The former CEO of Xinja Bank, Australia’s first neobank which collapsed in 2020, and a former non-executive director have been disqualified by the Australian Prudential Regulation Authority (APRA) in the first disciplinary action of its kind under the Financial Accountability Regime.
Eric Wilson, who led Xinja Bank at the time of its collapse, and former non-executive director Craig Swanger have been disqualified for eight years and 10 years respectively from acting as accountable persons of any authorised deposit-taking institution (ADI) for failing to comply with their accountability obligations.
Swanger today issued a statement to Business News Australia following the ruling by APRA, describing the personal impact of the four-year investigation and subsequent findings and why he agreed to settle the matter (see below).
Xinja, which is currently in liquidation, announced the winding up of its banking operations in December 2020, leading the neobank to return all customer deposits and ceasing to operate as an Australian bank by January 2021.
The disqualifications of the former directors follow an extensive investigation by APRA into the impact that “side agreements” between Xinja and some of its investors had on Xinja’s capital position during 2020. The investigation also sought to determine whether APRA was misled over the bank’s capital position.
APRA launched its investigation into the collapse of the digital bank in May 2021 and the subsequent disqualifications have been subject to review processes.
The investigation found that between May and August 2020, Xinja entered into agreements with three investors purporting to raise CET1 (Common Equity Tier 1) capital, which is considered the highest quality of capital as it doesn’t result in any repayment or distribution obligations on an institution.
Xinja represented to APRA that this capital was CET1 capital, but APRA later discovered 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APRA determined the actions of Wilson and Swanger breached the Banking Executive Accountability Regime, which was superseded by the Financial Accountability Regime (FAR) in March last year.
APRA notes that it sets requirements on minimum capital for authorised deposit-taking institutions (ADI) to ensure they can absorb unexpected losses in their business and to support financial system stability.
The banking regulator describes this as a key pillar of its “unquestionably strong” capital requirements for Australian ADIs, adding that compliance is a key responsibility of “accountable persons of ADIs”.
APRA’s deputy chair Margaret Cole says 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,” says Cole.
“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.
“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.”
Among other findings, APRA says that Wilson failed to comply with his accountability obligations by “not acting with due skill, care and diligence where Xinja raised capital”.
The authority says Wilson either knew or should have known that this could not be CET1 capital, which was misclassified and reported to APRA as CET1 capital
“It would have been immediately apparent to Mr Wilson that there was a significant issue about whether capital raised in accordance with the side agreements could be classified as CET1 capital and he failed to take steps to stop the existence of the side agreements or stop the erroneous classification and reporting of CET1 capital,” says APRA.
In Swanger’s case, APRA says that in his role as a non-executive director and an accountable person of Xinja, he failed to act with “honesty and integrity”.
APRA says he also was found to have not dealt with APRA in “an open, constructive and cooperative way, where in response to a request by an external investigator appointed by APRA for documents relating to arrangements with three of Xinja’s investors, Mr Swanger altered documents which he knew would be provided by Xinja to investigators appointed by APRA”.
“The impact of these alterations was to remove content that showed that capital raised by Xinja was incorrectly classified as CET1 capital,” says APRA.
“Providing all relevant documents unaltered would have put APRA on notice that there had been a change to the investment documents and allowed APRA to further consider how and why those changes had occurred.”
Swanger was also found to have not acted in a constructive and cooperative way where APRA was not informed of the side agreements and in relation to concerns within Xinja of the impact of the side agreements' impact on the capital that was raised.
Wilson received a shorter disqualification period than Swanger after APRA took into account that he did not breach his obligation to act with honesty and integrity under under Section 37CA(1)(a) of the Banking Act.
Statement from Craig Swanger
In the statement issued to Business News Australia, Swanger took issue with APRA's findings while also revealing the personal toll the investigation has exacted upon him.
“I respect APRA’s role in protecting Australia’s financial system, but I do not agree with its findings about my time at Xinja," says Swanger.
“Reluctantly, I agreed to settle the matter based on professional medical advice.
"In late 2022, I suffered a stroke resulting in a coma and major heart surgery. It was a significantly challenging time. However, I remained committed to co-operating with APRA, and I was confident that I would be vindicated through the independent tribunal process.
“In the end, however, due to health concerns I have chosen to settle the matter to achieve certainty and closure. My focus needs to be on recovery and supporting my family.
"After four long years, continuing a lengthy tribunal process would have been an exhausting distraction."
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