29 June 2020

Full Federal Court provides clarity on responsible lending obligations

This article was written by Moira Saville, Liam Burgess and Hannah Phua. 

In a 2:1 decision handed down on Friday, 26 June 2020, the Full Federal Court in Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111 provided further clarity for credit providers in relation to the responsible lending requirements of the National Consumer Credit Protection Act 2009 (“Act”).

The judgment confirms that the Act gives latitude to credit licensees to determine how they should perform the assessments of unsuitability required by law before entering into credit contracts.

Note: King & Wood Mallesons (including the authors) acted for Westpac in the proceedings mentioned in this article.

Background

ASIC commenced the proceedings in 2017, alleging that Westpac contravened responsible lending laws between 12 December 2011 and March 2015 in relation to home loans assessed using Westpac’s automated assessment system.

ASIC contended that Westpac contravened s 128 of the Act because one of the 200 rules used within Westpac’s system:

  • did not use the consumer’s declared living expenses, but instead relied on a statistical estimate of the household expenditure required for a reasonable standard of living based on customer circumstances (the HEM Benchmark); and
  • in respect of loans with an interest only period, assessed affordability on the basis of the equal monthly repayments that would be required to repay the loan over its full term (Full Term Method), rather than the higher repayments which would be required after expiry of the interest only period assuming the customer made only minimum required repayments during the interest only period (Residual Term Method).

Westpac argued that it was permissible to use the HEM Benchmark and the Full Term Method as part of its assessment process, and that even if it was required to also take account of declared living expenses in its assessments, it did so using another rule within the system that compared declared expenses to income (70% Ratio Rule).

Declared Living Expenses

The majority (Justices Gleeson and Lee) upheld the decision of Justice Perram at first instance who ruled in favour of Westpac.

Justice Gleeson found that the Act does not impose an obligation on a credit provider to obtain information about a consumer’s declared living expenses and, when such information is obtained, the Act does not prescribe the use to which that information must be put.  Her Honour also accepted that Westpac did make use of declared expenses in the assessment process through application of Westpac’s 70% Ratio Rule.  

ASIC had argued that Westpac’s reliance on the HEM Benchmark breached a requirement under the Act to have regard to the individual circumstances of each consumer.  Justice Gleeson’s judgment recognised that Westpac’s serviceability rule was “plainly directed to the risk of the particular consumer being unable to meet their financial obligations under the proposed credit contract without significant hardship as measured by the HEM benchmark.”

Justice Lee also held that nothing in ss 128 and 129 of the Act specifies how the assessment of suitability must be undertaken, and agreed with the primary judge that there is no statutory requirement to use all information collected from the consumer irrespective of its relevance or materiality to the assessment of unsuitability.

Justice Middleton, in a dissenting judgment, was of the view that the assessment required under the Act should be made based upon all relevant and material information presently available regarding the consumer's financial situation.  His Honour considered that this included the consumer’s level of past expenditure (whether discretionary or not).  His Honour nevertheless accepted that the assessment process is not limited to any prescribed methodology.

Interest Only Loans

The Court unanimously dismissed ASIC’s appeal in relation to use of the Full Term Method rather than the Residual Term Method.   

Justice Middleton held that Westpac’s use of “the Full Term Method reflected a legitimate choice in the exercise of Westpac’s judgment as to how to conduct a suitability assessment for an interest only loan”.

What does this mean?

The judgment confirms that a credit provider has flexibility over how it chooses to conduct its unsuitability assessment, that is, how it wishes to inform itself of the correct answer to the following questions it should ask when determining whether a loan is unsuitable for a consumer:

  • will the consumer be unable to comply with the financial obligations under the proposed credit contract; or
  • can the consumer only comply with their financial obligations under the proposed credit contract with substantial hardship?

There is no obligation to use all the information collected from the consumer in order to answer the unsuitability questions.

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