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What’s next with Responsible Lending?

The day after the first Australian Securities Investments Commission (ASIC) hearings to update responsible lending guidance, ASIC lost their test case against Westpac.

“ASIC took on the case against Westpac because of the need for judicial clarification of a cornerstone legal obligation on lenders; therefore, ASIC refers to this case as a ‘test case’. As a regulator, it is our role to test the law and its ambit. The obligation to assess loan applications builds on the requirement for banks to make inquiries about a borrower’s financial circumstances and capacity to service a loan and to verify the information that borrowers give banks,” ASIC Commissioner Sean Hughes said, in an official statement after the judgement was publicised.

Earlier this week, Justice Nye Perram ruled in the Federal Court that Westpac had not breached National Consumer Act regulation by using the Household Expenditure Measure (HEM) as a reasonable measure to assess a borrower’s ability to pay back a loan.

The regulator indicted that, initially, they alleged Westpac automated passement using the HEM benchmark, but did not take into consideration the prospective borrower’s actual expenses.

According to Justice Perram:

In fact, the Act is silent on how a credit provider is to answer the s 131(2)(a) Questions. Division 3 of the Act contains neither an express statement that a credit provider must use the consumer’s declared living expenses in doing so nor, in my opinion, can such a requirement be discerned from its terms as a matter of necessary intendment. To foreshadow what lies ahead, one may ask what knowing that a consumer currently spends $500 per month on wine tells one about whether the consumer can afford the repayments on a proposed $2 million loan (the first of the s 131(2)(a) Questions) or whether, whilst able to afford to make the repayments on that loan, the consumer could do so only by being placed in circumstances of substantial hardship (the second of the s 131(2)(a) Questions).

Thus, Justice Perram found Westpac did consider the consumer’s declared living expenses.

The issue of being able to completely identify a borrower’s total expenses is one that was raised by Commissioners Sean Hughes and Karen Chester at the ASIC hearings held in Sydney, the day before.

At these hearings, it was admitted that HEM does accurately represent a consumer’s total expenses. It was also noted that there were challenges when identifying discretionary spending from non-discretionary spending.

Karen Cox, CEO of the Australian Financial Rights Legal Centre, challenged the use of the HEM as a measure of financial hardship, and the Australian Retail Credit Association (ARCA) called for either clarification or a clearer definition of what financial hardship means in the current guidance—that is, whether there would be objective or subjective measure.

While the hearings are clearly aimed at changing the guidance rather than legislation, it will be interesting to see whether ASIC’s test case has the potential to lead to legislative changes in future when it comes to assessing a consumer’s total expenses.

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