. 

    BACKGROUND

13. In my principal reasons I analysed s 12CB and the predecessor version of s 12CC and found that on 6 April, 20 May and 1 and 6 December 2010, Westpac engaged in unconscionable conduct under the then s 12CC of the ASIC Act.

14. Specifically, I found that on each of the four contravention dates, Westpac traded with a dominant manipulative purpose.  The relevant state of mind was held by Mr Roden and Ms Johnston in relation to their respective trading.  They were aware of the significance of the BBSW.  Moreover, their conduct on each of the four contravention dates was deliberate and unfair. 

15. I also further analysed s 912A(1) of the Corporations Act and found that, as a result of Westpac’s inadequate procedures and training, Westpac contravened its financial services licensee obligations under s 912A(1).

16. Now ASIC says that the evidence discloses at least 58 trades by Westpac on the three contravention dates in respect of which civil penalties may be imposed, namely, 20 May 2010, 1 and 6 December 2010. 

17. In evidence put before me on the penalty phase by ASIC, schedule A to the affidavit of Ms Rayma Gupta sworn 28 August 2018 identified various broker transactions involving Westpac totalling at least 58 trades on the three contravention dates; a supplementary affidavit by Ms Gupta was sworn on 5 October 2018. 

18. It is not in doubt that a minimum number of $20 million of Prime Bank Bills could be purchased in a broker transaction.  The 58 trades referred to above included individual trades in quantities in excess of $20 million. 

19. In addition to these 58 trades, Westpac made bids and offers with the same manipulative purpose. 

20. On 20 May 2010, 1 and 6 December 2010, Westpac had exposures to 173 Affected Counterparties, being counterparties who were neither listed companies nor participants in the Bank Bill Market, in an amount of more than $4.29 billion. 

21. In terms of Westpac’s financial position at the relevant time, in 2010 Westpac reported that: 

    (a)as at 30 September 2010, it had a market capitalisation of $69.5 billion and net assets of $40.118 billion; and 

    (b)for the full year ending 30 September 2010, it had a net operating income of $6.146 billion and net profit after tax of $6.346 billion. 

22. In 2011, Westpac reported that: 

    (a)as at 30 September 2011, it had a market capitalisation of $61.6 billion and net assets of $43.8 billion; and 

    (b)for the full year ending 30 September 2011, it had a net operating income of $6.417 billion and net profit after tax of $6.991 billion. 

23. Westpac’s financial position since the commencement of the proceeding has been further detailed in Ms Gupta’s evidence which set out the following detail. 

24. Westpac’s 2016 financial results record that: 

    (a)as at 30 September 2016, Westpac had a market capitalisation of $99 billion; and 

    (b)for the full year ending 30 September 2016, Westpac’s: 

    (i)net operating income was $20.99 billion; 

    (ii)net assets were $58.18 billion based on total assets of $839.20 billion minus total liabilities of $781.02 billion; and 

    (iii)net profit after tax exceeded $7.445 billion. 

25. Westpac’s 2017 financial results record that: 

    (a)as at 30 September 2017, Westpac had a market capitalisation of $108.35 billion; and 

    (b)for the full year ending 30 September 2017, Westpac’s: 

    (i)net operating income exceeded $21.80 billion; 

    (ii)net assets were $61.35 billion based on total assets of $851.88 billion minus total liabilities of $790.53 billion; and 

    (iii)net profit after tax was $7.990 billion. 

26. Westpac’s 2018 interim financial results record that: 

    (a)as at 31 March 2018, Westpac had a market capitalisation of $97 billion; and 

    (b)for the first half of the 2018 financial year, Westpac’s: 

    (i)net operating income exceeded $11.15 billion; 

    (ii)net assets were $62.67 billion based on total assets of $871.86 billion minus total liabilities of $809.19 billion; and 

    (iii)reported profit after tax was $4.198 billion. 

1. As to Westpac’s compliance policies and procedures, from July 2012 Westpac had in place a “Monitoring of WBC Rates Contribution to the AFMA 10am BBSW Rateset policy” that addressed Westpac’s submissions, not its trading in the Bank Bill Market.  That was also the subject of Westpac’s “WIB Benchmarks Policy” in December 2013.  From February 2014 Westpac had an updated policy (the “Monitoring of WBC Trading Activity AFMA 10am BBSW Rateset”) that addressed trading in the Bank Bill Market.  As I noted in my judgment, I found that many of the steps that it took after July 2012 should have been in place during the relevant period.  I will return later to the question of Westpac’s current policies and procedures as it relates to a debate concerning the appropriate compliance order. 

2. There have now been changes in the calculation methodology of the BBSW. 

3. From 27 September 2013 changes were made to the methodology from that applying during the relevant period.  It is unnecessary to detail these for present purposes given the even more recent changes.  On 1 January 2017 the ASX became the BBSW rate administrator, and more recently it has introduced a new mechanism. 

4. On 21 May 2018 a new waterfall methodology was introduced by the ASX for the calculation and publication of the BBSW in each relevant tenor on each business day.  Let me summarise some of its elements. 

5. A volume weighted average price (VWAP) calculation is now the primary method used to determine the BBSW rate for each tenor for each business day.  The calculation is performed over all eligible primary and secondary market transactions in Prime Bank Bills (including NCDs) transacted within the rolling maturity pool, throughout the BBSW rate set window.  There are various points to note.  First, the VWAP calculation is based upon actual transactions and traded yields.  It is not based upon estimates of the best bids/best offers.  Second, the BBSW rate set window is the broader period of 8.30 am to 10.00 am.  Third, all eligible trades transacted bilaterally or through inter-dealer brokers during the BBSW rate set window must be reported and provided to the Benchmark Administrator for inclusion in the calculation.  Such reporting of eligible trades must occur by 10.15 am.  Fourth, the VWAP calculation is then performed over all eligible transactions observed within the BBSW rate set window for each tenor to provide the BBSW for each relevant tenor.  This is then published at 10.30 am. 

6. But if a BBSW rate cannot be validly calculated under the VWAP method for a particular tenor, for example, because the thresholds for each of the minimum volume ($ millions), minimum number of transactions and minimum number of counterparties have not been met, then the national best bid and offer (NBBO) calculation method is to be used to calculate the BBSW for that tenor.  Further, in the event that a BBSW rate cannot be validly calculated under the NBBO method for a particular tenor, then the fall-back calculation waterfall is to be used.

7. In essence, the new calculation method is based upon actual market transactions, actual traded prices, a greater number of transactions and a longer BBSW rate set window.  If the BBSW was previously susceptible to manipulation, the recent changes have substantially reduced that risk.

   DECLARATORY RELIEF

8. Now I have a broad discretionary power to make declarations under s 21 of the Federal Court of Australia Act 1976 (Cth), which “[i]t is neither possible nor desirable to fetter … by laying down rules as to the manner of its exercise” (Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 at 437 per Gibbs J; Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581 and 582 per Mason CJ, Dawson, Toohey and Gaudron JJ). But it is confined by the considerations which mark out the boundaries of judicial power.

9. Now I readily accept the following propositions: 

   (a)Declarations ought determine what was a live controversy between the parties, being whether Westpac contravened the ASIC Act and the Corporations Act.

   (b)ASIC, as the Commonwealth agency responsible for enforcing both Acts, has a real interest in seeking declarations. 

   (c)Declarations should be framed to reflect the factual foundation as found by me and the basis on which Westpac’s conduct contravened the relevant statutory provisions.  In this respect I have found that Westpac traded in the Bank Bill Market on the specified occasions with the purpose of affecting the process through which the BBSW would be set on the relevant contravention dates and so that the BBSW would set to its advantage.  And that conduct was unconscionable having regard to:

   (i)the vulnerability of Westpac counterparties to Westpac’s conduct; 

   (ii)Westpac’s knowledge as to the status and function of BBSW as a central reference interest rate in Australian financial markets and for financial products supplied by Westpac; 

   (iii)Westpac’s intention to profit at the expense of its counterparties; and 

   (iv)the potential that counterparties may have been detrimentally affected were Westpac to have been successful in changing where BBSW set in a way that advantaged itself. 

   (d)Such conduct was against commercial conscience as informed by the normative standards and their implicit values enshrined in the text, context and purpose of the ASIC Act specifically and the Corporations Act generally.

   (e)I have also found that Westpac’s policies, procedures and systems were inadequate.  The public was entitled to expect that Westpac would take reasonable steps to comply with its statutory obligations.  Its systems failed to ensure efficiency and fairness in the provision of financial services. 

   (f)Further, it cannot be said that declaratory relief would have no consequences. There is utility in making the declarations sought. They will identify conduct that contravened the ASIC Act and the Corporations Act, mark my disapproval of those contraventions, assist ASIC in carrying out its duties and deter other persons from engaging in contraventions. Generally, the making of appropriate declarations will serve the public interest.

10. But consonant with such observations, in my view I should make the more narrowly targeted declarations proposed by Westpac.  They substantially reflect the relevant declarations sought in ASIC’s Third Further Amended Originating Process (the Originating Process).  The unconscionable conduct declarations proposed by Westpac are also similar to the declarations for attempted unconscionable conduct made in the BBSW proceedings brought against the ANZ and CBA. 

11. Contrastingly, the initially overly elaborate declarations proposed by ASIC differ significantly from those sought in the Originating Process, and from those made in the ANZ and CBA proceedings. 

12. The appropriate form of declarations to make in proceedings of the present kind and after my not insubstantial published principal reasons was addressed by Kiefel J in ACCC v Dataline.net.au Pty Ltd (2006) 236 ALR 665; [2006] FCA 1427 at [63] as follows:

    In Australian Competition and Consumer Commission v Danoz Direct Pty Ltd (2003) 60 IPR 296; [2003] FCA 881 at [260], Dowsett J pointed out that the courts are protective of the remedy of the declaration. In his Honour’s view the courts must ensure:

    [206] … that this very useful device is not deprived of its efficacy by over-use or inappropriate use … it is important that any declaration be framed so as to convey a limited and accurate message to those who have an interest in its subject matter. It is unlikely that any good purpose will be served by numerous declarations which merely repeat the various misrepresentations and the various occasions on which they were made. The most effective form of declaration will accurately reflect the impugned conduct in a concise way. Complete accuracy is essential … 

    The remedy of a declaration is not appropriate to record conclusions reached by the court in the course of its reasons: Warramunda Village Inc v Pryde (2001) 105 FCR 437; [2001] FCA 61.

13. The initial declarations proposed by ASIC are overly elaborate and do not meet these requirements.  Instead, they seek to unnecessarily and inappropriately summarise most elements of my reasoning which led me to make findings of contravention against Westpac.  ASIC’s initial proposed declarations are not concise.  Moreover, they are not completely accurate.  

14. As Westpac correctly points out, this latter point can be illustrated by an aspect of the declarations initially proposed by ASIC, which states that Westpac’s trading had “a likely effect on the yields and prices for 1 month Prime Bank Bills traded on 6 April 2010 and maintained or created an artificial price for 1 month Prime Bank Bills”.  Now such a statement does not make clear that I did not find that it was more likely than not that Westpac’s trading affected the yields for Prime Bank Bills.  The finding of “likely effect” was at the lower threshold of a real but not remote chance.  I emphasised this distinction on various occasions in my principal reasons.  Further, the reference in ASIC’s initial proposal to Westpac’s trading having the likely effect of maintaining or creating an artificial price for 1 month Prime Bank Bills has a further vice.  It was not expressly pleaded that Westpac maintained or created an artificial price for 1 month Prime Bank Bills.  The only express allegation of artificial price was in respect of BAB Futures, interest rate swaps and cross-currency swaps, claims on which ASIC failed. 

15. It is supererogation to enshrine in declarations ASIC’s verbiage attempting to encapsulate my findings.  It is neither necessary nor appropriate to descend to ASIC’s level of detail.  There is no reason for me to depart from the approach taken to the form of declarations in the Originating Process and in several of the other BBSW proceedings.  I reject ASIC’s initial formulation and its belated modified formulation recently submitted to my chambers. 

16. Further, in terms of general deterrence, the publication of my principal reasons, the present reasons and the shorter form of the declarations that I propose to make, adequately and clearly identify, dissect, and denounce Westpac’s contravening conduct. 

    PECUNIARY PENALTIES

17. In my view it is appropriate for a pecuniary penalty to be ordered against Westpac in respect of the contraventions of s 12CC of the ASIC Act. Let me elaborate on some relevant principles.

18. In the present context, the power to order a pecuniary penalty arises under s 12GBA(1)(a) of the ASIC Act. In determining the appropriate pecuniary penalty, s 12GBA(2) provides:

    In determining the appropriate pecuniary penalty, the Court must have regard to all relevant matters including: 

    (a)the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission; and 

    (b)the circumstances in which the act or omission took place; and 

    (c)whether the person has previously been found by the Court in proceedings under this Subdivision to have engaged in any similar conduct. 

19. The maximum pecuniary penalty payable under s 12GBA(1) in respect of a provision of Subdivision C or D and if the person is a body corporate, is 10,000 penalty units (s 12GBA(3), item 2). At the time of the contraventions that I am dealing with, a penalty unit was $110 (Crimes Act 1914 (Cth), s 4AA(1)). Accordingly, the maximum penalty for each contravention that I am concerned with is $1,100,000. Now I would note that the penalty unit rate has since increased, but the relevant and lower rate that I am required to apply is that which was in place at the time of the relevant conduct. If there is any perceived inadequacy, that is a function of the legislative choice made at the time. In some respects, ASIC’s artificial recasting before me of the number of contraventions appears to be designed to get around the manifest inadequacy of the then maximum penalty. Now whilst I understand the regulatory ambition driving such an attempt, I reject it. I am applying the law as it was, not what it should have been.

20. I will come back to the question of maximum penalty in a moment. 

21. The principles relevant to the determination of pecuniary penalties are not in doubt.  Let me at this point make some brief observations. 

22. Criminal penalties import notions of retribution and rehabilitation.  But the purpose of a civil penalty is primarily protective in promoting the public interest in compliance, and to be achieved through both specific and general deterrence.  A pecuniary penalty to the extent that the statute permits must put a price on contravention that is sufficiently high to deter repetition by the contravener and by others who might be tempted to contravene.  Its level must be fixed to ensure that the penalty is not to be regarded as an acceptable cost of doing business.  As I have said, both specific and general deterrence are important.  The need for specific deterrence is informed by the attitude of the contravener to the contraventions, both during the course of the contravening conduct and in the course of enforcement proceedings.  And the need for general deterrence is particularly important when imposing a penalty for a contravention which is difficult to detect. 

23. The fixing of a pecuniary penalty involves the identification and balancing of all the factors relevant to the contravention and the circumstances of the defendant, and the making of a value judgment as to what is the appropriate penalty in light of the purposes and objects of a pecuniary penalty that I have just explained.  Relevant factors include the following:

    (a)the extent to which the contravention was the result of deliberate or reckless conduct by the corporation, as opposed to negligence or carelessness;

    (b)the number of contraventions, the length of the period over which the contraventions occurred, and whether the contraventions comprised isolated conduct or were systematic;

    (c)the seniority of officers responsible for the contravention;

    (d)the capacity of the defendant to pay, but only in the sense that whilst the size of a corporation does not of itself justify a higher penalty than might otherwise be imposed, it may be relevant in determining the size of the pecuniary penalty that would operate as an effective specific deterrent;

    (e)the existence within the corporation of compliance systems, including provisions for and evidence of education and internal enforcement of such systems;

    (f)remedial and disciplinary steps taken after the contravention and directed to putting in place a compliance system or improving existing systems and disciplining officers responsible for the contravention;

    (g)whether the directors of the corporation were aware of the relevant facts and, if not, what processes were in place at the time or put in place after the contravention to ensure their awareness of such facts in the future;

    (h)any change in the composition of the board or senior managers since the contravention;

    (i)the degree of the corporation’s cooperation with the regulator, including any admission of an actual or attempted contravention;

    (j)the impact or consequences of the contravention on the market or innocent third parties;

    (k)the extent of any profit or benefit derived as a result of the contravention; and

    (l)whether the corporation has been found to have engaged in similar conduct in the past.

    (a)       Maximum penalty

24. Moreover and importantly, attention must be given to the maximum penalty for the contravention.  But if contravening conduct is not so grave as to warrant the imposition of the maximum penalty, I am bound to consider where the facts of the particular conduct lie on the spectrum that extends from the least serious instances of the offence to the worst category. 

25. In the context of criminal sentencing, the High Court explained in Markarian v The Queen (2005) 228 CLR 357 at [31] that:

    careful attention to maximum penalties will almost always be required, first because the legislature has legislated for them; secondly, because they invite comparison between the worst possible case and the case before the court at the time; and thirdly, because in that regard they do provide, taken and balanced with all of the other relevant factors, a yardstick. 

26. This explanation applies with equal force to the assessment of pecuniary penalties under s 12GBA of the ASIC Act. Proper weight must be given to the statutory maximum. Moreover, it is not appropriate or permissible to treat multiple contraventions as just one contravention for the purposes of determining the maximum limit dictated by the statute, subject to a matter relevant to the “course of conduct” principle that I will discuss later.

27. Now I must identify the maximum pecuniary penalty that may be imposed on Westpac for the contravening conduct on 20 May 2010, 1 December 2010 and 6 December 2010 as a yardstick against which to determine the appropriate pecuniary penalty. 

28. And in this respect ASIC relied upon my observations in Australian Competition and Consumer Commission v Get Qualified Australia Pty Ltd (No 3) [2017] FCA 1018 at [23] where I said:

    the Court may order a person who has contravened ss 21, 29, 79 and 86 of the ACL to pay such pecuniary penalty, in respect of each act or omission by the person, as the Court determines to be appropriate.  Strictly, each communication of a false representation, each failure to adhere to the unsolicited consumer agreement provisions of the ACL and each act of unconscionability involves a separate contravening act for the purposes of s 224(1).

29. In that case, I held that a separate contravening act occurred when: 

    (a)the defendant’s unconscionable conduct came to bear upon or affected each of the four individual consumers referred to in my earlier decision in that litigation (ACCC v Get Qualified Australia Pty Ltd (No 2) [2017] FCA 709); and

    (b)the defendant’s system of unconscionable conduct came to bear upon or affected any individual consumer. 

30. Consistently with that approach and in determining the maximum penalty in the present case, ASIC contends for an analysis targeted to the individual acts of the contravener, Westpac.  ASIC submits that each particular trade or transaction entered into by Westpac on the relevant date in the relevant tenor constitutes a contravening act. It says that the conduct that was unconscionable was trading with the dominant purpose of influencing where the BBSW set and that each trade or transaction was an instance of such conduct that sought to achieve that purpose. Accordingly, ASIC contends that the entry by Westpac into each trade or transaction is properly characterised as a relevant act or omission to which s 12GBA applies.

31. Further, it is said by ASIC that this is consistent with my principal reasons, which noted that “a contravention of either ss 12CB or 12CC may arise … in respect of discrete actions or transactions on specific days” (at [2179]) and that “trading for such an improper purpose in the Bank Bill Market is, of itself, unconscionable” (at [2190]).

32. Leveraging off such a characterisation, ASIC says that there were 58 contravening acts based on the rate set trading calls, including ICAP and Tullett trade data, at least 28 of which were disclosed by the affidavits of Mr Roden and Ms Johnston.  It is said that I should proceed on the basis that Westpac’s entry into each of these transactions was a contravening act, each having been actuated by the relevant improper purpose.  In this regard, ASIC points out that as to 20 May 2010, Ms Johnston accepted that she knew prior to trading that a Prime Bank was a seller in the 1 month tenor on the day and that she therefore may have known that the 1 month BBSW could have set higher, which would be adverse to her interests.  Ms Johnston said in her voicemail that she “tried to keep that down because we had a pretty decent rate set”.  I found that those words “best reflect[ed] her state of mind and purpose at the time” ([1189]).  The words were suggestive of a preconceived plan to engage in trading on that day for the relevant purpose.  And as to the December 2010 dates, there was evidence that Group Treasury employees were forecasting exposure in advance.  It was “premeditated trading” (at [1362]) and Mr Roden “had a plan to spend money” (at [1378]). 

1. ASIC also says that the above approach to acts or omissions is consistent with Australian Securities and Investments Commission v National Australia Bank Ltd (2017) 123 ACSR 341; [2017] FCA 1338 (ASIC v NAB & ANZ), where Jagot J accepted the parties’ joint submissions and made findings in respect of NAB’s conduct that on 20 December 2010 a single NAB employee engaged in two contravening acts by making two offers to sell 90-day Prime Bank Bills with an impugned purpose and on 5 October 2010 a single employee engaged in four contravening acts by making four offers to sell 90-day Prime Bank Bills with an impugned purpose.  Such contravening acts comprised six of the 12 contravening acts admitted by NAB, in respect of which the maximum penalty was $13.2 million (12 attempts at a maximum of $1.1 million each). 

2. But I would note that in the resolution of the ANZ matter the agreed facts before her Honour did not permit consideration of whether individual trades constituted contravening acts or omissions.  Moreover, this possibility was not raised for consideration by me in Australian Securities and Investments Commissions v Commonwealth Bank of Australia (2018) 128 ACSR 289; [2018] FCA 941 (ASIC v CBA). 

3. Generally, on ASIC’s characterisation the maximum penalty contended for by it in respect of Westpac’s 58 contravening acts on 20 May 2010, 1 December 2010 and 6 December 2010 is $63.8 million, being 58 times $1.1 million.  As I have already said, Westpac’s conduct on 6 April 2010 does not attract a pecuniary penalty because it pre-dated the introduction of the civil penalty regime for unconscionable conduct. 

4. Further, ASIC contends that I may consider that in addition to each trade, Westpac also engaged in separate contravening acts each time that it made a bid or offer for the manipulative purpose, even if such a bid or offer was not ultimately accepted.  Adopting this approach would give rise to a maximum penalty exceeding $63.8 million according to ASIC.  Now the number of bids made by Westpac on 1 and 6 December 2010 which did not result in a transaction is unknown.  But on 20 May 2010, Westpac made at least three bids which did not result in trades.  

5. An alternative approach, according to ASIC, would be to focus on Westpac’s manipulative trading on the contravention dates coming to bear on each of the 173 Affected Counterparties by putting them at risk.  On that approach the maximum penalty would be $190.3 million.  It is said that such an approach would be justified by my approach in Australian Competition and Consumer Commission v Get Qualified Australia Pty Ltd (No 3) at [39(b)] and the focus in the relevant statutory provision on the supply or possible supply of financial services to a person, albeit that it is not necessary to identify each person to establish a contravention of the statutory provision.

6. I do not accept ASIC’s analysis.  Let me explain why. 

7. In my view the contention that each and every trade on the 3 contravention dates was a separate contravening act is inconsistent with ASIC’s pleaded case, inconsistent with the evidence, and inconsistent with my findings in my principal reasons.  In summary, on each of the dates, the conduct constituting the contravention was defined in terms of the operative conduct of trading Prime Bank Bills in the BBSW Rate Set Window.  It was not defined in terms of a particular trade or any particular trade.  And this is understandable as the case that ran was in terms of potential effect on an Affected Counterparty by a movement in the BBSW.  That was the gravamen of unconscionability, and I was not concerned with an attempt case.  But the real and not remote chance of influencing the BBSW was never pleaded as being brought about by a single trade, but rather the conduct of trading in the relevant window.  Of course, the trading on a particular day may have been made up by a number of transactions.  But each transaction was not the contravening conduct, but rather the transactions collectively amounted to the trading and therefore the conduct.  Consistently with that, my reasons are replete with references to the unconscionable conduct and Impugned Conduct on four occasions, being 6 April, 20 May, 1 and 6 December 2010.  Of course I am now only concerned with three of these occasions.  No reference was made in my reasons to 58 occasions, and ASIC never ran and importantly never closed with such a case. 

8. It is appropriate to begin by making some observations as to ASIC’s pleaded unconscionability case, which Westpac rightly draws attention to. 

9. ASIC’s unconscionability case against Westpac was pleaded in [105] to [127O] of the Third Further Amended Statement of Claim (the Statement of Claim). It had a number of limbs, as I summarised at [2127] to [2139]. Several can be put to one side as they were not made out, namely, the claim in respect of parties to BBSW Referenced Products issued by parties other than Westpac, the claim based on the “Risk Exposure Conduct”, and the claim that Westpac engaged in unconscionable conduct within the meaning of the unwritten law. But the unconscionability claim which was made out was engaging in the “Impugned Conduct” on the 4 contravention dates found by me in contravention of s 12CC, on the basis that Westpac’s conduct had a real and not remote chance of prejudicing parties to BBSW Referenced Products issued by Westpac (Affected Counterparties) on those dates ([2183] to [2199]).

10. It is necessary to consider the manner in which this claim was pleaded and run at trial.  In this respect, Westpac correctly pointed to the following matters. 

11. First, the contravention of s 12CC was alleged at [126] as follows:

    By reason of the matters set out in paragraphs 111, 115 and 125 above, insofar as the Affected Westpac Counterparties … were not listed public companies, Westpac contravened: 

    a.        … 

    b.the former s 12CC of the ASIC Act (as it then stood) on each of the dates of the Sale Contraventions and Purchase Contraventions pre-dated 1 January 2012. (Emphasis added.)

12. Second, that plea requires consideration of the allegations at [111], [115] and [125] as the source of the alleged unconscionable conduct.  In that respect it was pleaded that the “Impugned Conduct”: 

    (a)was engaged in by Westpac in and for the purposes of trade or commerce within the meaning of the unconscionable conduct provisions of the ASIC Act [111];

    (b)was in relation to financial services within the meaning of s 12CA and in connection with the supply, or possible supply, or acquisition, or possible acquisition, of financial services within the meaning of s 12CC [115]; and

    (c)constituted an unconscionable taking of advantage by Westpac of its position in the Bank Bill Market to the disadvantage of Affected Counterparties or was otherwise unconscionable in all the circumstances [125].

13. Relevantly, the particulars to [125] identified the unconscionability of the Impugned Conduct as arising from Westpac’s purpose of influencing BBSW “on the relevant dates”, the Purchase Contraventions having the actual or likely effect of causing BBSW to be set “on the relevant dates” at a lower yield than it would have been set “on the relevant dates in the absence of the relevant conduct”, and the Purchase Contraventions having the actual or likely effect of influencing the calculation of payments to the disadvantage of Affected Counterparties. 

14. The allegation at [125] and the particulars thereto are important.  They set out why it is said that the Impugned Conduct constituted statutory unconscionable conduct.  As I have just indicated, they particularise “actual or likely effect”.  Moreover, [125] cross-references back to, inter-alia, [95(f)] and [100(f)] which themselves refer in substance to effect or likely effect. 

15. Third, as is apparent, central to the pleaded s 12CC unconscionability claim was the “Impugned Conduct”. The Impugned Conduct is defined at [110] as being that Westpac:

    …

    (e)entered into, and carried out (or purported to carry out) its obligations arising in relation to and under, the Affected Products; and 

    (f)       engaged in the Westpac Rate Set Trading Practice: 

    (i)on the dates of each of the Sale Contraventions and the Purchase Contraventions by engaging in conduct pleaded in Section N above. 

16. Clearly, it is sub-paragraph (f) of [110] which is the key.  Now I found that ASIC failed to prove the existence of the Westpac Rate Set Trading Practice as such.  Accordingly, to the extent that I found that Westpac had engaged in the Impugned Conduct, the relevant conduct was trading in the BBSW Rate Set Window on the specific dates of the “Purchase Contraventions” found by me, being 6 April 2010, 20 May 2010 and 1 and 6 December 2010, with the sole or dominant purpose of influencing the level at which BBSW set on those dates in a way that was favourable to Westpac’s rate set exposure. 

17. Now it is important to note that the “Purchase Contraventions” were defined at [79] as follows: 

    The transactions pleaded in paragraphs 82, 90 and 96 below (each a Purchase Contravention, and collectively the Purchase Contraventions)

18. The particulars to [79] refer to the amended Schedule 2 and Schedule O particulars.  Significantly, both of those documents refer only to the total volume of Westpac’s purchases in the Bank Bill Market on the relevant dates.  They do not identify the individual trades which made up the total volume traded on the day.  Further, the reference to “Purchase Contravention” when used in the singular was a reference to the aggregate volume (or all transactions) constituted by the trading on the stipulated day; it was not a reference to any one trade or transaction on the stipulated day. 

19. Further and consistently, [82], [90], and [96] identified only the aggregate volume of bank bill purchases by Westpac on 6 April 2010, 20 May 2010 and the remaining Purchase Contravention dates respectively.  Relevantly: 

    (a)[90] alleged: 

    “On 20 May 2010, Westpac bought 30-day Prime Bank Bills with a Face Value of $710 million in the Bank Bill Market.”

    (b)[96] alleged:

    “Further, Westpac entered into purchase transactions (Additional Purchase Transactions) of Prime Bank Bills in the Bank Bill Market on each of the dates, and each of the tenors and with a Face Value of each of the amounts set out below:

Date	Relevant Tenor	Amount of Buying
…
Wednesday, 1 December 2010	90-day	$2.77 billion
Monday, 6 December 2010	90-day	$3.03 billion
…

1. Fourth, the effect or likely effect of the “Purchase Contraventions” on 20 May 2010, 1 December 2010 and 6 December 2010 was pleaded at [95] and [100] on the basis of the total volume of Prime Bank Bills bought by Westpac on those dates.  That is, it was alleged that the transactions by which those total volumes were purchased collectively, as opposed to each of them individually, had or were likely to have the effect of: 

   (a)depleting the supply of Prime Bank Bills in the relevant tenor during the BBSW Rate Set Window on each of the Contravention Dates; 

   (b)as a result, causing Prime Bank Bills in the relevant tenor to trade at a decreased yield during the BBSW Rate Set Window on those dates; 

   (c)as a result, causing Prime Bank Bills in the relevant tenor to trade at a yield that did not reflect forces of genuine supply and demand during the BBSW Rate Set Window on those dates; 

   (d)as a result, causing the BBSW Panellists’ respective submitted views to the Australian Financial Markets Association Ltd (AFMA) of the mid-rate of the yield for Prime Bank Bills of the relevant tenor on the relevant dates to be lower than they otherwise would have been; 

   (e)as a result, causing the BBSW in the relevant tenor on the relevant dates to be set by AFMA at a yield which did not reflect forces of genuine supply and demand; and 

   (f)causing the BBSW in the relevant tenor on the relevant dates to be set by AFMA at a yield which was lower than the yield at which BBSW would have been set on that day in the absence of the relevant transactions. 

2. Further, the pleading at [95] and [100] in relation to the contravention dates 20 May 2010 and 1 and 6 December 2010 mirrors the general likely effect allegations made at [35] to [37].  Significantly, it was always ASIC’s pleaded case that the purchase of Prime Bank Bills on any Sydney business day in the relevant period, by Westpac “in sufficient volumes during the BBSW Rate Set Window, was likely to affect the setting of the BBSW for the relevant tenor on the relevant day…” (emphasis added) (at [37]).  ASIC never pleaded or ran a case that any particular individual purchase by Westpac was likely to have such an effect. 

3. Fifth, and as I have already indicated, an essential element of the pleaded s 12CC unconscionability case was the allegation in the particulars to [125] that the Purchase Contraventions had the actual or likely effect of influencing BBSW to the disadvantage of Affected Counterparties. That necessarily required that the conduct constituting each Purchase Contravention have that effect or likely effect. This is because a contravention could not be made out on the pleaded case otherwise. But what was pleaded as a separate “Purchase Contravention” was the aggregate volume of trading on the relevant contravention date. On ASIC’s pleaded case, it was only trading “in sufficient volume” during the BBSW Rate Set Window on each contravention date which had the pleaded effect. And it was only on the basis of the total volume traded by Westpac on each contravention date that it was alleged that Westpac’s trading had the likely effect of influencing BBSW and thereby disadvantaging Affected Counterparties. 

4. ASIC never alleged that each and every trade entered into by Westpac on the contravention dates individually had that likely effect.  Nor could it.  Consistently with this, ASIC never alleged that each separate trade on a contravention date independently had the likely effect of disadvantaging Affected Counterparties.  This is no doubt why the aggregate volume of trading on each contravention date was pleaded as a separate “Purchase Contravention”.  Only the aggregate of the total volume purchased on a contravention date was alleged to have the likely effect on BBSW and therefore the capacity to operate to the disadvantage of Affected Counterparties. 

5. For these reasons, I agree with Westpac that the submission ASIC now makes, that each individual trade by which Westpac purchased Prime Bank Bills on the contravention dates constituted a separate contravention of s 12CC, is outside its pleaded case. And as explained above, the submission ASIC now makes is contrary to two central elements of that pleaded case. One element is that the trading which constituted each alleged contravention was trading which had the effect or likely effect of influencing BBSW to the disadvantage of Affected Counterparties. The other element is that the only trading of Prime Bank Bills which was likely to have that effect was trading in sufficient volumes, as distinct from each individual trade.  In my view, the submission ASIC now makes to inflate the total quantum of Westpac’s maximum liability is not open to it and should be rejected. 

6. Now ASIC has put to me, contrary to the foregoing, that its pleaded Impugned Conduct case did not rely upon establishing effect or likely effect, but rather just the relevant purpose.  Moreover, it says that it was about each individual trade or transaction.  But I disagree. 

7. First, ASIC points to the use of the words “transactions” in, for example, [93] and [95]. But I do not consider that in context that establishes the point in terms of the individual aspect. That is because one is looking in context at the composite expression “the transactions”.

8. Second, the very foundation of the plea uses the concept “Purchase Contravention” which has attached a likely effect aspect (see [79(c)]).  And as I have already said, this picks up the aggregate trades or in composite the trading on the day. 

9. Third, [110(f)] picks up the conduct in section N, which in turn is picking up the likely effect aspect. 

10. Fourth, ASIC’s submission that the treatment of each separate trade as a separate contravention is consistent with Jagot J’s findings in ASIC v NAB & ANZ is inapt.  The findings of attempted unconscionable conduct made by Jagot J in the NAB proceeding reflect the case put against NAB at the time of settlement.  But that case was a different one from the unconscionable conduct case which ASIC had pursued against NAB to that time, and which it continued to make against Westpac.  Moreover, ASIC’s submission is also not consistent with Jagot J’s findings concerning ANZ or my findings concerning CBA.  I will return to these other cases later. 

11. Fifth, there is also another difficulty for ASIC.  Its attempt case against the other banks only had the purposive aspect, not the likely effect aspect.  But here we are not talking of attempted unconscionable conduct but actual unconscionable conduct. 

12. Sixth, ASIC has referred me to some transcript of senior counsel’s oral opening submission said to support its position that likely effect was no part of its unconscionable conduct case on this aspect.  But these references were not convincing.  And nor are they consistent with how the case was pleaded, run or closed.  Notably ASIC made no reference to any oral or written closing submission said to support such a position, although I invited it to provide me with such a reference. 

13. And in any event the transcript reference is equivocal.  Let me set it out: 

    COUNSEL:  On the other days – well, the important point to recognise, your Honour, is our case does not ultimately depend upon showing that there was an effect. 

    HIS HONOUR:  I’m talking about likely effect. 

    COUNSEL:  Or even a likely effect.  It’s enough for us to say that that was the purpose of the trading.  That’s the way we have pleaded it.  It is the way we 35 pleaded it.  It’s the way it is pleaded in paragraph 62 for the rate set trading practice, and it is pleaded that way in the unconscionable conduct part of our pleading as well.  It is enough they were seeking to prove the rate, engaging in that practice.  Not – we don’t have to demonstrate – we say we will, but we don’t have to demonstrate that that did have an effect, that trade. 

    HIS HONOUR:  I am focusing on likely effect.

    COUNSEL:  Yes. 

    HIS HONOUR:  Yes.  You are saying it only had to be a bare possibility. 

    COUNSEL:  Yes.

14. There are a number of points.  First, in opening, senior counsel for Westpac took issue with how ASIC had represented its pleaded case.  Second, ASIC appreciated that it had to show a possibility.  And as is apparent from my principal reasons, I focused on likely effect as a real and not remote possibility. 

15. Let me now turn to another dimension of the problem concerning the forensic landscape and the evidence led before me on the likely effect of manipulative trading. 

16. Consistently with its pleaded case against Westpac, ASIC did not lead any evidence that any particular trades on any of the contravention dates had an effect or likely effect on BBSW.  The focus of ASIC’s forensic case on effect or likely effect was the total volume traded by Westpac on the relevant dates, or at least sufficient volume. 

17. Now ASIC led some interesting expert evidence from Professor Putnins in an endeavour to establish the likely effect of Westpac’s trading on BBSW on each of the contravention dates.  His evidence was largely rejected by me.  But it is relevant to observe that Professor Putnins’ evidence sought to prove a price impact of Westpac’s trading on each contravention date based only on the total volume of Westpac’s trading.  But his evidence never descended to the effect or likely effect of particular individual trades.  This was true of Professor Putnins’ evidence based on microeconomic and market microstructure theory, which I observed was dependent on the concept of sufficient volumes, which Professor Putnins defined only as volumes sufficient to have a price impact.  The circularity of that part of Professor Putnins’ evidence, as I found, meant that it was not capable of providing a basis for a finding that any individual trade had an effect or likely effect on bank bill yields, let alone BBSW.  

1. Similarly, Professor Putnins’ quantitative empirical analysis relied upon, relevantly, Westpac’s “signed trading volume” on each contravention date, namely the total volume of Westpac buying less the total volume of Westpac selling on that date; see at [1767] and the table that I set out at [1772].  ASIC’s case was not put or analysed in terms of individual trades.  One would have thought that this was too obvious from my principal reasons to need to be said.  Further and again, there was circularity.  As I said at [1808] to [1815]: 

   Professor Putnins conducted a regression analysis to discern the relationship between trading in the Bank Bill Market and changes in BBSW.  However, every trade has both a buyer and seller.  ASIC’s case is that buying in sufficient volume is likely to reduce the yield at which Prime Bank Bills trade and therefore BBSW, and vice versa for selling in sufficient volume.  But as Westpac pointed out, simply observing movement in BBSW following a day’s trading cannot make good that theory because any movement in BBSW could be equally correlated to the same amount of buying and selling. 

   So, as Westpac rightly identified, Professor Putnins sought to resolve this difficulty by identifying what he described as the “net signed volume” on each day, being the buy volume minus sell volume or “order imbalance”.  He did so using the BVC approach, which identified net signed volume on a day (i.e. whether there was more buying or selling volume) by looking at whether the price moved up or down.  In simplified terms, he determined whether trading on a given day was to be signed as “net buying volume” or “net selling volume” by reference to whether Prime Bank Bill yields/BBSW went up or down on that day compared with the day before.  And then having so classified the signed volume for each day, he conducted a linear regression of signed volume so determined and changes in Prime Bank Bill yields/BBSW.  As Westpac points out, unsurprisingly, the correlation between the signed volume and the movement in Prime Bank Bill yields/BBSW is very strong.  The latter was in fact used to derive the former. 

   So the first problem with Professor Putnins’ model is that it is circular.  Now although Professor Putnins did not disclose this in his original report, he conceded in the Joint Report that his model was circular at least in so far as it estimated the direction of any price impact from trading in the Bank Bill Market.  As I have explained earlier, that circularity is apparent from equations (1) to (3) and equation (4).  Equations (1) to (3) determined a net signed volume of trading in the Bank Bill Market on any given day (i.e. whether buy volume exceeded sell volume or vice versa) as a function of the change in Prime Bank Bill yields/BBSW between that day and the day before.  Accordingly, if Prime Bank Bill yields/BBSW increased on a day, Professor Putnins’ model determined that selling volume must have exceeded buying volume and thus the signed volume of trading would be negative, and vice versa if BBSW decreased on the day.  The signed volume of trading was then used as the independent variable in Professor Putnins’ model, the form of which is shown by equation (4).  But the dependent variable in equation (4) is also the change in Prime Bank Bill yields/BBSW between the day in question and the day before.  Accordingly, there is built into the model a circular relationship between the direction of the signed volume of trading (which is a function of the change in Prime Bank Bill yields/BBSW), being the independent variable, and the direction of the change in Prime Bank Bill yields/BBSW, being the dependent variable. 

   Further, I agree with Westpac that the circularity in his model affects not only the direction of any price impact but also its magnitude.  That is also apparent from equations (1) to (3), and equation (4).  Equations (1) to (3) determine not only the direction, but also the magnitude of the buy volume and sell volume and thus the signed volume of trading on any given day.  The magnitude of that net signed volume of trading is also a function of the change in Prime Bank Bill yields/BBSW between the previous day and that day.  That is, the greater the decrease in yield from the previous day, the greater the percentage of the total trading volume allocated to buy order flow than sell order flow and the greater the magnitude of the positive signed volume of trading, and vice versa with increases in yield from the previous day. 

   As already clear, the signed volume of trading is the independent variable in Professor Putnins’ model, as shown in equation (4).  As a result, there is built into the model a relationship between the magnitude of that signed volume of trading (which is a function of the magnitude of the change in Prime Bank Bill yields/BBSW), being the independent variable, and the magnitude of the change in Prime Bank Bill yields/BBSW, being the dependent variable.  In essence, the independent variable is a function of the dependent variable.  Further, it should also be apparent from equation (4) that the magnitude of each of those two variables will determine the magnitude of the beta coefficient, which in essence explains the relationship between them.  In my view the model is circular as to the magnitude as well as the direction of price impact. 

   As succinctly and correctly submitted by Westpac, the objective of Professor Putnins’ model was to determine the magnitude of the relationship between the dependent variable (change in Prime Bank Bill yields/BBSW from the previous day) and the key independent variable (signed volume of trading).  Yet the magnitude for the independent variable (signed volume of trading) on a given day was a product of the magnitude of the change in Prime Bank Bill yields/BBSW from the previous day.  The magnitude of the signed volume of trading affected the magnitude of the beta coefficient for that variable.  And the magnitude of the beta coefficient estimated the magnitude of the impact of the signed volume of trading on the dependent variable.  Accordingly the model was circular insofar as it estimated the magnitude of the impact of trading on a change in BBSW.  Professor Putnins constructed a regression analysis where the dependent variable was being regressed on itself. 

   I also note that in Mr Bishop’s supplementary report, he changed the distribution assumption from a t distribution to a normal distribution using the same data.  But the beta coefficient, and therefore the magnitude of the impact of the signed volume of trading on Prime Bank Bill yields/BBSW, then changed materially.  Professor Putnins agreed that changing the distribution but using the same data will produce different magnitudes of the relationship between the dependent and independent variable.  I agree with Mr Bishop that this shows that the magnitude of the estimates is a “function of the circularity built into the model and that assuming different transformations within the estimated circular relationship leads to different estimates of the magnitude of effects”. 

   Further, as Mr Bishop pointed out, the circularity of the model, both in terms of direction and magnitude, is demonstrated by the fact that Professor Putnins’ model when applied to randomly generated data finds a statistically significant result of a similar magnitude. 

2. My finding that Westpac’s trading on the 4 contravention dates (including 6 April 2010) had a likely effect on yields and BBSW at the lower threshold of “real and not remote chance” was based principally on the evidence of Westpac’s witnesses that trading in the Bank Bill Market may have an effect on BBSW (see at [1845] to [1848]).  As those paragraphs make clear, recognition by the witnesses that Westpac’s trading could affect BBSW was based on the potential that buying by one participant in large volume could exert downward pressure on yields depending on the volume that other participants were willing to sell on the day.  In other words, the focus was on the pattern of trading behaviour or sufficient volumes.  But no witness gave evidence that any particular trade by Westpac on a contravention date may have had an effect on BBSW let alone affect the interests of a counterparty under a derivative instrument; it is also to be recalled that I rejected ASIC’s “Risk Exposure Conduct” case.  The potential for impact on BBSW was dependent on considering the whole of trading or at least sufficient volumes of trading in the BBSW Rate Set Window. 

3. Accordingly, there was no evidence at the trial that any particular trade, much less each and every individual trade, had a likely effect on BBSW.  Moreover, the only evidence of significance about the individual trade data from ICAP and Tullett was that it was unreliable in that it did not show the course in which, and the times at which, completed trades were executed; see at [1863], particularly my finding that “[n]o reliable historical information exists as to completed trades, bids and offers during the BBSW Rate Set Window”. 

4. Now ASIC says that none of this evidence was relevant to the unconscionable conduct case but only the market manipulation case.  I found that submission surprising.  It is difficult to see how one could put a case of unconscionable conduct relative to Affected Counterparties without considering the potentiality of the former’s conduct to affect the latter. 

5. Thus far I have been lingering in the foothills of intellectual challenges to ASIC’s attempts to recategorise its case on the relevant contravening conduct.  Let me now turn to my principal findings. 

6. ASIC’s contention that Westpac engaged in unconscionable conduct on 58 separate occasions is not consistent with the form of expression of my findings.  As Westpac correctly identified, those findings (at [2183] to [2204]) relevantly include the following: 

   (a)“I have rejected ASIC’s Rate Set Trading Practice allegation but do accept that the Impugned Conduct was engaged in on four occasions.  I would note at this point that notwithstanding the infelicity of ASIC’s pleading I consider that it has in substance also pursued a case against Westpac concerning the Impugned Conduct on specific contravention dates even if it has not made out its systemic practice plea of a Rate Set Trading Practice as such” ([2184]); 

   (b)“The Impugned Conduct on the four occasions was in connection with” the supply or acquisition of financial services ([2186]); 

   (c)The Impugned Conduct on the four occasions “had the possible effect of causing the payment obligations attaching to the financial services to be different than they otherwise would have been, to Westpac’s advantage and to the relevant Affected Counterparties’ detriment” ([2186]).  Obviously from my principal reasons, that was only so if BBSW had been potentially affected by sufficient or all volumes of trading by Westpac, not any one trade; 

   (d)“the conduct on the four occasions was engaged in for the purposes of influencing the BBSW of the relevant tenor and date” ([2186]); 

   (e)“the conduct on the said four occasions can readily be said to go with or be involved in the relevant supply or acquisition of financial services” ([2187]); 

   (f)“Westpac failed to disclose to the Affected Counterparties that it had engaged in such trading on the said four occasions” and “Affected Counterparties were exposed to loss or detriment in respect of their relevant BBSW Reference Products by reason of the conduct on the four occasions.” ([2190]); 

   (g)“All of these matters in my view support the conclusion that Westpac engaged in unconscionable conduct on the said four occasions” ([2191]); 

   (h)“the concept of good faith is directly inconsistent with the Impugned Conduct to the extent that it was carried out on the said four occasions.  The purpose of the Impugned Conduct on those occasions was to influence the BBSW to Westpac’s advantage and therefore necessarily to the disadvantage of counterparties with opposite exposures on affected products on those dates.” ([2194]); 

   (i)“the Impugned Conduct on the said four occasions ran contrary to the norms of well-regulated financial markets underlying the Corporations legislation.” ([2195]); 

   (j)“Westpac had obligations to support the Bank Bill Market as a Prime Bank, BBSW panellist and member of relevant AFMA committees.  Its conduct on the four occasions ran counter to those obligations.” ([2196]); and 

   (k)“In summary, in my view Westpac engaged in unconscionable conduct on the said four contravention dates in relation to Affected Counterparties.  Its conduct had a real and not remote chance of prejudicing such counterparties. …” ([2199]). 

7. Reference should also be made to [2137] where I said the following: 

   Generally, ASIC has said that in relation to the Impugned Conduct it was unconscionable for Westpac to engage in the Rate Set Trading Practice on particular dates, as doing so would or might affect payment obligations on BBSW Referenced Products to Westpac’s actual or possible advantage and to the detriment of the Affected Counterparties and Other Affected Counterparties. 

8. That could only be a realistic possibility where there was a likely effect on BBSW, albeit at the level of real and not remote chance. 

9. Consistently therewith, I also said at [2144] the following: 

   Now to a large extent both formulations of the unconscionable conduct case are premised on establishing that Westpac engaged in the Rate Set Trading Practice.  But as I have found, I do not accept that Westpac engaged in such a practice.  I will address later the question of any unconscionable conduct concerning the four specific contravention dates that I have previously identified, namely, 6 April 2010, 20 May 2010, 1 and 6 December 2010.  And I would note at this point that I have only found conduct on the four trading days that may have had a likely effect on yields and BBSW at the lower threshold of likely in terms of a real but not remote chance. 

10. Now ASIC has relied upon [2190] and it is appropriate that I set it out: 

    Sixth, I agree with ASIC that in the present case Affected Counterparties were unaware that the BBSW was capable of being manipulated.  Indeed, Professor Stulz opined that the risk of manipulation of traded benchmarks did not emerge publicly until after the relevant period. I will elaborate on his evidence in another context later.  Further, Affected Counterparties were unaware that Westpac had engaged or might engage in trading directed at influencing the BBSW.  Further, Westpac failed to disclose to the Affected Counterparties that it had engaged in such trading on the said four occasions.  Further, Affected Counterparties expected the BBSW to be determined by and reflect genuine market forces of supply and demand, and Westpac was aware of this.  Further, ASIC says that whatever the effect of trading engaged in for the sole or dominant purpose of influencing where the BBSW sets, that is, leaving to one side for the moment the question about likely effect, trading for such an improper purpose in the Bank Bill Market is, of itself, unconscionable.  I agree.  Further, Westpac had the capacity to trade so as to influence, or likely influence, the BBSW to its advantage.  Further, Affected Counterparties were unable to trade in the Bank Bill Market so as to counteract or protect against trading by Westpac directed at influencing the BBSW.  Further, Affected Counterparties were exposed to loss or detriment in respect of their relevant BBSW Referenced Products by reason of the conduct on the four occasions. 

11. Now this may not fully reflect the pleaded case (cf my finding at [2186]).  But in any event that does not support the proposition that a or each particular trade constituted a separate contravention.  That is not how the case was run.  Further, if one adopts ASIC’s focus on purpose for the moment, the case was focused upon the purpose of trading in the relevant window.  That was the pleaded conduct.  The unconscionable conduct on a particular day was the trading for the relevant purpose that was put as something that could affect the BBSW and potentially Affected Counterparties.  ASIC also referred to [2179] but I do not see how that assists given that it was dealing with the system case which failed. 

12. Now I have been referred by ASIC to Australian Competition and Consumer Commission v Meriton Property Services Pty Ltd (No 2) [2018] FCA 1125 at [56] to [65] per Moshinsky J, but that was quite a different case. ASIC also says that Westpac would suffer no prejudice by its reconceptualisation, but I disagree. The course of evidence or conduct of the trial may have been different. In any event there is inherent prejudice in permitting ASIC to depart from how it ran its case.

13. Consistently with the way in which the case was pleaded and run at trial, my findings of contravention of s 12CC were findings of conduct engaged in on 4 separate occasions which had the potential to affect BBSW and thereby disadvantage Affected Counterparties. Those findings necessarily proceeded on the basis that the conduct which had that potential effect on BBSW, so as to give rise to a contravention of s 12CC, was the whole of Westpac’s trading in the BBSW Rate Set Window on each of the 4 contravention dates or at least in sufficient volumes.  I did not find that any particular trade was likely to have that potential effect on BBSW, let alone that each and every such trade was likely to have that effect.  Nor was there any evidentiary basis on which I could do so.  To the contrary, I found that due to the absence of data as to the order of trading “it is difficult to be satisfied that any particular trade by Westpac had a particular impact on the BBSW” ([1839]). 

14. Further, I did not find that every trade by Westpac on the 4 contravention dates, as recorded in the ICAP and Tullett trade data, was entered into during the BBSW Rate Set Window. No doubt most of the trading took place during the BBSW Rate Set Window, but there was no way of knowing whether particular trades, and if so how many, were entered into at other times. It would not have been appropriate to treat, and I did not treat, each and every trade as a separate contravention of s 12CC when there was and could be no finding that each such trade was entered into in the BBSW Rate Set Window so as to have the potential to impact BBSW and therefore Affected Counterparties.

15. Generally, and consistently with all of the above points, I did not hold that any individual trade in Prime Bank Bills by Westpac constituted a separate contravention of s 12CC. As a result, ASIC’s submissions proceed on the basis of findings of contravention that I did not and on the evidence before me could not make.

16. ASIC has also invited me to take alternative approaches to determine the number of Westpac’s contraventions of s 12CC. One of those approaches is to find that, in addition to each individual trade, Westpac also engaged in separate contravening acts each time it made a bid or offer for the purpose of affecting where BBSW set. But again, ASIC neither pleaded nor ran such a case. And nor have I made findings of contravention in accordance with such a case. The other approach that it is suggested that I take has neither been pleaded nor run. And nor has it been found to have been made out. The statute speaks to Westpac’s conduct.  The gravamen of the relevant conduct was not ASIC’s recent “each individual trade” thesis. 

17. Let me now turn to one other matter concerning the meaning of “in respect of each act or omission” in s 12GBA(1).

18. Now as I have said, ASIC’s submission to me is that each trade entered into on 20 May 2010 and 1 and 6 December 2010 attracts a separate pecuniary penalty. In other words, the entry into of each such trade was a separate contravention of s 12CC. But ASIC may be seeking to draw a distinction between a contravention on the one hand, and a “contravening act” on the other hand, based on the language of s 12GBA(1). That is, even though I only found 4 contraventions of s 12CC, ASIC may be suggesting that each trade on a contravention date was a separate “contravening act” making up those 4 contraventions, each of which attracts a separate penalty. But if that is the argument I reject it. The plain meaning of the words “in respect of each act or omission by the person to which this section applies” in s 12GBA(1) is that they are a reference to any act or omission satisfying one of the preconditions to imposition of a penalty as set out in subs 1(a) to (f). In the present context, they refer to each act or omission constituting a contravention by Westpac of s 12CC referred to in subs 1(a). They do not permit a penalty to be imposed in respect of an act or omission which does not constitute a contravention. So much is confirmed by s 12GBA(4), which provides that if conduct “constitutes a contravention of 2 or more provisions referred to in paragraph 1(a)” the person is not liable for more than one pecuniary penalty; that is, conduct attracts a pecuniary penalty if it constitutes a contravention of the Act. Further, to the extent that ASIC relies on my analysis in ACCC v Get Qualified Australia Pty Ltd (No 3) [2017] FCA 1018 in support of such a distinction, that reliance is misconceived. In that case I made clear that when referring to separate contravening acts I was referring to acts each of which was “a separate act by GQA in contravention of the ACL”.  The unconscionable conduct pleaded and proved in that case consisted of interactions between the defendant and individual consumers, including false representations made directly to those consumers by the defendant’s sales representatives and the entry into of agreements with those consumers containing unfair terms.  And there were many hundreds of affected consumers who had those direct dealings with the defendant.  In imposing a penalty of greater than $1.1 million for the defendant’s unconscionable conduct, I made it plain that I had found multiple contraventions of s 21 of the Australian Consumer Law. That case and the characterisation of the relevant contraventions is distinguishable from the present case.

1. Now I accept what Westpac has said concerning the mandatory factors, but otherwise reject its conclusion.  Westpac has not shown the contrition of the other banks.  Moreover, imposing the maximum penalty is the only step available to me to attempt 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. 

   COMPLIANCE ORDER

2. ASIC seeks a compliance order under both s 12GLA of the ASIC Act and s 1101B of the Corporations Act. I consider that it is appropriate to make one but not in the form contended for by ASIC, which is too prescriptive and not properly justified given the very detailed modifications which have now been made to Westpac’s policies and procedures.

3. Section 12GLA of the ASIC Act relevantly provides:

   (1)The Court may, on application by ASIC, make one or more of the orders mentioned in subsection (2) in relation to a person who has engaged in contravening conduct. 

   (2)The orders that the Court may make in relation to the person are: …

   (b)       a probation order for a period of no longer than 3 years; … 

   (4)       In this section: …

   probation order, in relation to a person who has engaged in contravening conduct, means an order that is made by the Court for the purpose of ensuring that the person does not engage in the contravening conduct, similar conduct or related conduct during the period of the order, and includes: 

   (a)an order directing the person to establish a compliance program for employees or other persons involved in the person’s business, being a program designed to ensure their awareness of the responsibilities and obligations in relation to the contravening conduct, similar conduct or related conduct; and 

   (b)an order directing the person to establish an education and training program for employees or other persons involved in the person’s business, being a program designed to ensure their awareness of the responsibilities and obligations in relation to the contravening conduct, similar conduct or related conduct; and 

   (c)an order directing the person to revise the internal operations of the person’s business which lead to the person engaging in the contravening conduct. 

4. Section 12GLA(2)(b), considered with the broad definition of “probation order” in s 12GLA(4), empowers me to make an order directing a contravener, particularly if it has not already done so, to establish a compliance program for employees or other persons involved in the contravener’s business, being a program designed to ensure their awareness of the responsibilities and obligations in relation to the contravening conduct, similar conduct or related conduct.

5. In Australian Securities and Investments Commission v Superannuation Warehouse Australia Pty Ltd (2015) 109 ACSR 199; [2015] FCA 1167, I exercised power under that provision to order a defendant to establish a compliance program.

6. Relatedly, s 1101B(1) of the Corporations Act relevantly provides that:

   The Court may make such order, or orders, as it thinks fit if … on the application of ASIC, it appears to the Court that a person … has contravened a provision of this Chapter, or any other law relating to dealing in financial products or providing financial services … .  However, the Court can only make such an order if the Court is satisfied that the order would not unfairly prejudice any person. 

7. ASIC further submits that a compliance program tailored to addressing the contraventions established falls within the scope of s 1101B. It says that that provision is broad enough to empower me to make an order requiring a contravener to establish a compliance program tailored to remedying the contraventions established. I agree, and would note the following. First and generally speaking, one should not read provisions conferring jurisdiction on, or granting powers to, a court by making implications or imposing limitations which are not found in the express words. Second, it is no objection to an order requiring a compliance program to be established that it is in a form of mandatory injunction; I would note that the illustrative orders set out in s 1101B(4) contain examples that are mandatory in nature. Third, what the court “thinks fit” is not at large. The power must be exercised judicially having regard to the text, context and purpose of the Corporations Act. Now given that this is a power that must relate to a contravention, a compliance program can be readily accommodated within its scope as an order designed to ensure that a contravention of a similar kind does not occur again. And given that one of the purposes of the civil penalty regime is deterrence, a compliance program can address specific deterrence.

8. Let me add the following further observations common to both provisions. 

9. First, both s 1101B of the Corporations Act and s 12GLA of the ASIC Act confer a broad discretionary power. So much is evident from the text of s 1101B(1), which provides that the Court “may make such order, or orders, as it thinks fit”. And whilst s 12GLA is drafted differently, the same point can be made. Moreover, I must consider whether such an order “is necessary in light of the particular circumstances of the contravention, other relief proposed to be granted, and in particular in light of any existing compliance program and steps taken since the contravention occurred”: Australian Competition & Consumer Commission v Renegade Gas Pty Ltd (trading as Supagas NSW) [2014] ATPR 42-485; [2014] FCA 1135 at [100(1)].

10. Second, the compliance program must have a connection with the contravening conduct that has been found; see Australian Competition & Consumer Commission v Z-Tek Computer Pty Ltd (1997) 78 FCR 197 at 205.

11. Third, I must strike the appropriate balance between prescription, so as to avoid uncertainty, and over particularity, so as to avoid unworkability (Australian Competition and Consumer Commission v Virgin Mobile Australia Pty Ltd (No 2) [2002] FCA 1548 at [24] per French J).

12. Now Westpac had compliance policies and procedures in place prior to the contravening conduct.  But these programs were deficient and did not prevent the contravening conduct. 

13. In the circumstances, ASIC submits that its proposed compliance order is within the scope of ss 12GLA and 1101B and is appropriate. It submits that:

    (a)its proposed order will ensure a company-wide awareness of responsibilities and obligations in relation to the contravening conduct or similar or related conduct; 

    (b)there is a sufficient nexus between the contravening conduct and its proposed compliance program; 

    (c)its proposed program sets out with sufficient clarity the steps to be taken; 

    (d)it is in the public interest that Westpac undertake the compliance program to assist it and its employees in understanding the relevant statutory obligations and ensuring compliance with those provisions; 

    (e)its proposed program is more closely tailored to responding to, and deterring future reoccurrences of, the contraventions which I found; 

    (f)its proposed program does not unfairly prejudice Westpac, and places Westpac on a similar footing to the other prime banks (ANZ, CBA and NAB); 

    (g)its proposed program is more prescriptive than Westpac’s proposed orders, and more appropriate as a result; and 

    (h)its proposed program may require minimal changes to Westpac’s current policies and procedures if they are adequate and appropriate. 

14. Now I accept ASIC’s position on questions of statutory power, but otherwise reject ASIC’s proposed compliance regime.  Let me explain. 

15. I found that Westpac’s policies and procedures in relation to the potential manipulation of BBSW during the relevant period were inadequate, and that such inadequacy gave rise to a contravention of s 912A(1) of the Corporations Act. My findings were the following.

16. During the relevant period, Westpac did not have any policies or procedures that specifically addressed trading in the Bank Bill Market or making submissions to AFMA as to Westpac’s view of the mid-rate of the yield for Prime Bank Bills ([610]). 

17. After the relevant period, Westpac put in place a number of policies directed to these matters including the following: 

    (a)In July 2012, Westpac adopted the “Monitoring of WBC Rates Contribution to the AFMA 10am BBSW Rateset” policy, which was focused on the submission process as opposed to the underlying trading that informed the submissions ([611], [2521]).

    (b)In December 2013, Westpac adopted the “WIB Benchmarks Policy”, providing guidelines for its participation in any benchmark setting process ([613], [2522]).

    (c)In February 2014, Westpac adopted the “Monitoring of WBC Trading Activity AFMA 10am BBSW Rateset” policy, which required Treasury traders participating in the Bank Bill Market to complete a daily template setting out their trading activity and providing the rationale behind their actions, which templates were to be reviewed by the risk manager ([614], [2521]).

18. Westpac’s policies and procedures during the relevant period were deficient. And its updated policies and procedures adopted following the relevant period should have been in place during the relevant period, having regard to the general awareness of market participants prior to mid-2012 of the susceptibility of the Bank Bill Market and BBSW to manipulation ([2525], [2530]).

19. Now it is against the background of these findings that it is necessary to assess the need, appropriateness and terms of any order under s 12GLA(2) of the ASIC Act and s 1101B(1) of the Corporations Act.

20. First, it would appear that the deficiencies in Westpac’s policies and procedures in relation to Bank Bill Market trading during the relevant period were partly remedied by the policies and procedures adopted following the relevant period up to 2014. 

21. Second, this position has been substantially reinforced by the substantial enhancements to Westpac’s policies, procedures and training that have taken place since 2014.  The current compliance arrangements in relation to Bank Bill Market trading have been set out in detail in the affidavit of Ms Penny Ward affirmed 26 September 2018 and tendered before me yesterday.  Ms Ward is the Chief Operating Officer, Group Treasury at Westpac.  ASIC has not sought to specifically challenge any detailed aspect of this material other than to complain that Westpac has an internal provider for training when it should have an external provider.  It has not sought to cross-examine Ms Ward.  And it has not otherwise pointed to any substantial deficiency in these new policies and procedures. 

22. Third, as I indicated close to the outset of these reasons, the calculation methodology for BBSW changed on 21 May 2018, with BBSW now determined based on the VWAP of Prime Bank Bills traded between 8.30 am and 10.00 am (ASX Rate Set Window) subject to the ASX BBSW Trade and Trade Reporting Guidelines, which reduces the susceptibility of BBSW to manipulation of the kind addressed by me in the present proceedings. 

23. Let me elaborate on the evidence that has been adduced before me rather than conjecture. 

24. Westpac’s current compliance policies and procedures in relation to the Bank Bill Market include amongst other policies and procedures the “BBSW Trade Execution & Reporting Procedures” adopted by Westpac on 18 May 2018, including several appendices (Westpac BBSW Procedures) which provide the following: 

    (a)All issuing and trading in bank paper is undertaken by the Short Term Liquidity Management (STLM) team.  Traders within STLM who trade in bank paper must be AFMA accredited, must have attended BBSW training facilitated by Westpac's Institutional Bank Compliance team (Compliance) before carrying out any trading in bank paper and have approval from their “Desk Head” as well as from separate market risk personnel to buy and sell bank paper through their “Designated Dealing Authority”.  Dealing Authorities authorise Westpac teams within the Chief Investment Office (CIO), the team within Group Treasury previously known as Portfolio Risk Management or PRM and which includes STLM, to engage in activities relevant only to that particular team’s remit.  

    (b)Further, STLM is not responsible for managing the interest rate and basis risk positions which arise from its trading activities and an information barrier is in place between STLM and the remainder of the CIO.  Pursuant to this information barrier, the system access rights of employees in STLM are restricted in order to prevent their access to any information about Westpac's net rate set exposure, rules are in place regarding communications between STLM employees and other employees including a prohibition on communicating any rate set information or attempting to influence trading activity and, if a STLM team member receives any net rate set exposure information, they must contact Westpac's Group Control Room, which manages conflicts of interest.  Generally, interaction between the trading teams and STLM is required to be kept to a minimum during the rate set window. 

    (c)Further, STLM does not manage any market risk, trading profit and loss outcomes of the CIO or any rate set exposure arising from the daily setting of BBSW.  Those market risks are managed by the Trading Book and Banking Book (the other two teams within the CIO) which are not permitted to trade in bank paper.  Moreover, the daily BBSW net rate set report is held on a restricted secure drive to which STLM does not have access. 

    (d)Employees are expressly prohibited from attempting to influence where the BBSW sets.  If any person becomes aware, or has reasonable grounds to suspect, that such conduct has occurred, the person is to immediately report the conduct to the Group Control Room and Compliance. 

25. And the appendices to the Westpac BBSW Procedures include the following: 

    (a)The STLM Risk and Control Matrix sets out the risks most likely to arise in relation to activities specific to bank paper trading and maps out the controls in place to manage each of those risks. 

    (b)The BBSW Group Treasury Dealer Template is a template which each STLM trader must complete at the conclusion of trading during the ASX Rate Set Window.  STLM traders must note their reasons for trading or not trading during the window, must save completed templates to a secure location and email them to the second line of defence monitoring and surveillance team shortly after completing trading.  This team is comprised of compliance personnel and establishes frameworks, policies, limits and processes for the management, monitoring and reporting of compliance risk. 

    (c)There are written rules containing restrictions on communications that apply between the STLM team and the remainder of the CIO, generally and during the ASX Rate Set Window, including any information about Westpac’s net rate set exposure or any attempt to influence trading activity in bank paper.  There are also restrictions on sharing information between Financial Markets and Group Treasury, which are physically separated on the trading floor by a secure door and belong to separate “user groups” within the electronic systems that store trading information. 

    (d)Other written procedures provide guidance on the sharing of information between Group Treasury and Financial Markets, including example communication scenarios. 

26. On an annual basis, Group Treasury employees are all required to complete an attestation that they are aware of and have read and understood each of Westpac's policies and frameworks.  This includes key policies relevant to bank paper trading such as the “Electronic Communications Policy”, the “Financial Benchmarks Policy”, the “Market Misconduct Policy” and the “Westpac Institutional Bank Conflicts Framework Policies”. 

27. Further, Westpac has in place a compliance training and education program, which requires training to be completed by each employee depending on their role, with such training monitored and informing how Westpac measures the performance of individual employees.  Specific training is provided to Group Treasury employees, including the “Westpac Institutional Bank Conflicts of Interest Framework Training”, which includes an outline of Westpac’s conflict of interest framework, relevant responsibilities of employees and the nature of information barriers, and the “Market Misconduct Policy Training” on both the Market Misconduct Policy and Financial Benchmark Policy, which also includes examples of common forms of market misconduct and details appropriate escalation channels for complaints.  Further, dedicated training was presented by Compliance on the ASX BBSW Benchmark to Group Treasury employees in around November 2017 and April 2018, covering such matters as what constitutes trading for genuine business purposes, appropriate communications between Financial Markets and Group Treasury and trade execution policies. 

28. Further, Westpac via its first line of defence monitoring and surveillance team undertakes a range of monitoring and surveillance activities designed to detect when employees are not acting in accordance with standards expected of them.  Such monitoring includes automated “lexicon alerts” in respect of all Bloomberg and Reuters chats, emails and telephone calls from desk phones within Group Treasury, which alerts are raised when the communication uses a word or phrase that Westpac has identified as potentially indicating inappropriate conduct.  All alerts are reviewed by a surveillance analyst and escalated when appropriate.  

29. Further, each day the second line of defence monitoring and surveillance team compares published BBSW rates with BBSW from the previous two days and, if any unusual movements are observed, will manually review Westpac’s trading with a focus on identifying any transactions which may have been undertaken for the purpose of influencing the level at which the BBSW is set or maintained.  

30. Finally to complete the description, both the first and second line of defence monitoring and surveillance teams are audited and evaluated by a third line of defence team which checks risk management efficacy and compliance with policy. 

31. Generally and importantly, ASIC does not raise any direct and substantial issue or concern with Westpac’s current arrangements (save the internal training provider point), notwithstanding obtaining discovery of documents relating to current compliance arrangements and having been served with Ms Ward’s affidavit.  Further, Westpac’s current arrangements are much more detailed than any evidence led before me or Jagot J concerning the other banks’ compliance arrangements.  Further, as I have intimated, the current compliance arrangements and their adequacy are to be viewed against the new arrangements implemented on 21 May 2018 concerning the calculation methodology for BBSW. 

32. In my view it is appropriate to make an order under s 12GLA(2) of the ASIC Act and s 1101B(1) of the Corporations Act in the terms proposed by Westpac, which provides for Westpac to ensure that appropriate systems, policies and procedures are in place in relation to Bank Bill Market trading and for the adequacy of those systems to be assessed by an independent expert.

33. But I agree with Westpac that it is neither necessary nor appropriate for the s 12GLA(2) order to include the very prescriptive requirements of the compliance program referred to in Order 11 and incorporated in Annexure A to ASIC’s draft orders. I agree with Westpac that Annexure A to ASIC’s proposed orders appears to be drafted on the assumption that Westpac does not have in place systems or procedures in relation to Bank Bill Market trading with the focus on ASIC’s proposal being to implement such arrangements. Yet the substantive content of ASIC’s proposal is already dealt with in my view by Westpac’s existing arrangements. And Westpac’s proposed orders provide for an independent expert to report on the adequacy of those arrangements. I will order that this be done at Westpac’s expense and I will order that ASIC be given an opportunity to have input into the selection of the expert and the terms of any retainer. Moreover, I will reserve liberty to apply in the event that the compliance order needs to be varied if any deficiencies become apparent after the independent expert has reported.

1. In my view, the prescriptive detail in ASIC’s Annexure A is not warranted in the circumstances.  This can be demonstrated by the following examples that Westpac has pointed to and ASIC has not controverted. 

2. Paragraph 4.4 requires that compliance training of Westpac traders be conducted by an external training provider.  But I accept Westpac’s position that this is likely to be less effective than training by Westpac’s legal and compliance functions which have a detailed understanding of Westpac’s business and can better tailor training to deal with the particular compliance situations that might arise in Westpac’s business operations. 

3. Paragraph 7.1.1 requires Westpac to suspend the following employees from issuing or trading bank bills until they have participated in a training program conducted by an appropriately qualified training provider endorsed by an expert.  First, the 8 named individuals in Annexure B, the majority of whom were not the subject of any allegation of improper trading, some of whom are senior executives (including Mr Zuber and Ms Dawson) against whom no suggestion of impropriety has been made and one of whom (Mr Hosie) trades bank bills as part of his current role.  Second, any person who traded bank bills during the relevant period and who currently trades in bank bills, regardless of whether any allegation of impropriety has been made against them.  Third, all persons who were the direct heads or supervisors of the STIRR desk during the relevant period.  In my view, these categories are an over-reach. 

4. Paragraph 7.1.3 requires Westpac to conduct at least fortnightly ongoing spot auditing of each of the persons referred to in the first category I have just mentioned to identify any inappropriate behaviour and for Westpac to provide regular reporting to ASIC of such spot auditing.  But in my view such a regime is not warranted requiring, for example, the fortnightly spot auditing of the behaviour of Mr Zuber, Westpac’s Group Treasurer and Ms Dawson, the Deputy Group Treasurer.  No adverse findings were made against them. 

5. Now ASIC says that Westpac’s orders suffer from various problems. 

6. First, ASIC says that they are insufficiently precise to ensure that all interested parties are sure of what is required of Westpac.  They lack particularity.  Now I agree that they are at a broad level of generality.  But this is against the backdrop of the more detailed procedures in place.  Moreover, the independent expert reporting function is where the value and work of the orders is being done.  And I would also say that if this was a convincing point, then I would not make any compliance order at all.  It would certainly not entail that I should fall back on ASIC’s overly prescriptive order without regard to the current procedures in place.  And it is also not good enough for ASIC to say that its program may require minimal changes to Westpac’s current policies and procedures if they are adequate and appropriate.  If that is right, I should not add to the current policies and procedures until they are shown to be defective.  And that is why I am reserving liberty to apply and making any compliance order subject to further order. 

7. Second, ASIC says that they do not go far enough to ensure that similar conduct will not re-occur.  All that is required is a once off review by an expert in nine months’ time.  It is said that a targeted iterative process of the kind sought by ASIC is more conducive to promoting compliance.  But in the context of what Westpac has in place I disagree. 

8. Third, ASIC says that the sparing formulation of Westpac’s orders is reflective of an underlying narrowness of perspective and an inability to recognise the seriousness of the contravening conduct.  I also disagree.  The detail and comprehensiveness of what Westpac has put in place belies such a suggestion. 

9. Now I accept that it is important to emphasise my findings about Westpac’s breach of AFMA’s Code of Ethics and lack of good faith (at [2193] to [2196]). And even focusing on s 912A, it is important to emphasise that I found that Westpac’s conduct was “deliberate”, that employees “were aware of the significance of the BBSW” and “aware of speculation about Westpac” trading to influence the BBSW (at [2355] to [2358]). And against this back-drop, a robust compliance program is warranted. But it has not been shown that what Westpac has in place is not robust.

10. Fourth, ASIC says that Westpac appears to repeat what it said, effectively, at the trial on liability, namely that it has policies and procedures in place, which include monitoring requirements.  ASIC says that policies, procedures and monitoring of some form were all formally in place during the relevant period.  But it says that what is required to respond to my findings is evidence of their operation or implementation in fact, and assurance that they do work in practice and are responsive to practical experience.  It is said that it is these elements of compliance that ASIC’s orders strive to encourage, and it is these problems that underpinned the deficiencies in what Westpac had in the past.  But it is said that there is no evidence of critical engagement with the findings made or with the conduct, communications and culture which were exposed.  I disagree.  Further, it is said that Westpac’s evidence for the penalty hearing and its retreat into a raft of written policies and procedures does not demonstrate that ASIC’s proposed orders have no utility.  I disagree.  Moreover, the real point is that ASIC has not identified any substantial defect in Westpac’s current compliance procedures other than the internal provider point. 

11. Fifth, ASIC complains that Westpac’s proposed orders would delegate to the independent expert the task of assessing compliance with my orders.  It is said that that is not an appropriate form of order to make in the exercise of my discretion (Australian Competition and Consumer Commission (ACCC) v ACN 117 372 915 Pty Ltd (in liq) (Formerly Advanced Medical Institute Pty Ltd) (2015) 331 ALR 76 at [43]). It is said that in this regard, the role which ASIC’s orders give to an independent expert is to be preferred. What ASIC’s orders carve out is a role for the expert to consider Westpac’s policies and procedures critically, to identify issues with them and to propose changes. It is then up to Westpac, however, to determine how it wishes to respond to those recommendations. But in my view the order that I propose to make would permit of a similar functionality.

12. In summary, I will make the order proposed by Westpac but with some modifications as discussed with counsel.  For completeness, I would also note that even if I had rejected Westpac’s order, I would not have made ASIC’s order which is overly prescriptive and unnecessary in light of Westpac’s current arrangements. 

    COSTS

13. Westpac should pay ASIC’s costs of the penalty hearing.  

14. I should also note that I have previously ordered that Westpac pay 50% of ASIC’s costs of the trial on liability.  I did so for the following reasons. 

15. I have power to order that parties bear costs in specified proportions.  And a relevant factor warranting apportionment is where the plaintiff does not obtain all the relief sought or has not succeeded on all factual and legal bases upon which it sought relief.  Moreover, such an apportionment does not require a precise identification and tallying up of issues on which each party was successful.  It may be determined pragmatically based upon impression. 

16. I formed the view that it was appropriate, in all the circumstances, that ASIC’s recoverable costs of the trial on liability be reduced to reflect the considerable number of issues in the liability hearing on which Westpac succeeded.  In this respect the following may be noted.  First, ASIC succeeded on only some of the alleged contravention dates.  A significant part of the evidence at the hearing was directed to contravention dates on which ASIC’s case did not succeed.  Second, ASIC failed to make out its “Rate Set Trading Practice” case, which formed a significant part of the factual substratum of its case.  It underpinned a significant number of the ss 1041A and 1041B claims, the unconscionable conduct claims and the misleading or deceptive conduct claims.  And a considerable part of the evidence and hearing time was devoted to this practice case.  Moreover, part of this practice case was ASIC’s assertion that trading Prime Bank Bills could not operate as a hedge of rate set exposure risk, a controversy on which ASIC failed.  Third, ASIC failed on some of the issues which it sought to prove by expert evidence.  Professor Putnins’ evidence was not in large part accepted and ASIC abandoned reliance upon Dr Duarte-Silva’s evidence of a causal relationship between trading in the Bank Bill Market and the price of BAB Futures.  Fourth, ASIC did not succeed on its principal market manipulation case, whether under s 1041A or s 1041B.  Fifth, ASIC failed on the substance of its conflict of interest case, to which a large part of the evidence of Professors Stultz and O’Brien was directed.

17. Accordingly, Westpac succeeded on a significant number of the contested issues of fact and law at the trial on liability.  Taking into account Westpac’s measure of success, I considered it appropriate to only award ASIC 50% of its costs on the trial on liability. 

    CONCLUSION

18. Westpac is to pay a pecuniary penalty in the sum of $3.3 million. 

19. I will also make limited forms of declarations and compliance orders. 

20. The orders that I propose to make are as set out at the start of these reasons.  

I certify that the preceding two hundred and twenty-nine (229) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beach.

Associate:

Dated:        9 November 2018