The Australian Securities and Investments Commission’s $35 million victory against Westpac looks likely to be short-lived, after a court heard the settlement was rushed and failed to articulate how the bank had breached responsible lending laws.
Former solicitor-general Justin Gleeson, SC, who now practices at the private bar, also told the Federal Court on Wednesday the $35 million penalty agreed between the regulator and Westpac was not sufficient, and Westpac should pay at least $100 million if it, in fact, breached lending laws.
This is a blow to the regulator, which claimed a win against Westpac last month, after facing heavy criticism in the Hayne royal commission for bringing only 10 court cases against the big banks, preferring to deal with them via agreed undertakings.
ASIC got Westpac to admit that it broke responsible lending laws when it used the household expenditure measure (HEM) benchmark rather than declared expenses in approving 10,500 home loans.
But Mr Gleeson said that while both ASIC and Westpac had “powerful incentives” to settle the case quickly they were unable to reach an agreement on many aspects of the case, which meant Justice Nye Perram was “kept in the dark” about how Westpac’s home approval system breached lending laws.
“The problem is evident from what is not there [in the agreed statement of facts],” Mr Gleeson said.
ASIC and Westpac want the court to make a declaration that the bank breached responsible lending laws by relying on the HEM benchmark when approving home loans, rather than declared expenses.
However, Mr Gleeson told Justice Perram not to make such declaration, because it would be detrimental to other lenders, who would have to follow the court’s finding declared expenses are more useful than the HEM benchmark even though the court has not seen the evidence of that.
“It’s not just Westpac but it’s setting the statutory standard for the whole of the banking industry,” Mr Gleeson said.
In an unusual turn of events, Mr Gleeson appeared amicas curiae, or a friend of the court, to advise the court on whether Justice Perram should approve this proposed settlement.
ASIC took Westpac to court last year, alleging the bank was not a responsible lender because it automatically approved home loans using a statistical benchmark known as the household expenditure measure benchmark.
Mr Gleeson also said the regulator failed to articulate how many times Westpac contravened the responsible lending laws.
“ASIC says, ‘don’t bother, it’s too hard, there is a lot of contraventions’,” Mr Gleeson said.
Mr Gleeson said in the proposed settlement ASIC significantly reduced its scope scope from targeting 260,000 home loans for irresponsible lending to 10,500.
He questioned if the responsible lending breach was proven, whether the proposed $35 million penalty was appropriate, given Westpac’s admission that it breached lending laws in relation to 10,500 loans.
Mr Gleeson said an appropriate penalty would be at least $100 million – around $9000 per contravention – given the bank’s profit of billions of dollars a year.
Setback for ASIC
At the banking royal commission earlier this year, commissioner Kenneth Hayne questioned whether the HEM benchmark should continue to be used as borrowers’ living expenses benchmark.
Commissioner Hayne said in the interim report using HEM as the default measure of household expenditure is not verification of a borrower’s expenditure, as the HEM only calculates modest expenditure and does not take into account unusual household expenditures such as a household with an aged parent or a household with special needs.
All the big four banks now use the higher of the HEM benchmark and declared expenses.
Westpac now asks for borrowers’ expenses over 13 categories when assessing a home loan.
The intervention from Mr Gleeson is an setback for ASIC, which has been exposed by the banking royal commission as being soft on the major banks and is now pursuing a turnaround strategy of taking a tougher stance against the major banks.
This is also an unwelcome distraction from ASIC’s future cases. The regulator is understood to be investigating court cases against bank and non-bank lenders for more breaches of responsible lending laws, to be launched before Christmas.
Justice Perram has reserved the judgment for a later date.
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