Where will the buck stop? Attribution of wrongdoing in a post Banking Royal Commission era

Responsibility for wrongdoing was an overarching theme of the public hearings in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Commission) and in the Final Report released by Commissioner Kenneth Hayne on 1 February 2019 (Report).

A critical question for any financial service entity or officer facing litigation involving allegations of wrongdoing will be whether they are responsible at law for the alleged misconduct. Central to this will be the way in which Courts are likely to attribute motive, purpose and intention of individuals to corporations in light of the recent case of ASIC v Westpac [2018] FCA 751 (Westpac decision).

Responsibility lies at the top

The Report focusses upon a company’s board of directors and senior management taking responsibility for the misconduct attributed to their institutions during the Commission.

Commissioner Kenneth Hayne said:

“There can be no doubt that the primary responsibility for misconduct… lies with the entities concerned and those who managed and controlled those entities: their boards and senior management. Nothing that is said in this Report should be understood as diminishing that responsibility. Everything that is said in this Report is to be understood in the light of that one undeniable fact: it is those who engaged in misconduct who are responsible for what they did and for the consequences that followed.”

The Commissioner’s view was that “effective leadership, good governance and appropriate culture within the entities are fundamentally important” and “closely connected”.

A number of the examples of misconduct raised during the Commission and in the Report involved administrative or system based errors. At its worst, that misconduct was said to likely amount to dishonest conduct in contravention of section 1041G of the Corporations Act 2001 (Cth).

Courts likely to take a ‘contextual’ view of attribution

Justice Beach delivered judgment in ASIC v Westpac Banking Corp (No 2) [2018] FCA 751 on 24 May 2018, midway through the public hearings of the Commission. His Honour confronted the question: how can the state of mind of a company be assessed or determined when it has “no soul to be kicked, no body to be damned…”?

The answer to this in Australian Courts was found by identifying the “controlling or directing mind and will” of the company. The requisite mental and conduct elements were only attributable to the corporation if they could be traced directly to the board, senior management or someone to whom management powers had been specifically delegated.

Beach J identified a series of fundamental problems with that approach and, in its place, put forward a test more like that applied in the UK. He held that that in considering the context and purpose of the relevant rule:

“The question becomes: whose state of mind was for the purpose of the relevant rule of responsibility to count as the knowledge or state of mind of the company?”

Self-evidently, following this test, the relevant person for attribution of purpose or intention will vary depending on the organisation, structure and the specific laws being applied. The seniority of that person may be relevant, but will not be determinative.

In the Westpac decision, Beach J found that two particular traders had engaged in the misconduct and that the misconduct was to be attributed to the company. Key factors in this assessment included the nature of the position the two traders held and, in particular, the autonomy they were given.

Looking forward

The test adopted by Beach J for the attribution of wrongdoing at law has the potential to produce unexpected and uncertain results in any prosecutions or litigation falling out of the Report. It will require the Court to undertake a contextual analysis of the financial services entity’s structure and the role and responsibilities of the individuals involved, the outcome of which may be far from certain.