ASIC won't appeal Westpac 'shiraz and wagyu' case

The Financial Review reported last week that members of the federal government are anxious that an ASIC appeal would create legal uncertainty that could exacerbate a slowdown in bank lending and hurt the economic recovery from COVID-19.

Bankers need finality

The Liberal chairman of the Parliamentary Joint Committee on Corporations and Financial Services, James Paterson, last Wednesday pressed ASIC's Mr Shipton about whether it was "time for ASIC to accept the umpire's verdict" after its appeal loss in the full Federal Court in June.

It is understood Senator Paterson's concerns are shared by senior ministers in the Morrison government, but they were reluctant to comment publicly because ASIC is an independent regulator.

Senior bankers also want finality to provide confidence they have reasonable discretion about what customer information to use when assessing loans.

Mr Shipton told a parliamentary hearing last week ASIC was taking external legal advice on the full Federal Court decision.

Westpac last month won a significant victory in the Federal Court, where two judges to one found in favour of the bank on its interpretation of responsible lending duties, dealing another blow to the corporate regulator in the prolonged dispute.

The court backed Westpac's arguments the national credit act provides banks with discretion on how to use information when assessing whether loans are suitable for customers, and that customers can be expected to reduce historical levels of spending to meet repayment obligations.

The case is being watched by all banks because it examined Westpac's automated loan assessment system.

Big lenders all use computer algorithms to assess suitability for loans, so they can create "scaled" processes to serve millions of customers.

Focus on future ability to pay

ASIC appealed the original "shiraz and wagyu" decision, which last year said the regulator did not understand how credit laws operate when it sought to limit the bank's ability to assess what was discretionary expenditure by a loan applicant.

ASIC argued Westpac's system was based on improper inputs, including an index of household spending.

ASIC described the household expenditure measure benchmark used by Westpac as "frugal", arguing it underestimated the true level of borrowers' expenses and hence allowed the bank to lend more than was appropriate.

It alleged the bank broke responsible lending laws 261,987 times between 2011 and 2015 because it did not properly assess whether the loans were "unsuitable" for the customers as required by the credit act.

In his original decision, Justice Nye Perram said a consumer's past spending was not relevant to their future habits, which could be changed to factor in servicing a loan.

"I may eat wagyu beef every day washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare," Justice Perram said in August 2019.

"The fact that the consumer spends $100 per month on caviar throws no light on whether a given loan will put the consumer into circumstances of substantial hardship. Nor for that matter does knowing that the consumer spends $500 per week on basic food items."

The full Federal Court said this month its key focus was whether a figure for "declared living expenses" provided by a customer "is a likely reflection of the consumer's future expenditure if they enter into the credit contract".

"The act cannot be construed to require Westpac to consider the total figure for declared living expenses in each case for the purpose of assessing the consumer's likely ability to meet their financial obligations," the court said.