ASIC’s loss to Westpac is terrible for everyone
3rd Sep 2020
In June, the Federal Court ruled against the Australian Securities and Investments Commission (ASIC) in Australian Securities and Investments Commission v Westpac Banking Corporation  FCAFC 111. In the case, Westpac was alleged to have improperly assessed whether loans granted between 2011 and 2015 were suitable for customers.
Kenneth Hayne, former High Court judge and Royal Commissioner, stated that wherever ASIC sees the law disregarded, it has a responsibility to litigate even where it predicts it would likely lose. He explained that only then would deficient and inadequate laws be exposed and tested in the courts, encouraging the need for legislative reform.
So with that in mind, ASIC’s loss can be subjected to a sober assessment.
Hemming and hawing
ASIC’s responsible lending case against Westpac dates back to March 2017, when it initially charged the bank with failing to take account of borrowers’ expenses as it was required to do by law. Westpac’s defence was that, strictly-speaking, it had complied, in that it had taken account of borrowers’ notional expenses. It did so by using the Household Expenditure Measure (HEM) benchmark. The HEM provides a benchmark for expenses which is on the genteel side of the poverty line. It is, by any reasonable assessment, absurd.
Westpac initially agreed to a $35 million settlement to resolve ASIC’s proceedings, subject to court approval. In an August 2018 case dismissal, Perram J in the Federal Court decided that irrespective of the fact that the HEM might assess notional expenditure at a level far below that of actual expenditure, it was nonetheless a justifiable method by which to comply with the affordability requirement contained in the National Consumer Credit Protection Act 2009 (the Act).
In deciding that Westpac had not contravened the Act, Perram J stated:
(a) the policy objective of the Act was to prevent unsuitable loans;
(b) the test of suitability focuses on the customer’s ability to comply with their loan obligations – without substantial hardship;
(c) the Act does not prescribe how a lender is to make such assessments, it merely requires that the lender not make unsuitable loans; and
(d) ASIC’s case was based on a slew of “implied” and “unnecessary” rules.
It was in this case that Perram J famously stated that a borrower may enjoy ‘wagyu beef and shiraz’ three nights a week (actual expenditure) but in order to service their mortgage, may well be prepared to make do with far more modest fare (HEM).
ASIC appealed and lost. The majority of a Full Bench of the Federal Court upheld Perram J’s decision.
At worst, their Honours erred in that they failed to understand the context within which these laws were enacted. In particular, the systemic threats underlying Australia’s runaway property prices, and the manner in which this legislation should have been interpreted: not as a set of prescriptive rules in a positivist paradigm, but as a set of principles designed to drive good conduct and financial consumer wellbeing.
At best, their Honours correctly interpreted the legislation, thereby demonstrating that it is inadequate to the task of combatting reckless lending. In major part because it fails to direct the bench away from a black-letter law, positivist and rules-based interpretation, to a principles-based approach where consumer financial wellbeing is the touchstone against which every provision of the Act should be interpreted.
Either way, ASIC has exposed the problem in practice, and the deficiencies of the purported remedy. If the regulator decides not to appeal to the High Court then the stage must be set for legislative reforms. And those reforms are urgent because this is the calm before the storm.
For example, there have been reports in the press of soup kitchens in Adelaide providing food to families – including families with mortgages. To be clear, these people are not skipping wagyu beef and shiraz. They’re skipping meals.
Lies, damned lies … and statistics
In the interim, our banks have fought a concerted rear-guard action designed to question ASIC’s motives and undermine its strategy. In so doing they hope to sap ASIC’s morale, so that it will cease interfering in its drive for profit-at-all-costs. This includes leaving consumers over-indebted and trapped; setting them up to be the kindling for a fire, the first sparks of which may soon become evident in the wash-out from COVID-19.
Principally, banks have argued that ASIC’s ruckus over HEM is making it difficult for hard-working Australians to obtain loans. That argument comes from the same playbook that said a Royal Commission into misconduct in the banking industry would cost a fortune and those costs would ultimately have to be borne by consumers.
It’s a veiled threat that is not only transparent and insulting, but also factually incorrect. For starters, I imagine that tighter lending laws would see exactly the same number of borrowers succeed in obtaining loans. They just won’t get loans that are as big. The technical term for this in the academic literature is ‘affordability’.
However, it is true that we have seen a decline in the provision of loans of late. But according to data from the Australian Bureau of Statistics, this has not been supply-side driven. It has been demand-side driven.
Where’s the beef?
If the warning signs – a property bubble; our big four banks ever more dependent on mortgages; an exogenous shock to the economy delivered by a global pandemic; and wide-spread reckless mortgage lending – morph into a financial crisis in Australia, the question will surely be asked: why don’t we have laws to prevent reckless lending?
The answer is that we do, but we just don’t enforce them.
This is an edited version of an article that was first published in Regulation Asia here.
Dr Andy Schmulow is a lecturer at the University of Wollongong. He is the founder and CEO of Clarity Prudential & Regulatory Consulting where he specialises in advising banks and insurers on how to embed good conduct and improve customer outcomes.
The views and opinions expressed in these articles are the authors' and do not necessarily represent the views and opinions of the Australian Lawyers Alliance (ALA).