Full Court dismisses ASIC’s Appeal

Background

On 13 August 2019, the Federal Court of Australia handed down its judgment in the commercial litigation case Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 (“the Liability Trial”), whereby Perram J dismissed ASIC’s allegation that Westpac had contravened its responsible lending obligations under s 128 of the National Consumer Credit Protection Act 2009 (Cth) (“the Act”). Perram J’s now-famous decision made headlines of major news articles in Australia and branded ‘the wagyu and shiraz decision’. This came in light of a striking comment made by Perram J that: ‘I may eat [w]agyu 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’.^[1]

ASIC’s case was succinctly summarised by Perram J at paragraphs 2 to 7 of the Liability Trial decision. In summary, ASIC alleged that Westpac, in approving its home loan through its ‘automated decision system’ (“ADS”), which utilises tests such as the serviceability rule, 70% ratio rule and the ‘Household Expenditure Method’ benchmark, failed to have regard to any living expenses declared by its consumers on their application forms. By doing so, ASIC alleged that Westpac did not perform any unsuitability assessment required under s 129 of the Act at all.^[2]

An unsuitability assessment involves credit providers determining whether:

1. the consumer will be unable to comply with the consumer’s financial obligations under the contact; or
2. the consumer will be able to comply with the consumer’s financial obligations under the contract but with substantial financial hardship.^[3]

And if the questions posed by s 131(2)(a) are answered in the affirmative, a credit provider must not enter into a credit contract with the consumer.^[4]

From ASIC’s concise statement dated 1 March 2017, ASIC also alleged that Westpac contravened ss 131(1) and 133(1) for not having regard to the declared living expense in its unsuitability assessment.^[5]

First instance decision

ASIC’s argument failed on two fronts before Perram J: factually and by way of statutory interpretation. In relation to the latter, his Honour struggled to comprehend why, in light of the words of statute, the consumer’s declared living expenses must be or is necessary to be considered under s 131(2)(a).^[6] Moreover, his Honour held that the Act was silent on how credit providers are to answer the question posed by s 131(2)(a).^[7] Perram J opined that it was not possible to accept that the consumer’s declared living expenses is indicative of their capacity to service the loan.^[8] Interestingly, his Honour employed an ‘opportunity costs’ analysis in his justification for such a finding.^[9]

Notwithstanding Perram J’s interpretation of s.131(2)(a), ASIC’s claim was also rejected because Perram J found that Westpac’s ADS did have regard to the consumer’s declared living expenses.^[10]

On appeal

In its notice of appeal dated 10 September 2019, ASIC advanced three grounds of appeal arguing that Perram J erred in reaching his conclusions as to the declared living expense issue.^[11]

On 26 June 2020, a majority of the Full Court dismissed ASIC’s appeal with costs.

The majority of Gleeson and Lee JJ, in separate judgments, held that Perram J did not fall into error as advanced in ASIC’s grounds of appeal one to three.^[12] Gleeson J affirmed the conclusions reached by Perram J (both as a matter of statutory interpretation and fact-finding exercise).^[13] Her Honour found that the words of the Act cannot be interpreted in the prescriptive fashion proposed by ASIC.^[14]

Gleeson J further held that it was ultimately up to credit providers as to how they would make the relevant inquiries under s 130(1)(a) and (b) and what steps they will take to verify the consumer’s financial situation under s 130(1)(c) in order to carry out an unsuitability assessment.^[15] Lee J agreed with Gleeson J on this point and also held that there was no textual requirement prescribing how the unsuitability assessment is to be carried out by credit providers.^[16] This proposition was apparently accepted by ASIC which stated that ‘it remains open to a [credit provider] to choose how it conducts the assessment required’.^[17] Nonetheless, Gleeson J found that Westpac’s ADS, through the use of the 70% ratio rule and serviceability rule, did in fact take into account the consumer’s declared living expenses when answering the s 131(2)(a) questions.^[18]

Conclusion

Since the handing down of the Full Court’s decision, ASIC Commissioner, Sean Hughes, has since made a media release stating that ASIC ‘will review each of the separate decisions carefully – including what additional measures or clarifications may be required to support compliance with [the Act]’.^[19] ASIC has not yet expressed any intention to apply for special leave to appeal the Appeal Decision to the High Court.  In the end, the case reflects a view that borrowers still have a responsibility to manage their own finances and make their own decisions as to whether they can repay debts.

^[1] Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 at ^[76].

^[2] Pursuant to s 129 of the National Consumer Credit Protection Act 2009 (Cth), credit providers must make an assessment that specifies the period the assessment covers and assesses whether the credit contract will be unsuitable for the consumer if the contract is entered or the credit limit is increased in that period.

^[3] National Consumer Credit Protection Act 2009 (Cth) s 131(2)(a).

^[4] National Consumer Credit Protection Act 2009 (Cth) s 133(1)(a).

^[5] For a copy of ASIC’s concise statement, see: https://download.asic.gov.au/media/4167349/17-048-concise-statement-asic-vs-westpac.pdf.

^[6] Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 at ^[73].

^[7] Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 at ^[5].

^[8] Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 at ^[77].

^[9] See Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 at ^[74].

^[10] Australian Securities and Investments Commission v Westpac Banking Corporation (Liability Trial) [2019] FCA 1244 at ^[27] and ^[36].

^[11] For a copy of ASIC’s notice of appeal, see: https://download.asic.gov.au/media/5263790/19-246mr-notice-of-appeal-1.pdf.

^[12] Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111 at ^[87] and ^[164].

^[13] Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111 at ^[144] and ^[154].

^[14] Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111 at ^[141].

^[15] Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111 at ^[141].

^[16] Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111 at ^[167] and ^[171]-[172].

^[17] See Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111 at ^[167].

^[18] Australian Securities and Investments Commission v Westpac Banking Corporation [2020] FCAFC 111 at ^[154] and ^[160].

^[19] For ASIC’s full media release, see: https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-149mr-asic-s-responsible-lending-appeal-dismissed-by-the-full-federal-court/.

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