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Westpac's new best friend? Australian Federal Court rejects settlement with regulator

BIScom Subsection: 
Nigel Morris-Cotterill

It's one of those times where there is double take. Are you reading it right? A Court has said it will not approve an agreed settlement between a financial institution and a regulator? Oh, OK, it must be that the Court thought that the penalty was too light and he's sent the parties away to decide how much more should be paid, or perhaps penalties beyond money should be added?

No, that's not it. It's far more fascinating than that.

(previous story)

Today Westpac's biggest problem is that it stood in the Federal Court and told the Court to do as it's told, that its job is to rubber stamp deals not to inquire into them. In legal language, the bank's position is that that an agreement between the parties in litigation can be an agreement to oust the jurisdiction of the Court.

Courts don't like that sort of thing.

The first point is that the Court approval is not a formality. If it were, then there would be no reason to appear before the Court. A deed between the bank and ASIC would do just as well. Courts are required to approve all kinds of things including, in criminal cases, plea deals. While the ASIC action is not a prosecution, it has some similarities. Civil penalties can be assessed in many jurisdictions: that's what the UK's unified regulator, the FSA, began and it's continued by its several successors. Penalties can be appealed to a dedicated tribunal. But that's not the route Australia took.

The argument about whether an approval is a rubber stamp has been going on for a while. In 2013, in ASIC v Ingleby, the Victorian Court of Appeal "raised concerns that the current approach to Court approval of civil penalty settlements, as set out in two Full Federal Court decisions, fettered the Court’s discretion, reduced the Court to a ‘rubber stamp’, and compromised the separation of powers." (See further reading, below)

The first case that caused trouble was the Federal Court case of NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission in 1996. The Court specifically said that the agreed facts should be accepted and the agreed penalty should be adhered to: "A proper figure is one within the permissible range in all the circumstances. The Court will not depart from an agreed figure merely because it might otherwise have been disposed to select some other figure, or except in a clear case." So, the Federal Court should not, if following its own precedents, go behind the agreement unless there are specific circumstances causing concern.

However, in the Victorian Court, they were not impressed: Harper, J, hearing an appeal, said that the problem was separation of powers. It is, he said, the Court that exercises the power of punishment; regulators investigate and prosecute. Courts, he said, must make sure that agreements do not "transfer the power to impose penalties to the regulator. More generally, too ready an acceptance of a settlement because of the efficiencies and savings associated with settlement ignores the important role that Courts must play in ensuring that serious contraventions of regulatory statutes are adequately denounced, and punished." (see Legg and Emmerig, below, University of New South Wales, Centre for Law, Markets and Regulation).

The bank, then, might not have been quite as rash as it first seems when its argument is laid out: there is precedent, albeit precedent that is challenged. But even that precedent does not say that there is no power in the Court to go behind the settlement when it finds a good reason to do so and the only non-good reason is that the Court thinks the financial penalty should be higher.

Big deal, readers all over the world are saying. It's the Aussies and no one pays them any attention. That's a mistake. It is a big deal, and there's no sarcasm in that.