Australia’s banking and wealth management sector has been hit by a number of misdeeds and oversights. Late in 2017, the government created a Royal Commission to probe into a raft of problems over mis-selling, weak AML controls and lapses, and other regulatory matters. Senior figures at a number of banks have resigned and been replaced. (See an overview of these stories here.)

Challenges
In a statement, Fitch said that APRA's actions will “further challenge the bank, but should ultimately result in WBC being better placed to address evolving industry risks”. 

If regulators find against Westpac, the bank will have to set aside more money to cover its costs. There are risks of further management turmoil and instability, hitting operations.

“Fitch believes further operational risk charges, management changes and remediation could arise should the bank's deficiencies in non-financial risk management exceed the regulator's expectation or if breaches of the Banking Act, including the Banking Executive Accountability Regime, are found. This would place further pressure on the bank's ongoing business,” it said.

APRA's additional capital charge raises WBC's total operational risk capital add-on charge to A$1 billion, placing it on par with Commonwealth Bank of Australia (AA-/Negative/aa-). 

Westpac expects the capital charge to reduce its common equity Tier 1 ratio by 16 basis points. Fitch said such a cut will not affect the bank's ability to meet APRA's “unquestionably strong” minimum of 10.5 per cent.

Fitch has an AA-/Negative/aa- rating on Westpac.

AML lapses and breaches of sanctions of countries such as Iran, Sudan and Cuba have prompted a wave of fines, C-suite resignations and licence cancellations in jurisdictions such as Singapore, Denmark, France and Australia. In Europe, to give one example, Copenhagen-based Danske Bank’s executive leadership has been replaced over AML failings linked to its Estonia branch. Other European banks have been allegedly implicated.

In Asia, a massive corruption scandal centred on the state-created fund, 1MDB, has prompted criminal investgations in Singapore, Switzerland and the US. Singapore’s regulator has kicked out Falcon Private Bank and BSI, both Swiss firms, from the Asian city-state. The US government has slapped heavy fines on banks such as BNP Paribas ($8.9 billion, May 2015) for sanctions breaches. In the small Mediterranean island of Malta, the jurisdiction has been rocked by claims – hotly denied by Prime Minister Joseph Muscat – that he and ministers used offshore Panama accounts to launder money. Several senior Malta government ministers have resigned. Maltese regulators removed a banking licence from the lender Pilatus exactly a year ago for AML failings.

The profusion of AML cases raises questions about what systems banks should use when onboarding clients and handling existing ones, such as making better use of technology to flag up problems early on. The way that bankers are remunerated, and the corporate ethos they should have to protect the reputation of a bank, are also hot topics for this industry.