Do lenders need to consider all available customer information when assessing the suitability and affordability of a loan? The answer, according to the new leading judgment on responsible lending in Australia, is 'no': lenders can make a reasonable assessment, and lend responsibly, without analysing each declared expense.
In so finding, a 2-1 majority of the Full Court of the Federal Court of Australia upheld the primary judge's view that borrowers' declared expenses were not a conclusive measure of affordability, because they could often be reduced. To use the judge's example, borrowers could swap
“wagyu steak washed down with the finest shiraz" for
“more modest fare." The majority of the Full Court reached the same conclusion, in somewhat milder terms.
Though drafted differently, New Zealand's consumer credit regime is conceptually similar to Australia, and so the reasoning of the Australian Court is likely to be influential when the equivalent provisions (and planned new regulations) are first considered in a New Zealand Court.
The Australian Securities and Investments Commission (ASIC) claimed that Westpac had breached the responsible lending provisions of the National Consumer Credit Protection Act 2009 (NCCPA). Those provisions require, in brief, that lenders:
Assess whether a loan will be unsuitable for a consumer (ss 128 and 129).
Before making that assessment, make reasonable inquiries about the consumer's requirements, objectives, and financial situation, and take reasonable steps to verify their financial situation (s130).
Decline the application if it is likely that the consumer will be unable to comply with their obligations under the loan (or could only comply with “substantial hardship"), or that the loan will not meet the consumer's requirements or objectives (s 131).
For the loans in issue, Westpac customers were required to provide a categorised list of their living expenses, using a standard form. The declared living expenses were automatically processed by an “Automated Decision System" (ADS). This comprised over 200 rules, including:
a “70% Ratio Rule" - triggered if a consumer's declared living expenses exceeded 70% of their income; and
a “Serviceability Rule" which calculated net income accounting for the new loan repayments. That rule used benchmark statistics for living expenses (the “Household Expenditure Measure") rather than the consumer's declared expenses.
In the Federal Court,1 ASIC had unsuccessfully argued that Westpac's approach was insufficient. In its appeal, it claimed that the primary judge had misconstrued the NCCPA. They argued that to make the requisite assessment, lenders must necessarily take account of the available information obtained about the particular consumer's financial situation, including that arising from its inquiries via the standard form. ASIC said that Westpac had failed to take account of this information and therefore had not carried out the required assessment. It did not say the ADS had resulted in any specific wrong decisions (nor did it challenge use of benchmarks per se) but said instead that whatever process was used it should take account of individual customer information including declared expenses, which the ADS did not do.
The Court's findings
The majority of the Full Court (Gleeson and Lee JJ) found that lenders do not need to take into account all information obtained.2 The NCCPA simply requires assessment of the consumer's financial situation overall, rather than any
“particular integer of which it consists." They noted that many consumers' financial circumstances include matters of no relevance. While some declared living expenses may be relevant to an assessment, this did not mean that declared living expenses
must be considered in order to make an assessment.
ASIC had argued that in order to reach the view that certain declared living expenses could be disregarded, the lender first needed to consider those figures. Some might be reducible, but it did not follow that Westpac was entitled to ignore
all consumers' declared living expenses. However, the majority (Middleton J dissenting) dismissed that argument as
“missing the point": the NCCPA did not oblige Westpac to obtain that information, nor specify how it should be used if obtained. As such, Westpac was free to choose how it reached a reasonable assessment.
In reaching that view, the majority highlighted the distinction between making inquiries of borrowers, and assessing suitability. The inquiry provisions set out the
“sequence leading up to" the suitability assessment, but the results of the inquiries did not need to be applied in any particular way. The manner of the assessment was up to lenders, and using detailed statistical metrics, rather than customers' own declared expenses, was not unreasonable. As the majority put it:
“it is far from intuitively odd that Westpac would focus on independent, objective data."
Given the above, the factual question of whether Westpac had in fact considered individuals' expenses was irrelevant. But, in any event, ASIC failed on that factual claim also: the Court found that the 70% Ratio Rule did incorporate the declared living expenses, and that the benchmark in the Serviceability Rule used figures applicable to consumers' individual circumstances.
ASIC raised a separate argument regarding loans with interest only periods. The ADS assessed such loans as if the principal was repaid throughout the life of the loan, whereas ASIC claimed that lenders had to assess suitability using the specific repayment details of the particular loan. All three judges rejected this argument, and held that Westpac's method reflected a legitimate exercise of judgment as to how to conduct a suitability assessment for an interest only loan.
The Full Court dismissed ASIC's claim and ordered costs. This will no doubt be a pleasing result for Westpac, which in 2018 had agreed to admit breaches and settle the claim for AU$35 million (until the Federal Court rejected the settlement for lack of clarity as to what the “breach" was said to comprise3).
New Zealand implications
The NCCPA provisions are conceptually similar to the equivalent New Zealand provisions. Section 9C of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) provides:
|[Lenders] must, in relation to an agreement with a borrower,-|
make reasonable inquiries, before entering into the agreement, so as to be satisfied that it is likely that-
the credit or finance provided under the agreement will meet the borrower's requirements and objectives; and the borrower will make the payments under the agreement without suffering substantial hardship…
The CCCFA does not currently prescribe how lenders are to make reasonable inquiries or to assess affordability and suitability. The words “so as to be satisfied" suggest some degree of connection between the inquiries and the suitability/affordability assessment, but the extent of that relationship is not explicit. Therefore, the
ASIC v Westpac rationale may well be influential when the New Zealand Courts address these matters for the first time, and it is possible that New Zealand courts could similarly find that lenders are not required to factor every result from every inquiry into their assessment.
Of course, things may change with the introduction of new responsible lending regulations4 due to come into force from October 2021. Submissions closed in February, and revised draft regulations are expected shortly. It is likely, on the basis of the first draft of the regulations, that the process of collecting information will become considerably more detailed and prescriptive (which may narrow the relevance of
ASIC v Westpac). However, even with the rigid methodologies proposed, there will be inevitable uncertainties given the contextual nature of the analysis (e.g. the draft regulations require that borrowers are left with a
“reasonable surplus" after repayments, but without specifying the extent). It may be of some comfort, therefore, that the Full Court observed that ambiguities in the responsible lending regime, where civil penalties now apply, should be construed in favour of lenders. To that extent at least,
ASIC v Westpac is likely to remain of interest even beyond October 2021.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed, or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.