Westpac has been cleared of manipulating a key Australian interest rate but the bank did engage in unconscionable conduct by trying to influence it, the Federal Court has found.
Justice Jonathan Beach found corporate regulator ASIC had "not made out its case" that the bank engaged in market manipulation or market rigging.
However, he did find the bank engaged in unconscionable conduct four times in 2010, by trying to rig bank bill swap rates (BBSW).
"Westpac's conduct was against commercial conscience," the judge said in his ruling in Melbourne on Thursday.
"I agree with ASIC that such trading on the said four occasions is contrary to the statutory standard that all things be done to ensure that financial services are provided efficiently and fairly.
"None of Westpac's conduct on the said four contravention dates could be described as fair."
ASIC had accused the bank of engaging in misconduct and market manipulation to push the BBSW higher or lower between 2010 and 2012.
The BBSW is a key interest rate that affects the rate at which institutions borrow and lend money.
Justice Beach said the market manipulation or rigging alleged had not been made out but the unconscionable conduct to influence the rate was "deliberate".
"Westpac failed to ensure its traders were adequately trained not to engage in trading with such a sole or dominant purpose," he said.
"This should have been reinforced and stipulated to them orally and in writing."
The judge found the bank contravened its financial services licensee obligations, by reasons of these inadequate procedures and training.
Justice Beach also noted traders such as Colin Roden were awarded "not insubstantial bonuses" at that time, and Westpac's Group Treasury's profit and loss was at least a factor in awarding those bonuses.
"Generally, Westpac's bonus structure allowed for Group Treasury staff to earn many multiples of their base salary as a result of their financial performance," he said.
However, the judge conceded it was another thing to say that traders engaged in manipulative trading.
"But I do agree that the financial incentives (albeit indirect as they are not directly referable to specific trading activities) are supportive of ASIC's case."
Westpac said in a statement it was committed to working with regulators in a constructive manner, "including when we have a genuine difference of opinion".
"When that occurs our aim is to resolve the difference in an open, transparent and respectful way," it said.
An ASIC spokesman lauded the judgment as a "very significant and positive outcome for the integrity of the Australian financial market".
The three other big banks settled out of court over the same accusation of rate rigging but Westpac decided to fight on.
The size of any penalty is yet to be decided. Under the ASIC Act, one count of unconscionable conduct alone draws a $1.1 million penalty.
In May, CBA agreed to pay $25 million to settle action brought against it by ASIC over bank bill swap rates for attempting "to engage in unconscionable conduct".
The amount is half that paid by rivals National Australia Bank and ANZ in similar settlements related to alleged manipulation of the key rate.
Costs were reserved on Thursday, with parties to return to court at a date to be fixed.
Australian Associated Press
