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)¹ 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. They are the first disqualifications under the FAR.

Xinja, now known as A.C.N. 618 937 054 Limited, is in liquidation after returning deposits and handing back its ADI licence to APRA in 2021.

The disqualifications 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 and whether APRA was misled in relation to the bank’s capital position. APRA’s investigation commenced in May 2021 and the disqualifications have been subject to review processes.  

Between May and August 2020, Xinja entered into agreements with three investors purporting to raise CET1 capital. CET1 capital is considered the highest quality of capital because it does not result in any repayment or distribution obligations on an institution. Xinja represented to APRA that this capital was CET1 capital. However, 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of Mr Wilson and Mr Swanger in relation to this matter breached the Banking Executive Accountability Regime, which was superseded by the FAR in March last year.  

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.  

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.

“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,” Ms Cole said.

Craig Swanger
 

During 2020, Mr Swanger was a non-executive director and an accountable person of Xinja.

APRA found that Mr Swanger failed to comply with his accountability obligations as an accountable person by:  

• not acting with honesty and integrity, and not dealing 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. 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;
• not acting with integrity in his involvement in Xinja’s entry into the side agreements with investors where he knew the capital raised under them was not CET1 capital, but would be classified as CET1 capital, and caused the disguise and obscuring of the substance of the capital;
• not acting with due skill, care and diligence in raising capital for Xinja that he knew or should have known could not be CET1 capital and did not take steps to stop the capital being erroneously classified and reported to APRA as CET1 capital, and did not satisfy himself that agreements with an investor that required APRA’s consent had been provided by Xinja to APRA; and
• not taking reasonable steps to prevent matters arising that would adversely affect the prudential standing of Xinja where he knew Xinja had erroneously reported capital raised as CET1 capital, did not take steps to provide the side agreements to APRA nor ascertain whether capital raised was misrepresented to APRA and did not take steps to put in place adequate procedures to stop Xinja erroneously classifying funds as CET1 capital.

APRA has disqualified Mr Swanger for a period of 10 years.

Eric Wilson
 

During 2020, Mr Wilson was the CEO and an accountable person of Xinja.

APRA found that Mr Wilson failed to comply with his accountability obligations by:

• not acting with due skill, care and diligence where Xinja raised capital that Mr Wilson knew or should have known could not be CET1 capital, which was misclassified and reported to APRA as CET1 capital, in circumstances where APRA was not informed of or provided with the side agreements relating to the capital raising. 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;
• not dealing with APRA in an open, constructive and cooperative way where APRA was not informed of the side agreements and in relation to concerns within Xinja of these side agreements’ impact on the capital that was raised. Mr Wilson knew or should have known of the impact of the side agreements on the status of Xinja’s CET1 capital and failed to advise APRA and/or failed to satisfy himself that APRA had been advised of this issue; and
• not taking reasonable steps to prevent matters arising that would adversely affect the prudential standing of Xinja where he did not take steps to put in place adequate procedures to stop Xinja misclassifying the capital that was raised as CET1 capital.

APRA has disqualified Mr Wilson for a period of eight years. Mr Wilson’s relative disqualification period reflects that he did not breach his obligation to act with honesty and integrity under s 37CA(1)(a) of the Banking Act 1959 (Cth).

¹Mr Wilson and Mr Swanger are also disqualified from being an accountable person of an authorised non-operating holding company (NOHC) of an ADI, and any significant related entity of an ADI or NOHC of an ADI.