In the recent case of Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244, Justice Perram in the Federal Court of Australia dismissed the claim by the Australian Securities and Investments Commission (ASIC) that Westpac had breached the responsible lending provisions of the National Consumer Credit Protection Act 2009 (Cth) (Act) by using a computer operated loan approval system that relied on the Household Expenditure Measure (HEM) to calculate potential borrowers’ living costs.
Westpac approved 261,987 loans in the period between December 2011 and March 2015 (Relevant Period) using a computer operated loan approval system, otherwise known as the automated decision system (ADS). The ADS broadly assessed whether a potential borrower could service their loan by reference to the HEM, which provides for an estimate of basic living expenses. However, the ADS did include a series of ‘rules’ whereby a potential borrower’s declared living expenses could trigger an automatic decline or referral for manual assessment.
ASIC claimed that by using the ADS, Westpac breached the responsible lending provisions in the Act as it had failed to have regard to the potential borrowers’ declared living expenses and it had not properly assessed whether loans might be unsuitable for potential borrowers.
ASIC’s case was comprised of three primary arguments:
The Court dismissed ASIC’s case on the facts and as a matter of statutory construction.
Justice Perram found that the mere fact that a consumer has declared living expenses is not necessarily relevant to whether the consumer will be unable to comply with their loan obligations, because it is always possible that some of the declared living expenses might be foregone by the consumer in order to meet repayments. In what will no doubt become one of His Honour’s most quoted observations, Justice Perram summed up his view in noting that:
“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 also found that while the Act does require a credit provider to consider the consumer’s declared living expenses in assessing whether a loan is suitable, the Westpac ADS did have regard to the declared living expenses by way of the ‘rules’ that could be triggered by those declared expenses.
Justice Perram ultimately held that credit providers must ask consumers about their financial situations, but that the key questions for credit providers were whether the consumer:
This decision provides useful guidance to consumer credit providers around what must be considered when making an assessment as to whether a loan will be unsuitable for a consumer.
Whilst it is clear that credit providers must ask consumers for information about their financial situation, the decision appears to confirm that credit providers can also have regard to benchmark living expense data in asking themselves the fundamental questions of whether:
the consumer will be unable to comply with the consumer’s financial obligations under the contract; or alternatively
the consumer could only comply with their financial obligations with substantial hardship.
ASIC has issued a statement confirming that it is reviewing the judgment carefully, and it is possible that the decision will be appealed.
