ASIC to appeal Federal Court decision over responsible lending lawsuit against Westpac

The corporate watchdog will appeal a Federal Court take-down of its landmark lending lawsuit against Westpac.

The landmark Westpac case on responsible lending will be tested

The corporate watchdog will appeal a Federal Court take-down of its landmark lending lawsuit against Westpac, prolonging the legal case that bankers have complained is adding to the uncertainty for rules surrounding lending.

The Australian Securities & investments Commission on Tuesday lodged an appeal to the “Wagyu and Shiraz” decision last month, in which Federal Court Justice Nye Perram dismissed a claim by the watchdog that Westpac breached responsible lending practices when assessing customer applications.

The Federal Court overturned what was originally a $35 million settlement between ASIC and Westpac over the alleged breaches of responsible lending laws.

ASIC recently wrapped up a series of public hearings as part of a move to clarify responsible lending laws in which it grilled banking executives on their claims the regulator’s expectations for complying with the laws would restrict credit growth and cause customers to lose out on loans.

“ASIC considers that the Federal Court’s decision creates uncertainty as to what is required for a lender to comply with its assessment obligation, nor does ASIC regard the decision as consistent with the legislative intention of the responsible lending regime,” said ASIC commissioner Sean Hughes on Tuesday.

“For those reasons, ASIC will appeal to the Full Court of the Federal Court,” he said.

Consumer groups have complained the ruling could mean that lenders of all stripes would now be free to ignore customers’ expenses and simply apply a benchmark to consumers when assessing their ability to repay a loan.

Westpac bankers complained ASIC’s decision to appeal would prolong uncertainty relating to the laws for at least another year. Credit growth last month rose at its fastest pace in five years after slowing to its worst pace on record amid the sliding housing market.

Westpac provided one of the more forceful submissions arguing against ASIC’s proposals to clear up responsible lending guidance, and earlier this year earned a slap down from the prudential regulator after jumping the gun on a proposal to lower the hurdles for borrowers to gain approval for loans.

Last month, Justice Perram dismissed ASIC’s interpretation of the responsible lending provisions — which require lenders to only sell loans to customers who can afford to repay them — as incorrect. He said requiring banks to comb over expenses left out the fact that it was “always possible that some of the living expenses might be foregone by the consumer in order to meet the repayments.

“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 case was the third time in two years that ASIC had taken Westpac to court over alleged conduct breaches.

In its notice of appeal lodged with the Federal Court on Tuesday, ASIC said Justice Perram should have found that Westpac would not have been able to comply with laws requiring it to hold off from selling loans to consumers who would endure ”substantial hardship” when repaying their mortgage.

ASIC also said Justice Perram should have found that Westpac failed to properly assess consumers’ ability to repay loans, particularly interest-only loans, which the bank did not assess as if consumers had an interest-only period before repaying the principal amount.

In the original case that began in May, ASIC alleged that Westpac breached responsible lending laws when assessing almost 261,987 home loan applications between December 2011 and March 2015.

Westpac argued that nothing in the governing legislation or regulation dictated that a loan suitability assessment had to be conducted in a prescriptive manner.

The Justice Perram’s ruling was expected to have repercussions for all lenders because it will help define how they meet responsible lending obligations and whether they can continue to use benchmarks such as the HEM to decide whether an applicant can afford to repay a loan.

In the final report of the royal commission into banking misconduct Justice Kenneth Hayne said that if the Westpac case revealed any deficiency in the law’s requirements that a lender make reasonable inquiries about, and verify, a consumer’s financial situation, there should be legislation to fill in that gap.