Westpac wins case against Australian Securities and Investments Commission

Westpac has won a legal battle against the corporate cop ASIC over claims the bank violated lending laws, but the ruling will affect all lenders.

Home buyers could swap Wagyu beef for “more modest fare”, so expenses they declare in mortgage applications don’t necessarily reveal if they can repay their loans, the Federal Court says.

The finding forms part of a far-reaching judgment handed down by the court in dismissing a landmark case over responsible lending brought by the corporate cop against Westpac.

Handed down Tuesday, the ruling rejects the idea credit laws compel a lender to use borrowers’ self-reported expenses when assessing if they can repay their loans. The Australian Securities and Investments Commission has been pushing banks to give more consideration to each individual’s circumstances rather than relying heavily on general expense benchmarks when writing loans.

A $35m legal case against Westpac over loan applications has concluded.

At the financial services royal commission, banks were panned for defaulting to general expense benchmarks rather than diligently analysing each customer’s household expenses.

Consumer rights organisations on Tuesday criticised the Federal Court’s ruling and said the nation’s credit laws needed to change so they forced lenders to verify each borrower’s actual financial situation.

“The court finding is incredibly disappointing,” Financial Rights Legal Centre chief Karen Cox said.

“The decision suggests that banks do not have to have regard to people’s actual expenses when they lend, which in turn will allow lenders to continue to extend unsustainable loans.”

ASIC alleged Westpac breached responsible-lending laws almost 262,000 times when it provided home loans between December 2011 and March 2015.

The rejection of ASIC’s case comes after the Federal Court last year took the unusual step of refusing to approve a $35 million settlement between Westpac and the regulator.

ASIC alleged Westpac only used a general living expenses benchmark — the household expenditure measure, dubbed HEM — in working out whether potential borrowers could repay their loans.

Justice Nye Perram. Picture: Bob Finlayson.

HEM provides expense estimates for households in a given region, based on broad demographic information.

In dismissing the case, Justice Nye Perram found Westpac did take into account borrowers’ declared living expenses.

But in an embarrassing blow for the corporate cop, Justice Perram added that the credit laws in question did not operate as ASIC alleged. While a lender is required to ask potential borrowers about their expenses, it is under no obligation to use their responses during loan assessments, he found.

In the most significant ruling for the financial sector, Justice Perram found self-declared expenses were not a bulletproof formula for assessing if borrowers could pay back their loans.

As an example he singled out food. A potential borrower’s grocery bill may be far greater than the “conceptual minimum” actually required to keep them fed and healthy, Justice Perram said.

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“I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare,” he said.

“The problem for ASIC’s argument is that the mere fact that there are living expenses is not necessarily relevant to whether a consumer will be unable to comply with their loan obligations because it is always possible that some of the living expenses might be forgone by the consumer in order to meet the repayments.”

Westpac consumer division chief David Lindberg.

Westpac consumer division chief David Lindberg said the bank had always taken responsible lending obligations seriously.

“We welcome the clarity that today’s decision provides for the interpretation of responsible lending obligations,” he said.

ASIC commissioner Sean Hughes said the regulator lodged the case to clarify “a cornerstone legal obligation” on lenders. “ASIC is reviewing the judgment carefully,” he said.

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