Federal Court judge Nye Perram took the unusual step of throwing out an agreed $35 million settlement between Westpac and the regulator last year, saying ASIC had not made out its case in regards to why Westpac’s method of approving home loans was unlawful.
A change of law to force banks to do more work in assessing a borrower’s finances could mean the process for getting a home loan would take longer and that many home buyers might struggle to get a home loan under these stricter rules. It could also lead to increase in loan costs for consumers because of the extra scrutiny required.
ASIC is under pressure to increase the number of cases it takes to court following criticism from the Hayne royal commission reports that it was too close to the banks and relied too often on soft outcomes like enforceable undertakings.
In the past year, the regulator, under the watch of recently-appointed enforcement boss Daniel Crennan, QC, has recorded a 50 per cent increase in the number of enforcement investigations of misconduct by large financial institutions. The most notable case is against AMP over representations made by the wealth manager about an independent expert report.
Commissioner Hayne strongly criticised the banks over the light touch reviews they performed of customers’ expenses when applying for loans, particularly the reliance on benchmark or poverty indexes instead of the expenses declared by borrowers.
The Houshold Expenditure Measure 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 – which are items that we would like to have but are not essential, like clothing, or holidays. Banks also consider a range of other inputs before deciding to approve a loan.
Commissioner Hayne noted during the royal commission that customers are often “poor historians” of their spending and savings. He suggested home loans might be better assessed based on the income of a borrower after all monthly expenses were deducted. He was also critical of the use of benchmarks in his interim and final report.
“In the Interim Report, I said that using a statistical measure of ‘the median spend on absolute basics’ plus the 25th percentile spend on discretionary basics as a default measure of household expenditure does not constitute verification of a borrower’s expenditure,” he said.
“I remain of that view,” he said.
Commissioner Hayne, a retired High Court judge, said in his final report that it would not be appropriate to comment on the conclusions reached by Justice Perram ahead of the Westpac trial and judgment.
“The court processes must play out without commentary from me,” Commisioner Hayne said.
“If the court processes were to reveal some deficiency in the law’s requirements to make reasonable inquiries about, and verify, the consumer’s financial situation, amending legislation to fill in that gap should be enacted as soon as reasonably practicable.”
The case is still in preliminary hearings and may well go to trial this year. Both Westpac and ASIC will have the right to appeal after the court hands down its decision.
Sarah Danckert is a business reporter.