ASIC lending rules must fit criteria

ASIC showed no reluctance to broach the sensitive legal issue of banks using statistical benchmarks in making loan decisions.

A second strike for Westpac’s remuneration report is almost a certainty. Picture: Hollie Adams for The Australian

ASIC has delivered on its promise to publish updated guidance on the vexed issue of responsible lending obligations before the end of the year.

In the new year, though, all eyes will be on the Full Federal Court’s hearing of the regulator’s appeal in the Westpac responsible lending case, which, thanks to a quirky decision by judge Nye Perram, will go down in history as the “wagyu and shiraz” case.

The Full Court will hear the appeal on February 25 and 26.

ASIC said on Monday that the decision of the Full Court would be reflected in its revised guidance.

In the meantime, it showed no reluctance to broach the sensitive legal issue of banks using statistical benchmarks — expense benchmarks, in particular — in making loan decisions.

ASIC’s original complaint against Westpac was that it used a benchmark instead of the actual expenses declared by borrowers in assessing their ability to repay a loan. Not only that, but the bank was alleged to have approved loans where a proper assessment of a borrower’s ability to repay the loan would have shown a monthly deficit.

To say that Justice Perram wasn’t particularly concerned about Westpac’s conduct would be an understatement. In fact, he ruled that a lender “may do what it wants in the assessment process”.

ASIC appealed because it regarded the decision as inconsistent with the intention of the responsible lending regime, which imposed a number of legal obligations on credit providers, including “reasonable” inquiries about a borrower’s financial circumstances.

It backed up this assertion on Monday, ruling in its updated guidance that income and expense benchmarks do not confirm or verify the financial information obtained about the borrower.

While comparison of the information to a reasonable benchmark could be useful in some circumstances, the regulator said lenders should ensure the benchmark was adequate and appropriate, and its use was “regularly monitored and reviewed”.

It further advised that some consumers would spend less than a benchmark figure, and it was reasonable to use a lower amount if appropriate steps were taken to verify the consumer’s expenditure.

As for the most commonly used benchmark, the household expenditure measure (HEM), which was updated quarterly, ASIC noted it did not include spending on a range of items that were commonly part of a consumer’s outgoings. It warned banks that when they were comparing a borrower’s estimates to the HEM, it was important to only use the spending estimates for items included in the benchmark figure; not for their total expenditure.

“Otherwise the comparison is unlikely to give you useful information about whether the estimate of the consumer’s basic expenditure is realistic,” ASIC said.

Stay tuned for the Full Federal Court’s view next year.

Board games

The Westpac board meeting in the lead-up to Thursday’s annual meeting will confirm the blindingly obvious.

A second strike on the embattled bank’s remuneration report is almost a certainty; a follow-up vote to spill the board will likely fail, and respected non-executive director Peter Marriott’s bid for re-election is in serious trouble.

Austrac’s statement of claim, which alleges a systemic breakdown in Westpac’s control environment, indifference by senior management and inadequate oversight by the board, could be wallpaper for the bank’s hall of infamy.

If there’s any solace for directors, the 202-year-old lender’s crisis in 1992 was far worse.

The fallout from Westpac’s near-death experience, brought about by a reckless concentration of risk in commercial property, was brutal.

In quick succession, the bank reported a $1.67bn loss, suffered an $880m shortfall in an emergency capital raising, and directors briefly had the pleasure of Kerry Packer’s company after the nation’s then-richest person conducted a $500m raid.

By the time Packer and his chum Al Dunlap stormed out of a board meeting in high dudgeon, the casualty list of Westpac directors extended to nine.

The bank’s annual meeting, which attracted 5000 mostly hostile shareholders, went into a second day.

Measured against the 1992 experience, the Austrac-induced crisis looks positively benign.

Chief executive Brian Hartzer’s departure matches the sacrificial offering of then-CEO Frank Conroy to appease Packer, while chairman Lindsay Maxsted’s early retirement is the modern-day equivalent of Eric Neal’s resignation.

Maxsted probably sees it differently after two weeks in the furnace over links between 12 Westpac customers and child exploitation in The Philippines.

However, Ewen Crouch’s acceptance that he was likely to face decisive opposition to his re-election on Thursday falls well short of the long tail of board departures in 1992-93.

Contrary to speculation, this week’s board meeting is unlikely to resolve the chairman’s position.

It’s a fluid situation and things could change, but at this stage it’s not contemplated that either of the two main internal contenders — ex-Morgan Stanley Australia boss Steve Harker and former KPMG Australia chair Peter Nash — will be anointed.

Search firm Korn Ferry is continuing to undertake an orderly process to locate Maxsted’s successor. The chairman’s position is the first priority, because that person will be pivotal to the choice of Westpac’s next CEO.

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