Westpac and the corporate regulator look set for a trial to test the bank's conduct as a responsible lender, after the Federal Court refused to rubber stamp a settlement for the bank to pay a $35 million fine for breaching lending laws.

In a judgment handed down on Tuesday, Justice Nye Perram rejected the Australian Securities and Investments Commission and Westpac's proposed settlement, saying it failed to articulate how Westpac has breached lending laws.