The Federal Court of Australia has today ordered Westpac Banking Corporation to pay a penalty of $9.15 million in respect of 22 contraventions of section 961K of the Corporations Act (the Act), and to pay ASIC’s costs of the proceeding.
The court case relates to poor financial advice provided by a former Westpac financial planner, Mr Sudhir Sinha, in breach of the best interests duty and related obligations under the Act. Westpac is directly liable for these breaches, which attracts a significant civil penalty, because the law imposes a specific liability on licensees for the breaches of their financial advisers.
The decision comes as a result of civil penalty proceedings brought by ASIC against Westpac in June 2018 (18-175MR). ASIC’s investigation revealed internal Westpac reviews, including an internal bank investigation in 2010, had raised concerns about Mr Sinha’s compliance history yet he continued to receive several ‘high achievement’ ratings from Westpac. It was not until 2014 that Mr Sinha was dismissed by Westpac and March 2015 that Westpac reported Mr Sinha’s conduct to ASIC.
The trial took place before Justice Wigney in April 2019, during which Westpac admitted that, as Mr Sinha’s responsible licensee, it had contravened the Corporations Act. The exact number of contraventions and penalty that should be imposed were contested by ASIC and Westpac.
In its decision, the Court found Mr Sinha failed to act in the best interests of his clients, provided inappropriate financial advice, and failed to prioritise the interests of his clients, in four sample client files identified by ASIC. Westpac is directly responsible for the breaches of the best interests obligations by Mr Sinha under section 961K of the Act.
‘Westpac, as Mr Sinha’s responsible licensee, failed to properly monitor and supervise Mr Sinha for a period of time. This meant his customers were not provided with advice in their best interests. ASIC brought this case as a result of Westpac’s suspected contraventions of the law and failures to observe its duties. The court has found that Westpac contravened the law in this regard’ ASIC Deputy Chair Daniel Crennan QC said.
In the judgment, Justice Wigney observed:
‘The relationship between Westpac and Mr Sinha was structured so that Mr Sinha was able to share in the commissions and fees earned or derived when, as a result of his advice or recommendations, clients signed-up for financial products in which Westpac or associated companies had an interest. As will be seen, that rather cosy arrangement turned out to be fruitful for both Mr Sinha and Westpac, but not always for their clients.
Unfortunately for four couples, it was subsequently discovered that the recommendations that Mr Sinha made, and the circumstances in which he made them, were deficient and defective, both as a matter of process and in substance. That should not have been a complete surprise to Westpac because Mr Sinha’s less than satisfactory conduct as a financial adviser had previously come to the attention of certain senior officers of Westpac as a result of various internal compliance reviews, audits or investigations.’
His Honour further found that Westpac ought reasonably to have known, from 1 July 2013, that there was a significant risk that Mr Sinha would not comply with the best interests obligations and that it failed to do all things necessary to ensure that the financial services covered by its licence are provided efficiently, honestly and fairly, and to comply with financial services laws. In doing so Westpac also contravened sections 912A(1)(a) and (c) of the Act.
Justice Wigney noted:
‘Westpac also stood to gain from Mr Sinha’s actions. That perhaps explains why Mr Sinha was permitted to continue as Westpac’s representative and partner despite the serious compliance breaches which were exposed by the 2010 investigation. It is tolerably clear that, at least prior to the commencement of the FoFA reforms, some officers or employees at Westpac were either unable or unwilling to terminate the services of a representative who achieved high achievement ratings and was plainly proficient and successful at promoting the financial products of Westpac and its associates. It may readily be inferred that Westpac’s compliance systems and practices were less than rigorously applied, at least in Mr Sinha’s case.’
In June 2017, ASIC banned Mr Sudhir Sinha from providing financial services for five years (17-178MR).
The penalty handed down by the Court was determined under the previous penalty regime where the maximum penalty for each contravention was $1 million. Penalties have increased after legislation was introduced in March 2019 and will apply to contraventions that have occurred after March 2019. Civil penalties have significantly increased, now to be capped at $525 million (19-032MR).
ASIC’s action against Westpac falls within ASIC’s Wealth Management Major Financial Institutions Portfolio. The Portfolio focuses on the financial services conduct of Australia’s largest financial institutions (NAB, Westpac, CBA, ANZ, Macquarie and AMP) with respect to credit and retail lending, financial advice, fees for no service, superannuation trustees, insurance, unfair contract terms and other licensee obligations, and other conduct arising from the Financial Services Royal Commission.