A massive regulatory investigation launched in 2013 into interest rate rigging inside the big four banks is heading for the courts.
It is understood that the Australian Securities and Investments Commission is on the verge of launching legal action against ANZ Banking Group amid a massive industry-wide investigation into manipulation of the bank bill swap rate (BBSW).
The regulator is believed to have drafted statements of claim and will file a civil action against ANZ in relation to breaches of the law relating to BBSW between 2007 and 2013.
An announcement is expected to be made in the next few weeks.
Ten individuals are also expected to be implicated in the civil suit. It is not known whether ASIC will file one action against ANZ and the 10 individuals, or follow the British model and launch a separate action against the institution and individuals.
ASIC's action will send chills throughout the other big banks, which are part of ASIC's BBSW rigging and collusion investigation. The investigation into the big four is being conducted sequentially.
It is understood the entire investigation will be wrapped up within the next six to 12 months.
A spokesman for ASIC declined to comment. He said ASIC doesn't comment on big investigations.
Pressure on ANZ chief
The legal brawl will add to the number of issues and scandals facing ANZ's new chief executive Shayne Elliott, who has been out on the hustings trying to downplay recent blockbuster allegations of a toxic culture inside the bank's global markets division.
The allegations, filed against the bank in a $30 million unfair dismissal claim by Etienne Alexiou, paint a picture of a depraved culture that included cocaine snorting by some traders, obscene language, sex, excess booze and excessive bonuses.
Alexiou was dismissed last September on the grounds that he breached the bank's code of conduct. In his statement of claim he alleges he warned some of the bank's senior management about unethical treatment of investors.
He and six staff were suspended by ANZ in late 2014 while the bank conducted its own investigations into BBSW.
On Friday, ANZ lodged its defence, which included releasing confidential messages between Alexiou and traders in other banks. The messages were highly offensive.
ANZ is understood to be aware of ASIC's impending legal action. In a statement to The Australian Financial Review an ANZ spokesman said: "We are continuing to co-operate with ASIC's investigation and remain in discussion with them."
Questions from Dastyari
When ASIC fronts the Senate on Thursday, Senator Sam Dastyari will ask commissioners for an update on the BBSW rigging investigation.
Senator Dastyari has taken a keen interest in ASIC's investigation. Last year he caused a stir when he named ANZ as the bank that was trying to stonewall ASIC's investigation. He told ANZ to stop "obfuscating the investigation".
His comments followed a plea by ASIC chairman Greg Medcraft for certain banks to stop using "legalistic" approaches to contest requests for information.
The investigation into BBSW is massive. The importance of benchmarks – and rigging them – cannot be underestimated. Benchmarks are integral to the functioning of markets. As Medcraft told the Senate: "They power the economy . . . They are like the wiring of a house . . . Interest rates are part of the wiring of the financial system."
To put it into perspective, the BBSW is used to set interest rates on hundreds of billions of dollars of wholesale and retail fixed-income securities.
Senator Dastyari told the Financial Review that "rate-rigging isn't a victimless act". He said if rigging has gone on, every Australian is a victim of it. He said if the allegations he was hearing were true, "these bankers have been committing insider trading on a scale never seen before in this country".
ASIC's investigation into the banks came on the back of the 2012 global banking scandal, in which it was found that some of the world's most well-known banks deliberately manipulated the most widely used interest rate in the world, the Libor (the London interbank offered rate), to boost their trading profits.
Banks including UBS, Royal Bank of Scotland and Barclays were fined billions of dollars.
In Australia, the Libor scandal had a domino effect, with BNP-Paribas informing ASIC in November 2012 it had uncovered conduct between 2007 and 2010 that suggested it was seeking to influence its BBSW submissions. (Until September 2013 the BBSW was calculated on submissions made by 14 market participants who made up the benchmark panel. Submissions were made to the Australian Financial Markets Association, which has since revised the system.)
The upshot was ASIC entered enforceable undertakings with BNP, Royal Bank of Scotland and UBS and imposed fines totalling $3.6 million – largely due to Australia's ridiculously low penalty rate.
However, ASIC's investigation into the big four has not been as straightforward.
It has involved trawling through an enormous amount of records, emails and transcripts between traders inside each of the banks, and their conversations with each other over a number of years.
The impending legal action against ANZ will open up a can of worms. It will also bring about some healthy debate about how the government needs to beef up Australia's embarrassingly low penalty regime.
The punishment needs to fit the crime. The penalties and fines need to be big enough to hurt the business.
It should also raise the urgency to introduce a special legislative provision for benchmarks.
And it should accelerate a decision on how BBSWs should be calculated going forward.
In 2013 Australia's umbrella body of financial regulators, the Council of Financial Regulators, changed the way the BBSW was calculated, to move from a submissions-based market to a market data-based benchmark, but this might well be tweaked again.
Given BBSWs form the lifeblood of the economy it is vital that it is robust and reliable, and that the institutions involved have integrity. The investigation into rate rigging relates to activities between 2007 and 2013. If the ANZ or the other banks are found to have engaged in untoward activity over that period they should be served up the most severe of penalties.
Shining a light on wrongdoing is the only way to clean up a financial system that has been embroiled in a string of scandals in the past few years. It also acts as a strong deterrent.
Culture change needed
But until the culture is changed this country will continue to face one scandal after the next.
ASIC and APRA have recently been vocal about culture. In a speech in Hong Kong last year APRA chairman Wayne Byres put it well when he said regulators can't regulate culture into existence. "Ultimately, the financial sector will collectively determine the values it wants to uphold and the behaviours it wants to display. Regulators and supervisors can only do so much," he said.
He added that the current focus of banks talking about ethics shouldn't be "just a passing fad". He is right. But until boards address the structure of executive remuneration and their KPIs, little will change. Medcraft put it succinctly when he said last September: "Poor culture – such as one that is focused only on short-term gains and profit – often drives poor conduct. Conversely, good culture will drive good conduct."Author: Alele FergusonSource: Australian Financial Review