The former CEO and a non-executive director of collapsed neobank Xinja Bank have become the first people to be disqualified by ASIC for failing to comply with accountability obligations.
The Australian Prudential Regulation Authority (APRA) has disqualified the former CEO of Xinja Bank (Xinja) and one other director from being or acting as accountable persons of any authorised deposit-taking institution (ADI) under the Financial Accountability Regime (FAR) for failing to comply with their accountability obligations.
Former CEO Eric Wilson has been disqualified for a period of eight years, while non-executive director Craig Swanger has been disqualified for 10 years.
The duo have become the first people to be disqualfied under the FAR.
What happened?
Xinja Bank (now known as A.C.N. 618 937 054 Limited) collapsed in 2020, after making the shock announcement that it would hand back its banking licence and cease offering banking products.
At the time of the announcement, Xinja had 37,884 customers with 54,357 individual deposits worth more than $252 million.
While the neobank had launched deposit accounts, it had not yet started offering lending products. It had ceased offering its savings product to new customers in a bid to ease funding pressures and preserve its savings rate and then undertook capital raises in order to gain more funds.
However, it was one of several neobanks to struggle to get its lending products off the ground and Xinja Bank completed its return of customer deposits in 2021 and transferred the remaining tail of deposits to National Australia Bank (NAB). It is believed that the bank’s issues with raising capital (and delays with receiving a $433 million commitment from Emirates’ World Investments) delayed the launch of its lending products, which would have balanced the cost of deposits. It had previously suggested that it would have worked with the broker channel once its loan suite was off the ground.
APRA said that the disqualifications came after an extensive investigation (which commenced in 2021) into the impact that “side agreements” between Xinja and some of its investors had on Xinja’s capital position during 2020.
The regulator was also investigating whether it had been misled in relation to the bank’s capital position.
APRA flagged that, between May and August 2020, Xinja entered into agreements with three investors purporting to raise CET1 capital (considered the highest quality of capital because it does not result in any repayment or distribution obligations on an institution).
Xinja reportedly presented to APRA that this capital was CET1 capital. However, APRA found that the transactions involved Xinja entering into side agreements together with share subscription agreements with the investors.
The side agreements contained additional terms that undermined the investments’ status as CET1 capital, in turn undermining APRA’s capital regime.
APRA sets requirements on ADIs’ minimum capital to ensure they can absorb unexpected losses in their business and to support financial system stability. It is a key pillar of APRA’s “unquestionably strong” capital requirements for Australian ADIs. Complying with laws and regulations governing capital raising and reporting is a key responsibility of accountable persons of ADIs.
APRA therefore determined the actions of Wilson and Swanger in relation to this matter breached the Banking Executive Accountability Regime (which was superseded by the FAR in March 2024).
As Xinja's CEO and an accountable person in 2020, APRA said Wilson failed his accountability obligations by not acting with due skill, care and diligence when capital he knew or should have known could not be CET1 capital was raised and misclassified. He was found to have failed to deal with APRA in an open, constructive and cooperative way by not informing them of the existence of the side agreements and the concerns they raised about the capital's status. Ultimately, Mr. Wilson did not take reasonable steps to prevent the issue, failing to implement adequate procedures to stop Xinja from misclassifying and erroneously reporting the capital to APRA.
Swanger, a non-executive director and accountable person for Xinja in 2020, was found by APRA to have failed his accountability obligations, resulting in a 10-year disqualification. He was found to have altered documents provided to APRA's external investigator to conceal that capital raised was incorrectly classified as CET1 capital, which removed crucial content about the investment arrangements. Furthermore, he was involved in using side agreements with investors, knowing the funds could not be classified as CET1 capital, and failed to take reasonable steps to prevent this misclassification from being reported to APRA.
Deputy chair Margaret Cole said the disqualifications demonstrate that APRA is willing to impose serious consequences on accountable persons who fail to comply with their obligations.
“An accurate understanding of banks’ capital adequacy framework is essential for APRA to protect depositors by ensuring banks have the financial resilience to withstand a crisis. It is vital that accountable entities and accountable persons are open and cooperative with APRA so that it may effectively discharge its responsibilities for overseeing the safety and soundness of Australia's financial system,” she said.
“These individuals failed to act in accordance with their duty to ensure Xinja had effective capital in place and to be open, constructive and cooperative with APRA in reporting Xinja’s capital position. These were serious failures and the disqualifications, which are the first under the FAR, reflect the gravity of this conduct.
“The FAR means greater accountability standards for regulated entities, their directors and senior executives, and tougher consequences for when they are not met. APRA recognises that the actions of directors and senior executives shape the conduct and operating culture of the entities they lead. Where accountable persons fall short, APRA will hold them to account,” Cole said.
[Related: Xinja returns customer deposits in Australian first]
