The embattled business leader has been facing heavy pressure to stand down in recent days after the country's financial watchdog filed civil legal proceedings in Federal Court last Wednesday, accusing the bank of breaching anti-money laundering and counter-terrorism finance (AML/CTF) laws 23 million times.
The case has triggered a furor in Australia, with a chorus of government ministers demanding accountability and the banking and securities regulators starting their own investigations.
Westpac has an annual general meeting scheduled for December 12. "Obviously there are some systemic issues that need to be addressed". As much as A$7.5 billion was wiped off Westpac's market capitalisation after the damaging scandal emerged.
In interviews with local media at the weekend, Maxsted had said firing Hartzer during the crisis would be destabilising for the bank.
"It is clear that we have fallen well short of what the community expects of us, and we expect of ourselves".
However, he is to forfeit unvested bonuses and is ineligible for future bonuses.
Westpac's reputation is in tatters after money laundering accusations.
Among the most damaging allegations against Westpac, the regulator accused bank executives of "indifference" to clear evidence that some worldwide transfers were used to fund child exploitation. Most of the offences concerned the late reporting of overseas transactions.
The most serious allegations relate to a separate consumer product known as LitePay.
The bank's systems were allegedly used to transfer hundreds of thousands of dollars to child exploitation rings in south-east Asia, including to pay for live child sex shows.
It's the lack of oversight of customer payments linked to child trafficking and child pornography that's triggered the outcry.
For chief executive Brian Hartzer, the departure appears to be an abrupt change of course given that the previous day he cancelled end-of-year parties but assured staff "this is not a major issue", according to The Australian newspaper.
The swift turnaround by United States born Brian Hartzer underscored how politically and publicly sensitive missteps by Australia's big banks have become in the wake of a bruising public inquiry that found rampant profiteering in the industry. That case was eventually settled with the bank paying a record A$700 million fine.
In step with this, Westpac's current Chief Operating Officer - Gary Thursby - will assume the role of acting Chief Financial Officer.
Australia's four finest banks - ANZ, Commonwealth Monetary institution, Westpac and Nationwide Australia Monetary institution - had been the targets earlier this year of a royal commission of inquiry which uncovered rampant malpractice.