The corporate regulator and Westpac Banking Group have been forced back to the drawing board after the Federal Court threw out the bank’s offer to pay a $35 million settlement after it admitted contravening responsible lending laws.
Federal Court judge Nye Perram tore up an agreed settlement between the parties on Tuesday on a technicality after finding the Australian Securities and Investments Commission (ASIC) and Westpac could not agree on exactly how, or how many times, Westpac broke the law.
The decision by Justice Perram means ASIC will now have to litigate the case in the Federal Court, agree to a new settlement, appeal the matter to a higher court or drop the case against Westpac altogether.
ASIC had accused Westpac of breaching responsible lending laws for using a benchmark – the household expenditure measure (HEM) – to assess its customers' ability to repay home loans.
The HEM and other similar benchmarks are used by all the big banks to determine whether the expenses declared by a home borrower on their application are realistic. To do this, banks assume that all customers are in the bottom 25 per cent quartile for discretionary spending expenses – ie, items that we would like to have but are not essential, like clothing, processed meats or even holidays.
The banks' use of the HEM came under scrutiny at the royal commission into financial misconduct after it emerged they were automating loan approvals using benchmarks rather than taking the time to properly assess a customer's expenses and income.
In throwing out the settlement on Tuesday, Justice Perram said: “I do not propose to make the declaration sought.”
In some 5041 instances, Westpac had used the HEM benchmark in preference of declared living expenses because they were higher than the benchmark, Justice Perram said.
“In these cases, the declared expenses were more than the HEM benchmark and, if those expenses had been used instead of the HEM Benchmark, a flag would have been triggered and the customer’s application would not have been approved without referral to manual assessment,” Justice Perram said.
“What would have happened after that manual assessment the parties have not told me. Nor have they told me whether any of these 5041 loans were, or were not, suitable for the borrowers.”
Justice Perram had voiced concerns over the terms of ASIC’s settlement agreement with Westpac during the hearings, taking the unusual step of using an amicus curiae - someone who is not a party to the case and who assists the court by offering expertise or insight - to argue the case on behalf of Westpac if it had not agreed to the settlement.
Former solicitor-general Justin Gleeson SC, who was hired by the court to perform the task of amicus curiae, argued that ASIC had not told the court how Westpac had breached responsible lending laws.
Mr Gleeson told the court this was because the section of the National Consumer Credit Protection Act that Westpac had agreed it had breached – section 128 – did not prevent the bank from using the HEM.
He said if section 128 excluded the bank from using the HEM, he would have expected Westpac to have been fined more than $100 million. It is understood that the sample of loans used in the case have had a very low default rate.
A case management hearing has been set down for November 27.
ASIC said it was reviewing the judgment and would make no further comment at this stage.
A spokesman for the bank said: “Westpac respects Justice Perram’s decision. We are carefully considering the judgment.”This article was first published by https://www.smh.com.au
Author: Sarah Danckert