Federal Court Judge Tim McEvoy on Tuesday found that while the bank's conduct was not deliberate, it occurred over a relatively lengthy period, from 2017 to 2023.
The Australian Securities and Investments Commission pursued Westpac in 2023 after it was found the bank had failed to respond to more than 200 online hardship requests from its customers over the six-year period.
Justice McEvoy found the requests were made by customers of Westpac and its subsidiaries St George Bank, Bank SA and Bank of Melbourne.
The customers were struggling to keep up with repayments on home loans, credit cards, personal loans, car loans and other responsibilities.
"I accept that Westpac's contraventions in this case were very serious," Justice McEvoy said.
"They impacted many vulnerable customers and continued over an extended period. It may in fact be said that the circumstances faced by the affected customers means that their financial vulnerability cannot be overstated.
"While the contraventions were not suggested to be deliberate and arose instead from inadequate systems and operational failures, I have accepted that they were grossly negligent."
ASIC deputy chairwoman Sarah Court said the penalty sends a clear message to Westpac and other lenders that they must do better in responding to customers seeking assistance.
"Westpac failed the very customers who needed help when they needed it most. These were customers who were asking for some breathing room for a range of reasons including domestic abuse, natural disasters, serious illness or the loss of their job," she said.
"Instead of providing a safety net for these customers, Westpac's systemic failures let them slip through the cracks."
Westpac has been ordered to pay the regulator's costs.
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