Australian Federal Court rules in favour of Westpac (in equivalent to CCCFA Lender Responsibility Principles)
The Federal Court of Australia has found in favour of Westpac Banking Corporation in respect of alleged contraventions of Australia’s National Consumer Credit Protection Act 2009 (CCPA), in a case which has relevance to the equivalent New Zealand provisions under the Credit Contracts and Consumer Finance Act 2003 (CCCFA).
The Australian Securities and Investments Commission (ASIC) was ordered to pay Westpac’s costs after it could not substantiate that Westpac had breached the CCPA in respect of its automated loan approval system.
Westpac had previously agreed to settle with ASIC for AU$35 million but, in an unusual step, the settlement was rejected by the Court, which also took the step of appointing an amicus curiae to argue on Westpac’s behalf (as if Westpac had not agreed to the settlement).
The proceedings related to Australian home loans that Westpac had provided from December 2011 to March 2015. ASIC alleged that in placing a level of reliance on its automatic loan approval system and “benchmark” statistics, Westpac had failed to consider the declared living expenses supplied by its customers, and had therefore failed to comply with its obligation to make due inquiries into its customers’ ability to repay loans. In particular, ASIC alleged Westpac had:
- failed to inquire into whether a consumer “will be unable to comply with the consumer’s financial obligations under the contract”, and
- failed to inquire into whether the consumer “could only comply with substantial hardship”.
In New Zealand, the CCCFA broadly obliges consumer lenders to conduct similar inquiries into borrowers as required in Australia, however the legal test is slightly different. Under the CCCFA, a lender must make reasonable inquiries, so as to be satisfied that it is “likely” a borrower will make payments under the loan agreement “without suffering substantial hardship”.
On the facts, the Court rejected ASIC’s submissions, and found that Westpac did have regard to the declared living expenses.
However, separately, the Court also made a number of findings about the inquiries required under the Australian CCPA. In particular, it was held that a customer’s declared living expenses were not necessarily relevant for such inquiries, and rather, the matter to be considered was the “more amorphous concept” of the customer’s financial situation.
This is relevant for the position in New Zealand. The Responsible Lending Code lists information that may be considered in such inquiries — including information obtained “directly from the borrower”, and certain reasonable “statistical information relating to an appropriate class of borrowers” — but does not prescribe reliance on any particular information. Interestingly, going forward, if the changes in the Credit Contracts Legislation Amendment Bill are passed, the presumption that lenders may rely on information provided by a customer (unless the lender has reasonable grounds to believe otherwise) will be removed from the CCCFA — but we continue to recommend that actual data provided by a customer is considered. The Credit Contracts Legislation Amendment Bill also will permit new regulations to specify the inquiries that must be made and the way in which the results of such inquiries must be taken into account.
The Federal Court of Australia found that declared living expenses may not necessarily help the requisite inquiries, as such information can include spending that might change to meet loan repayments. To explain, a hypothetical example was provided where the declared expenses indicated that loan repayments could not be made without a shortfall for the customer, but such expenses also included expensive gym memberships.
“… the consumer may choose to discontinue their gym memberships and meet the repayments in that way. The problem for ASIC’s argument is that the mere fact that there are living expenses is not necessarily relevant to whether a consumer will be unable to comply with their loan obligations because it is always possible that some of the living expenses might be foregone by the consumer in order to meet the repayments.”
“In fact, the only way that one or more declared living expenses can be shown to be necessarily relevant to the issue of whether the consumer can afford to make the repayments is by identifying some living expenses which simply cannot be foregone or reduced beyond a certain point. For example, everyone has to eat so there must be an amount for food which is the minimum which can conceivably be spent. But that minimum is an entirely different concept to the declared living expense of what the consumer actually spends on food. Indeed, knowing how much the consumer actually spends on food does not tell one anything about that conceptual minimum. I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare. Knowing the amount I actually expend on food tells one nothing about what that conceptual minimum is.”
The Court affirmed the requirement for lenders to make inquiries that are compliant with the CPPA — there being consequences where it can be shown these inquiries fall short. However it was held that lenders otherwise have flexibility as to how they adhere to the requirements of the CPPA:
“A credit provider may do what it wants in the assessment process, so far as I can see; what it cannot do is make unsuitable loans.”
In this respect, the ruling reflects a similar regulatory landscape to that in New Zealand under the CCCFA. The Lender Responsibility Principles under the CCCFA are broad and non-prescriptive, which creates some uncertainty when designing a compliance programme, but also grants lenders flexibility, provided they can prove that the overarching principles (including to make reasonable inquiries, and “exercise the care, diligence, and skill of a responsible lender”) have been met.
The Federal Court of Australia judgment is an important decision for consumer lenders, and recognises that some flexibility in approach is permissible. It also confirms that appropriate use of benchmarks is acceptable. We consider this to be helpful guidance for consumer lenders, in what is a challenging and complex compliance area.
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