ASIC appeals Westpac’s success in the responsible consumer lending test case

In Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244, the Australian Securities and Investments Commission (ASIC) has brought a ‘test case’ considering alleged breaches of responsible lending obligations against Westpac Banking Corporation (Westpac).

In particular, ASIC alleged Westpac breached the National Consumer Credit Protection Act 2009 (Cth) (the Act) through the use of its computer operated loan approval system. Specifically, ASIC argued Westpac had committed two breaches of the Act, in circumstances where:

1. In approving its home loans, Westpac allegedly failed to have regard to any of the living expenses declared by consumers on their loan application forms and thereby failed to take into account each consumer’s financial position when conducting its assessment of affordability
2. In answering the questions posed by section 131(2)(a) of the Act, Westpac allegedly breached the Act when assessing loans which had an initial interest only period before payment of the principal was required. In assessing those loans, Westpac treated them as if there was no initial interest only period and instead, amortised the principal over the life of the loan.

Ultimately, Justice Perram dismissed ASIC’s application with costs, stating [at 6] that the case failed “on both the facts and as a matter of statutory interpretation“.

Interestingly, it was also noted by the Court that this was “a case about the operation of the financial lending laws without any allegation of irresponsible lending” [at 9].

The Law

In reaching its decision, the Federal Court examined the provisions under Division 3, Part 3-2, in Chapter 3 of the Act, with particular emphasis on the questions stemming from the application of section 131(2)(a) of the Act. Referred to throughout trial and judgment as the ‘s131(2)(a) Questions’, Perram J declared, “so far as the consumer’s financial position is concerned, the Act requires a credit provider to ask itself only whether (1) ‘the consumers will be unable to comply with the consumer’s financial obligations under the contract’ or, alternatively, (2) whether the consumer ‘could only comply with substantial hardship’: s131(2)(a).”

Decision

In reaching his decision, Justice Perram stated the only statutory purpose for which the information collected under section 130 of the Act is obtained, is to answer the s131(2)(a) Questions, that is, “is it possible for the consumer to service the loan at all and, if it is, can it nevertheless only be serviced by the making of repayments which would put the consumer in circumstances of hardship?”

His Honour found it is not mandatory for a financial institution to consider all of the financial circumstances of a consumer, as many of those circumstances (such as the consumer’s superannuation or declared living expenses) are not relevant to either of the s131(2)(a) Questions.

This judgment has gained attention for Justice Perram’s colourful comments on luxury items such as “finest shiraz”, “wagyu beef” and “caviar” [at 76 and 78] in an attempt to demonstrate the types of items a consumer may indulge in purchasing prior to entering into a home loan. In assessing a consumer’s ability to afford a loan, His Honour considered these “declared living expenses” are not necessarily a good indicator of what a consumer would have to spend on necessities once they have a significant loan to service.

In any event, the Court also decided ASIC’s case failed on the facts insofar as it alleged Westpac did not take into account the consumer’s declared living expenses, because it did.

Evidence was tendered at trial about the process Westpac had adopted in collecting and assessing consumers’ financial information. Importantly, although the consumers’ information was entered into and assessed by Westpac’s automated decision system (ADS), the ADS comprised over 200 rules which were applied to the information obtained from the consumers before it would generate a recommended outcome for each application.

Importantly, the “70% Ratio Rule” was triggered if a consumer’s declared living expenses exceeded 70% of their verified monthly income, in which case those consumer’s loan applications would be referred for manual processing. It was therefore accepted by the Judge that the “70% Ratio Rule” did take into account a consumer’s declared living expenses and was considered a measure of unsuitability.

Finally, in relation to ASIC’s case concerning an initial interest only period, the Court considered ASIC’s contention that Westpac was legally required to assess the serviceability of a loan on the basis of repayments which would be due once the interest only period had expired, or alternatively, by reference to the additional cost of interest incurred on an interest only loan.

Ultimately, His Honour rejected this in its entirety, concluding [at 8] “Westpac’s legal obligation was to ask and answer the s131(2)(a) Questions. The fact that it did so as if the loan did not involve an initial interest only period does not mean that it did not answer those questions“.

The Appeal

On 10 September, ASIC filed an appeal of the decision to the Full Federal Court. ASIC’s Notice of Appeal (available from its website here: https://download.asic.gov.au/media/5263790/19-246mr-notice-of-appeal-1.pdf) confirms that ASIC is appealing Justice Perram’s conclusions in respect of both the assessment under section 129 of the Act and the interest only loans point.Justice Perram’s finding that Westpac did take into account the consumer’s declared living expenses by means of the “70% Ratio Rule” will be challenged on appeal.

Key takeaway

The Federal Court’s decision highlights the discretion lenders have in their assessment process, so long as sufficient weight is given to the questions posed by section 131(2)(a) of the Act in assessing whether a loan is unsuitable, that is —

1. is it possible for the consumer to service the loan at all? and, if it is
2. can it only be serviced by the making of repayments which would put the consumer in circumstances of hardship?’

The Court ultimately concluded a consumer’s entire financial position is not a mandatory consideration for the purposes of assessing a credit contract as unsuitable.

Essentially, as stated by Justice Perram [at 82] “…a credit provider may do what it wants in the assessment process… what it cannot do is make unsuitable loans.”

ASIC has appealed the decision to the Full Federal Court. Watch this space.

Authored by:

Kimberley Arden, Partner

Laura Fraser, Solicitor