Tim Boyd| Australian Financial Review| 13 August 2019
In a landmark case for responsible lending, the Federal Court has dismissed allegations against Westpac, brought by the corporate regulator, that it breached responsible lending laws more than a quarter of a million times.
Justice Nye Perram told a Sydney court room on Tuesday morning that the Australian Securities and Investments Commission must pay Westpac’s legal costs, after he dismissed the case.
The judgment lasted five minutes, after some debate from ASIC’s legal team about the specifics of which legal costs would be paid.
The regulator took Westpac to court over allegations it breached responsible lending laws 261,987 times between 2011 and 2015. ASIC claimed Westpac used a “frugal” benchmark – the household expenditure measure (HEM) – to estimate potential borrowers’ living expenses.
ASIC argued Westpac approved some loans using the HEM, when the customers’ actual declared expenses were higher than the benchmark.
Westpac said it acted in good faith when assessing the loans and satisfied its legal obligation to lend responsibly by not providing customers with loans that were “unsuitable”.
In Justice Perram’s judgment, he said a customer’s declared living expenses would only be “necessarily relevant” to whether they could make loan repayments if one could identify “some living expenses which simply cannot be foregone or reduced beyond a certain point”.
He called this point the conceptual minimum. The example he used was food. He said there must be a minimum amount of money that must be spent on food in order to survive.
“But that mimimum is an entirely different concept to the declared living expense of what the consumer actually spends on food.”
“I may eat Waygu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.
“Knowing the amount I actually expend on food tells one nothing about what the conceptual minimum is. But it is this conceptual minimum which drives the question of whether I can afford to make the payments on the loan.
“Without additional information, I do not consider that it is possible to accept that the consumer’s declared living expenses tell one anything about their capacity to meet the repayments under the loan.”
ASIC commissioner Sean Hughes said the regulator was carefully reviewing the judgment.
“ASIC took on the case against Westpac because of the need for judicial clarification of a cornerstone legal obligation on lenders, this is why ASIC refers to this case as a ‘test case’,” he said.
“As a regulator, it is our role to test the law.
“The obligation to assess applications builds on the obligation on banks to make inquiries about a borrower’s financial circumstances and capacity to service a loan and to verify the information that borrowers give banks.”
Chief executive of Westpac’s consumer division, David Lindberg, said Westpac took its responsible lending obligations very seriously and “has always sought to lend responsibly”.
“This is an important test case for the industry, and we welcome the clarity that today’s decision provides for the interpretation of responsible lending obligations,” he said.
Westpac and ASIC tried to settle the matter last November. However, the Federal Court refused to rubber stamp a settlement that would have seen the bank pay a $35 million fine for breaching lending laws.
In that judgment, Justice Nye Perram said the proposed settlement failed to articulate how Westpac had breached lending laws.
“How can the court be expected to assess the reasonableness of the proposed penalty if it be left in the dark about what the actual problem is?”
However after Tuesday’s result, no fine will be paid at all.