ASIC to review responsible lending guidance

The Australian Securities and Investments Commission (ASIC) has announced that it will not appeal the Full Federal Court’s 2-1 decision to uphold Justice Nye Perram’s dismissal of its responsible lending case against Westpac Group, which has since been dubbed the “wagyu and shiraz” case.

ASIC had the option of taking the matter to the High Court but claimed that it is “mindful of the impact of the additional time required to resolve this matter in the current challenging economic circumstances”.

This follows scrutiny from policymakers, which questioned whether a move to take the matter to the High Court would be counterintuitive to ASIC’s aim of addressing uncertainty in the lending space.   

ASIC has revealed that in light of the Full Federal Court’s decision, it will now review its updated regulatory guidance (RG 209) and consider the implications of the Federal Court’s decision on compliance practices.

ASIC issued its new guidance in December 2019, after holding two rounds of public consultation with industry stakeholders. 

The principles-based guidance was designed to provide lenders with greater clarity and flexibility amid uncertainty off the back of scrutiny from the banking royal commission. 

However, ASIC has stressed that prospective reforms of the National Consumer Credit Protection (NCCP) Act to further clarify the enforcement of responsible lending obligations is “ultimately a matter for the federal government and Parliament”.

Background

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 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.”

[Related: Court weights in on benchmarks, ‘belt-tightening’]