The Full Federal Court has dismissed the Australian Securities and Investments Commission’s (ASIC) appeal against Justice Nye Perram’s decision to overturn its responsible lending case against Westpac Group, which has since been dubbed the “wagyu and shiraz” case.
Two out of three judges in the Full Federal Court have upheld the court’s initial decision.
Reacting to the news, ASIC commissioner Sean Hughes told Mortgage Business that he was “disappointed” with the decision, adding that the regulator would consider its next steps, with ASIC entitled to pursue the matter in the High Court.
“[We] felt there was strong merit in taking the appeal. We felt that the first instance judgment left some uncertainties, particularly for us as a regulator in terms of applying the law,” he said.
“Naturally, we’re disappointed that we have lost on a two-to-one basis. We don’t commence litigation to lose, but we also commence litigation because it is important to test the boundaries of the law and to clarify the law where we think it is uncertain.
“We will take it away, we’ll analyse it [and] we’ll form a judgment as to what happens next once we’ve had an opportunity to do so, but we’ve got a little bit of time to think about that.”
In an official statement released by ASIC, Mr Hughes added: “ASIC notes today’s majority judgment and will review each of the separate decisions carefully – including what additional measures or clarification may be required to support compliance with the Credit Act.”
In a statement to shareholders, Westpac acknowledged the Full Federal Court’s decision to dismiss ASIC’s appeal and uphold the court’s original decision.
In September 2018, Westpac admitted to breaches of responsible lending obligations under the National Credit Act, agreeing to pay a $35-million civil penalty.
ASIC and Westpac jointly approached the Federal Court, seeking orders that the bank contravened the responsible lending provisions due to failures of its automated decision system.
The breaches related to Westpac’s home loan assessment process during the period December 2011 and March 2015, during which approximately 260,000 home loans were approved by Westpac’s automated decision system.
ASIC had alleged that for approximately 50,000 home loans, Westpac received but did not use consumers’ actual expense information, which exceeded the Household Expenditure Measure (HEM) benchmark used by the bank.
It was also alleged that for a further 50,000 home loans, Westpac used the incorrect serviceability process when assessing a consumer’s capacity to repay a home loan upon the expiry of interest-only periods.
The regulator contended that of the 100,000 loans, Westpac should not have automatically approved approximately 10,500 loans.
However, the Federal Court was not convinced that Westpac breached its obligations, with Justice Perram seeking a friend of the court to review the case – reportedly stating that “there is no fact before [him] that any unsuitable loans were made”.
Following his review of the case, Justice Perram judged that in complying with its NCCP obligations, a lender “may do what it wants in the assessment process”.
Justice Perram took the view that a borrower’s living expenses were not necessarily indicative of their future spending behaviour, acknowledging that borrowers would tighten their belts after taking out a home loan.
“I may eat wagyu beef every day, 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 then decided to appeal Justice Perram’s decision to address “uncertainty” caused by the verdict.
[Related: ASIC grilled over Westpac HEM appeal]