Australia's big banks face large fines from regulator

ANZ Banking Group, National Australia Bank (NAB) and Westpac are preparing to defend themselves in court against allegations of market manipulation and unconscionable conduct. The Australian Securities and Investment Commission (ASIC) is seeking to sue NAB $52m, ANZ $44m and Westpac $16m for their transgressions. While the banks are gearing up to fight the charges, ANZ and Westpac sources have suggested there is no possibility of a settlement. 

The statements are expected to reveal the role of other central financial markets figures and institutions in setting short-term interest rates.

Another banking source said that "trust between the banks and ASIC was disintegrating" as their respective positions became more entrenched.

On Friday trader transcripts filed to the court by ASIC revealed exchanges the regulator alleges were attempts to move the bank bill swap rate in a favourable direction, foreshadowing a potentially lengthy court battle.

The banks are said to have been encouraged by Federal Court judge Jonathan Beach's desire to fast-track and combine the bank cases, a move which the banks favoured and ASIC did not. ASIC was hoping for the ANZ case, which is said to be its strongest, to be heard first which they then hoped would facilitate a speedier and lest costly resolution in the other cases.

By combining the cases into a single hearing, the judge may also form a more holistic view of market practices, which the banks hoped might support their public posturing that their actions were appropriate to hedge interest rates in a fiercely competitive market. .

"I notice it is alleged on one day that you [ANZ] had one strategy and Westpac had the opposite," Judge Beach said in the June hearing.

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ASIC chair Greg Medcraft is understood to be keen to reach an agreement to avoid the costly court process. He said he has a preference for settlements "rather than have a lengthy court case that may go on for years. As a banker, I never like spending money on legal fees," he told BOSS Magazine in a profile published on Friday.

But the banks, which are budgeting tens of millions of dollars that they would have paid in settlements, may deplete ASIC's $80 million war-chest.

ANZ Bank offered about $20 million to settle the case, sources said, while ASIC wanted around $100 million. Sources estimated the banks had already spent in the tens of millions on legal fees defending the claims. The case is scheduled to be heard in court the second half of 2017.

In taking on the regulator, bank chiefs and their boards are risking their reputation at a time of intense political heat. They have also privately expressed concerns about the potential for class actions if they admit guilt, a point that has divided legal and market experts who are unsure as to whether the bank's counter-parties have been materially impacted by the alleged moves in the bank rate.

Others have suggested that with the Coalition victory now confirmed the Labor-led call for a royal commission into the banks may soften the urgency for a settlement.

However, sources said banks are said to be concerned that Commonwealth Bank, the only bank yet to be served with court papers, may agree to a settlement with ASIC to avoid further damage to its reputation following. Such a move could increase the pressure banks to follow suit.

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Commonwealth Bank is expected to be served with their papers shortly and their role in the rate set is viewed as limited.

ASIC's case against the banks is multi-pronged as they are suing the banks for both market manipulation and unconscionable conduct

The regulator's legal team is said to be confident it can prove the banks engaged in unconscionable conduct because even though their actions in attempting to influence the bank bill rate in a certain direction could be considered to be accepted amongst sophisticated traders, they failed to make a myriad of counter-parties, from companies to investment funds, aware of their conduct.

The banks, however, are gearing up to fight this charge, with sources in the NAB expected to show evidence that traders within various divisions of the bank did not co-operate, making it harder for the bank to influence the rate in their favour.

The only way a bank would settle is if they could pay a fine and not admit any guilt, sources said, but ASIC have ruled out that possibility.

With Patrick Durkin



