Overview
On 13 August 2019, Justice Nye Perram handed down his landmark decision on the boundaries of responsible lending obligations in Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 (Wagyu and Shiraz case). (Our summary of the decision is here.) The case was brought by the Australian Securities and Investments Commission (ASIC) as a test case, to provide 'judicial clarification of a cornerstone legal obligation on lenders'.
In dismissing ASIC's case, Justice Perram held that a lender 'may do what it wants in the assessment process' and is not obliged under the responsible lending provisions of the National Consumer Credit Protection Act 2009 (Act), to take into account a prospective borrower's actual/declared expenses when assessing whether a loan will be unsuitable to consumers. ASIC appealed against the decision and, in December 2019, released responsible lending guidance (RG 209), notwithstanding that the outcome of the appeal was yet to be determined.
On 26 June, the Full Federal Court handed down its decision. In separate judgements Justice Lee and Justice Gleeson dismissed ASIC's appeal with costs.
ASIC's case
The National Consumer Credit Protection Act 2009 (Cth) (NCCP Act) requires lenders to assess whether loans will be unsuitable for consumers.
Broadly, ASIC argued that Justice Perram erred in failing to find that the manner in which Westpac assessed the unsuitability of 261,987 home loan applications between December 2011 and March 2015 breached these obligations. For reference, ASIC's notice of appeal is here.
ASIC's argument had two parts.
1. Unsuitability assessment – the proper construction of responsible lending obligations
Broadly, ASIC argued that the method used by Westpac – an automated decision system which used a range of rules, the serviceability rule, the 70% rule and the HEM benchmark - to assess the unsuitability of the loans did not assess the consumer's likely ability to comply with their financial obligations as required under s131(2)(a), because each consumer's actual living expenses were not taken into account as (ASIC alleged) was required under the Act.
Section 131(2)(a) requires that lenders consider two questions (the 131(2)(a) questions) when assessing whether a loan will be unsuitable:
- Is it likely that the consumer will be unable to comply with the consumer’s financial obligations under the contract? and
- Is it likely that the consumer will only be able to comply with the consumer’s financial obligations under the contract with substantial hardship?
ASIC argued that 'upon a proper construction of the provisions of Div 3 of Pt 3-2 of the Act, the primary judge ought to have held that Westpac did not make an assessment of the s 131(2)(a) Questions and accordingly did not make the unsuitability assessment required by s 128 of the Act'.
2. Interest only loans
For loans with interest only periods, ASIC argued that Justice Perram erred in concluding that the lender made an assessment of unsuitability within the meaning of s131(2)(a) because in order to have met this requirement, ASIC considered it necessary for Westpac to have taken into account the higher repayments at the end of the interest-only period (which Westpac did not do).
The decision
Proper construction of the legislation
The Court confirmed that there is no statutory requirement for lenders to necessarily take into account a prospective borrower's actual living expenses
Gleeson and Lee JJ held separately, that as a matter of statutory construction, there is no obligation for lenders to take into account a prospective borrower's actual living expenses as ASIC contended.
Justice Gleeson states,
'The Act cannot be construed to require Westpac to consider the total figure for declared living expenses in each case for the purpose of assessing the consumer’s likely ability to meet their financial obligations...'
'The language of the Act does not support the degree of prescription contended for by ASIC. Rather, the Act leaves it open to the licensee to decide:
(1) what inquiries it will make under s 130(1)(a) and (b), provided that those inquiries are reasonable;
(2) what steps it will take to verify the consumer’s financial situation under s 130(1)(c), provided that those inquiries are reasonable; and
(3) how it will use the results of its inquiries and verification to make the unsuitability assessment, provided that it in fact assesses whether the contract will be relevantly unsuitable for the particular consumer and noting that the licensee is otherwise motivated by the Act to refrain from entering into an unsuitable contract.'
Similarly, Justice Lee disagreed with ASIC's interpretation of the obligations.
'The difficulty with this argument [ASIC's argument] is that the word “assessment”, as used in ss 128(c) and 129, does not seem to me to incorporate the obligation for which ASIC contends. There is no textual requirement specifying how the assessment is to be undertaken, and indeed ASIC accepted that “it remains open to a licensee to choose how it conducts the assessment required"'
Justice Lee went on to state that,
'There is substance in Westpac’s submission that if, as ASIC accepted, what a lender did with the information obtained under s 130 was “legitimately up to the lender”, and not all information gathered needed to be used, how does one delineate the information to which Westpac must have regard, from information to which it need not have regard? Nothing in the text allows a licensee in the position of Westpac to know which specific parts of the information obtained must be used in the assessment to avoid incurring a civil penalty. This uncertainty is difficult to reconcile with a mandatory requirement, implied from the text, that in performing an assessment under s 129, Westpac must have specifically used (by “having regard to”) the consumer’s Declared Living Expenses…'
'I respectfully agree with the primary judge (see J[71]) that it does not follow that the statutory purpose can only be achieved by taking into account all information collected, regardless of its relevance or materiality to the assessment of unsuitability'.
No error in finding that Westpac did not contravene responsible lending obligations
At first instance, Justice Perram found that as a question of fact Westpac did take into account customer's actual living expenses through the application of the 70% rule (though there was no statutory requirement that the bank to do so).
Justice Lee did not 'consider the primary judge fell into error in dealing with the Declared Living Expenses issue'. Justice Gleeson also agreed that primary judge did not err in 'concluding that Westpac asked and answered the s 131(2)(a) Questions and, accordingly, the primary judge was correct to conclude that ASIC’s case failed'.
The HEM benchmark
Their Honours Gleeson and Lee JJ, did not identify any issue with use of the Household Expenditure Benchmark as part of Westpac's process for assessing unsuitability. Justice Gleeson accepted Westpac's evidence that its 'systems and processes were designed to ensure that a customer would meet their financial obligations to the bank by ensuring that the loan was not unsuitable for the customer and that the customer had the ability to service the loan without suffering substantial hardship'.
Justice Gleeson states,
'Westpac’s ADS sought to answer the s 131(2)(a) Questions most particularly by the Serviceability Rule. The application of the Rule required calculations of the individual consumer’s Discounted Monthly Income, Assessed Monthly Repayments and Outgo, and the identification of an HEM benchmark figure applicable to the consumer’s circumstances. It is not fairly described as an assessment “without regard to the circumstances of the individual concerned”, and it is plainly directed to the risk of the particular consumer being unable to meet their financial obligations under the proposed credit contract without significant hardship as measured by the HEM benchmark'.
Justice Lee states,
'This was an unusual case, being a case alleging a serious want of compliance with responsible lending norms, divorced from consideration of any facts about any specific consumers. It was Westpac’s job to assess suitability and although not determinative, for my part, it is far from intuitively odd that Westpac would focus on independent, objective data as represented by the HEM Benchmark and use the Declared Living Expenses in the way it did (through the use of the “70% Ratio Rule”).'
Interest only loans
At first instance, Justice Perram rejected ASIC's argument that Westpac breached the Act in the manner in which it answered the s 131(2)(a) Questions in the case of loans with interest only periods. His Honour held,
'Westpac’s legal obligation was to ask and answer the s 131(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 ask and answer those questions. ASIC alleges that Westpac contravened the Act in this way on 154,351 occasions across the same period as its first allegation (these loans are a subset of the 261,987 loans which figure in ASIC’s primary case). ASIC’s case on these loans fails too'.
Justice Gleeson, Justice Lee and Justice Middleton separately agreed with Justice Perram's approach.
(Possible) push for law reform?
The Financial Services Royal Commission's Final Report made no express recommendation to ban the use of the Household Expenditure Measure (HEM) or the use of other benchmarks to verify prospective borrowers’ ability to service a loan. However, Commissioner Hayne noted with approval the shift by industry away from using such benchmarks. ‘I consider…steps taken by banks to strengthen their home lending practices and to reduce their reliance on the HEM – are being taken with a view to improving compliance with the responsible lending provisions of the NCCP Act’.
Noting the decision was then still pending, Commissioner Hayne added that should this interpretation of the content of the obligation be successfully challenged, that the law should be altered. 'If the court processes were to reveal some deficiency in the law’s requirements to make reasonable inquiries about, and verify, the consumer’s financial situation, amending legislation to fill in that gap should be enacted as soon as reasonably practicable'.
[Note: For Commissioner Hayne's discussion of the use of benchmarks see: Financial Services Royal Commission Final Report, Volume 1 at p57-59. See also: FSRC Final Report: Lending implications]
ASIC's statement in response to the judgement makes no reference to either a possible further appeal, or to pushing for a tightening of obligations. Rather, ASIC Commissioner Sean Hughes said that the regulator will ‘review each of the separate decisions carefully – including what additional measures or clarification may be required to support compliance with the Credit Act.' More particularly, ASIC flagged that it will 'carefully consider the Court’s determination and any revisions that are necessary to our [responsible lending] guidance'. ASIC released updated responsible lending guidance (RG 209) in December 2019.
In light of economic impact of the COVID-19 pandemic, and the focus on enabling banks to keep up the supply of credit to prospective borrowers, and in light of the government's decision to prioritise reforms that directly support recovery efforts, it seems unlikely that ASIC will push for law reform at present (even were the regulator to determine that this is desirable).
[Sources: ASIC media release 26/06/2020; Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111; Westpac media release 26/06/2020]
